13 July 2001 Internal T.I. 2001-0082727 - Foreign Dividends

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether a Canadian resident individual is required to include the amount of the "imputation tax credit" on a franked dividend" received from a corporation resident in Australia in his/her income for Canadian income tax purposes.

Position: No.

Reasons: Not part of the dividend received by the taxpayer.

July 13, 2001

	Dean Molinski	HEADQUARTERS
	International Tax Directorate	M. Cooke
	Tax Avoidance Section	(613) 957-2126

2001-008272

Foreign Dividends

This is in reply to Cheryl Smith's facsimile of May 2, 2001 and your facsimile dated June 21, 2001 wherein our views were requested on a situation involving a Canadian resident individual who receives a "franked dividend" from a corporation resident in Australia. Your question is whether the Canadian resident individual is required to include the amount of the "imputation tax credit" in his/her income for Canadian income tax purposes under the Income Tax Act (the "Act").

As you are aware, under Australian tax law, dividends paid by an Australian resident public corporation out of profits that have borne a certain level of corporate tax can be designated as "franked dividends". Each franked dividend carries an "imputation tax credit" that basically reflects the amount of corporate tax paid by the corporation that is attributable to the earnings the corporation has distributed by way of the franked dividend. It is our understanding that where a franked dividend is received by a natural person who is resident in Australia, the amount of franked dividend, as well as the amount of the imputation tax credit attached thereto, is included in that person's income for Australian income tax purposes. The imputation tax credit can then be credited against that person's Australian income tax otherwise payable for the year or, in some cases, even refunded. Australia's treatment of franked dividends received by natural persons is somewhat similar to Canada's dividend gross-up and dividend tax credit system for individuals.

Where a franked dividend is paid to a non-resident of Australia under Australian tax laws no portion of the imputation tax credit can be refunded, however, there is no obligation for the corporation to deduct any non-resident withholding tax on the dividend (if the dividend is only partially franked the non-resident withholding tax only applies to the portion of the dividend that is not franked).

The treatment of franked dividends under the tax laws of Australia does not effect how these amounts are treated for Canadian income tax purposes. Under subsection 90(1) and paragraph 12(1)(k) of the Act a taxpayer resident in Canada receiving a franked dividend will be required to include the full amount of the dividend in their world-wide income. As you are aware, it is our position that the amount of the imputation tax credit attached to a franked dividend is not a tax paid by the Canadian resident taxpayer to the Australian government for the purposes of computing the taxpayer's foreign tax credit that may otherwise be available on such foreign source income under subsection 126(1) of the Act nor can such an amount reasonably be considered to have been withheld and remitted by the Australian corporation on account of the recipient's Australian tax liability. It is also our position that the amount of the imputation tax credit that is attached to a franked dividend is not required to be included in the Canadian resident taxpayer's income for Canadian income tax purposes.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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