17 December 2002 External T.I. 2002-0155005 - FTC for U.K. 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 CCRA.

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

Principal Issues: How is the foreign tax credit calculated for dividends received from the United Kingdom?

Position: A foreign tax credit to the maximum of the treaty-specified rate is given by Canada and any excess amount of tax withheld should be refunded by the United Kingdom.

Reasons: Even though the United Kingdom has repealed the Advance Corporation Tax, Article X(3) of the Canada-U.K. Income Tax Convention (1978) continues to apply.

XXXXXXXXXX 2002-015500
T. Cook
December 17, 2002

Dear XXXXXXXXXX:

Re: Dividends from the United Kingdom

We are writing in reply to your letter of July 24, 2002, in which you requested an explanation of the taxation of dividends received by an individual resident in Canada from the United Kingdom. You provided the following example. An individual resident in Canada receives a cash dividend from a U.K. public company in the amount of $500 (when converted into Canadian dollars). The payment slip from the company shows a related "tax credit". This tax credit is sometimes greater than 15% of the total of the dividend paid and the tax credit. In particular, you have requested our views on the calculation of the foreign tax credit available under section 126 of the Income Tax Act (the "Act") and on the operation of paragraph 3(b) of Article X of the Canada-U.K. Income Tax Convention (1978) (the "Tax Convention").

Our Comments

Since you have asked for a simple explanation, we will limit our comments to the scenario you have provided. In this regard, we assume that the individual receiving the dividend is the beneficial owner of the dividend and that he or she controls less than 10% of the voting power of the U.K. company.

U.K. Taxation of Dividends

Under the United Kingdom's advance corporation tax (ACT) system (repealed in April 1999), when a corporation paid a dividend to a shareholder, it was also required to pay a tax based on the dividend amount. At the time the ACT was repealed, it was our understanding that this tax was 25% of the dividend paid, which equalled 20% on the gross dividend amount (i.e., the dividend paid plus the tax paid under the ACT). The tax paid by the company in respect of a dividend was shown as a "tax credit" on the dividend payment slip. The shareholder could then use this "tax credit" to reduce his or her U.K. tax liability. Any excess over his or her tax liability was refundable.

Paragraph 4 of Article XXVII and paragraph 3 of Article X of the Tax Convention provide rules that were originally designed to ensure that the ACT system meshed with Canada's income tax system when dividends were paid by a U.K. company to a resident of Canada. Paragraph 4 of Article XXVII clarifies that the amount of dividend included in an individual's taxable income for Canadian income tax purposes is the gross dividend amount, that is, the sum of the dividend received and the tax credit related to the dividend.

Paragraph 3(b) of Article X provides that when a resident of Canada receives a dividend from a company resident in the United Kingdom, the recipient is entitled to:

? The same tax credit as would have been received by a resident of the United Kingdom in respect of the dividend; and

? To a refund from the United Kingdom of an amount equal to the tax credit minus any U.K. tax liability of the resident of Canada.

Paragraph 3(a)(ii) of Article X then provides that where a resident of Canada is entitled to a tax credit under paragraph 3(b), the United Kingdom may levy a tax of up to 15% of the gross dividend amount. As a result, a resident of Canada was entitled under the Tax Convention to a net refund from the United Kingdom equal to the amount by which the tax credit exceeded 15% of the gross dividend amount.

As noted above, the ACT was repealed in 1999. It was replaced with a system under which the tax rate on dividends was reduced and the related tax credits are no longer refundable to residents of the United Kingdom. We have had informal discussions with the U.K. Competent Authority with respect to the new system. The U.K. Competent Authority has advised us that paragraph 3 of the Tax Convention continues to apply since individuals in the United Kingdom are still entitled to a tax credit (even though these credits are no longer refundable) in respect of dividends paid by a U.K. company.

However, the U.K. Competent Authority also informed us that non-resident individuals should no longer be eligible for any net refund from the United Kingdom because the tax credit available under paragraph 3(b) is now less than the tax allowed by paragraph 3(a)(ii).

We note that this does not agree with your statement that the tax credit is sometimes greater than 15% of the gross dividend amount. In this regard, we would suggest that you contact the Inland Revenue Commission as tax in excess of the relevant treaty-specified rate of 15% of the gross dividend amount should be refunded by the United Kingdom pursuant to paragraphs 3(b) and 3(a)(ii).

Taxation of a U.K. Dividend Under The Act

A Canadian resident shareholder must include in his or her income for Canadian income tax purposes the total of the dividend received from the U.K. company and the related tax credit. Subsection 126(1) of the Act allows a foreign tax credit for non-business-income taxes paid by a Canadian resident to a foreign government. A foreign tax credit of the U.K. tax paid (i.e., the tax credit amount) would be available to a maximum of the rate specified in the Tax Convention. As a result, a foreign tax credit would be available for U.K. taxes paid by a Canadian resident shareholder to a maximum of 15% of the gross dividend amount. Amounts of foreign tax paid in excess of a treaty-specified rate are not eligible for a foreign tax credit under subsection 126(1).

Conclusion

In summary, an individual resident in Canada receiving dividends from the United Kingdom would include the gross dividend amount in his or her income for Canadian tax purposes. He or she would then be eligible for a foreign tax credit in Canada for U.K. tax paid on that dividend to a maximum of 15% of the gross dividend amount. The individual should also request from the United Kingdom's Inland Revenue Commission a refund of any U.K. income tax paid in excess of 15% of the gross dividend amount pursuant to paragraph 3 of Article X of the Tax Convention.

We trust that our comments are of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the Canada Customs and Revenue Agency.

Yours truly,

Jim Wilson
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch