16 February 2004 External T.I. 2003-0033421E5 - Interaction of section 119 and ITAR 10(6)

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.

Principal Issues: Interaction of section 119 of the Income Tax Act and subsection 10(6) of the Income Tax Application Rules.

Position: Treaty rate applies with respect to the calculation of the credit under paragraph 119(b), not the regular Part XIII rate of 25%.

Reasons: Based on the interaction of paragraph 10(6) of ITAR and the implementing Act that gives the treaty the force of law in Canada.

XXXXXXXXXX 2003-003342
S. Leung
February 10, 2004

Dear XXXXXXXXXX:

Re: Section 119 of the Income Tax Act (the "Act") and
Paragraph 10(6)(a) of the Income Tax Application Rules ("ITAR")

We are writing in reply to your facsimile correspondence of August 1, 2003 ("Letter") in which you requested our view on the interaction of section 119 of the Act and subsection 10(6) of ITAR and whether the reduced treaty rate (for example, the reduced rate on dividends pursuant to paragraph 2(b) of Article X of the Canada-United States Income Tax Convention (the "Convention")) would apply to the calculation of the credit described in paragraph 119(b) of the Act.

Our Comments

Paragraph 10(6)(a) of ITAR reads as follows:

"Notwithstanding any provision of the amended Act, where an agreement or convention between the Government of Canada and the government of any other country that has the force of law in Canada provides that where an amount is paid or credited, or deemed to be paid or credited, to a resident of that other country the rate of tax imposed thereon shall not exceed a specified rate, any reference in Part XIII of the amended Act to a rate in excess of the specified rate shall, in respect of such an amount, be read as a reference to the specified rate ..."

Where the conditions described in paragraph 2(b) of Article X of the Convention are met such that the tax so charged shall not exceed 15% of the gross amount of the dividend, paragraph 10(6)(a) of ITAR would apply such that any reference in Part XIII of the Act to a rate in excess of 15% shall be read as a reference to 15%.

Paragraph 119(b) of the Act refers to an individual's tax payable under Part XIII in respect of dividends received and in respect of amounts deemed under Part XIII to have been paid to the individual as dividends from corporations resident in Canada. It therefore refers to the tax liability under Part XIII of the Act in respect of the dividends received. As discussed above, in the case of an individual resident in the U.S. who received dividends from a corporation resident in Canada, the individual would be subject to tax in Canada at a tax rate not to exceed 15% of the gross amount of the dividends under paragraph 2(b) of Article X of the Convention if that individual is the beneficial owner of the dividends. Based on the interaction of paragraph 10(6)(a) of ITAR and the fact that the implementing Act that gives the Convention the force of law in Canada provides that in the event of a conflict between the Convention and the Act, the Convention prevails, the tax payable under Part XIII in respect of dividends received or dividends deemed to have been paid as referred to in paragraph 119(b) of the Act is therefore the tax payable at the Convention specified rate of 15% of the gross amount of the dividends and that tax payable is the amount entered into the calculation of the credit under paragraph 119(b) of the Act.

We trust the above comments will be of assistance.

Yours truly,

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

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