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: Whether withholding taxes paid to Costa Rica in respect of dividend from foreign affiliate constitutes foreign taxes paid by resident of Canada?
Position: No
Reasons: Words in subsection 126(4)
2004-006233
XXXXXXXXXX Suzanie Chua
613 957-2115
March 11, 2004
Dear XXXXXXXXXX:
Re: Withholding taxes paid to Costa Rica
We refer to your letter regarding the above matter and write in response to your queries raised. The hypothetical situation you have described is as follows:
1. Canco is a taxable Canadian corporation.
2. CRH is a company incorporated and resident in Costa Rica that carries on business wholly in Costa Rica. Canco owns 100% of the shares of CRH.
3. CRO is a company incorporated and resident in Costa Rica and carries on active business in Costa Rica. CRO does not earn any investment or other passive income.
4. CRH owns 100% of the shares of CRO.
5. Both CRH and CRO are "controlled foreign affiliates" of Canco as defined in subsection 95(1) of the Income Tax Act (the "Act").
6. CRO has taxable surplus on hand. CRH has no surplus on hand.
7. CRO is proposing to pay a dividend out of taxable surplus to CRH and CRH is proposing to subsequently pay a dividend in the same amount to Canco.
8. Pursuant to Costa Rican tax law, the dividend paid from CRH to Canco will be subject to a 15% withholding tax only if Canco is entitled to a deduction under section 113 or a foreign tax credit under section 126 of the Act in Canada in respect of such withholding tax.
You ask whether subsection 126(4) of the Act would apply in the hypothetical situation described above.
It is our view that subsection 126(4) of the Act will apply to exclude the Costa Rican withholding tax described above from the meaning of the term "income or profits tax" for all purposes of the Act. Accordingly, it would not qualify as a "non-business income tax" or a "business income tax" as defined in subsection 126(7). For purposes of paragraph 113(1)(c) of the Act, any deduction that would otherwise be available to Canco under that paragraph would be denied.
We trust that the foregoing will be of assistance to you.
Yours truly
Olli Laurikainen
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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