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 Part XIII tax is reduced by looking through a trust resident in a non-treaty country and the beneficiary is in a third country.
Position: No.
Reasons: Under the Income Tax Act, the payment is made to the trust and having no treaty with the country where the trust is located, no reduction of Part XIII tax occurs.
November 2, 2005
International Tax Audit Pascal Tétrault
Calgary TSO (613) 946-3553
Attention: Bill Waddy
2004-009940
Application of Part XIII to Trusts in Non-Treaty Country
We are writing in response to your e-mail of October 12, 2004 regarding the above caption matter. We acknowledge receipt of further correspondence from Joanne Perrin in connection with this request.
You are inquiring on whether the approach taken in document E 70525 of this directorate is well founded. Essentially, the situation you are concerned with involves a trust resident in a non-treaty country and the income beneficiary is resident in a treaty country. The trust is receiving a dividend from a corporation resident in Canada and the trustee, located in Bermuda, in turn pays the dividend to the life tenant who is resident and domiciled in the United Kingdom.
The basic question is: what is the applicable withholding rate? Is it the basic withholding rate of 25 per cent provided in the Income Tax Act (the Act) or is it reduced pursuant to the Canada-U.K. Tax Convention?1
In your scenario, we consider that the payment is made to the trust because the trust is deemed to be an individual under the Act.2 Accordingly, when a trust is resident a non-treaty country, the trust would not benefit from any treaty and the applicable withholding rate is the basic rate provided under the Act.
We may "look-through" an arrangement where the trust may reasonably be considered to act as an agent for the beneficiaries. In such circumstances, we may look to the beneficiaries in determining the applicable tax treaty. However, this is not your situation and the applicable withholding rate is 25 per cent. We would like to stress that document E 70525 does not reflect our current position.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Yours truly,
Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
c.c.: Joanne Perrin, Calgary TSO
ENDNOTES
1 Convention Between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital as Amended by Protocol Signed April 15, 1980 and October 16, 1985. The most recent protocol was not in force in the year in issue in your file.
2 Subsection 104(2) of the Act.
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