18 November 2011 External T.I. 2011-0422441E5 - Capital dividend paid to a Non-Resident

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 a capital dividend paid to an estate and redistributed to a non-resident is subject to Part XIII withholding tax.

Position: Yes.

Reasons: An amount that is a distribution of, or derived from, a "dividend that is not a taxable dividend" (e.g. a capital dividend) received by the trust or estate on a share of the capital stock of a corporation resident in Canada is subject to Part XIII tax.

XXXXXXXXXX 					2011-042244
						Linda Compton

November 18, 2011

Dear XXXXXXXXXX :

Re: Capital Dividend Amount Paid to a Non-Resident

This is in response to your e-mail of September 23, 2011 inquiring about whether an amount paid out as a capital dividend to an estate and redistributed to a non-resident is subject to Part XIII withholding tax.

In the situation described in your correspondence, the estate held shares in a Canadian controlled private corporation on account of capital. The shares held by the estate were redeemed for cash proceeds. The dividend arising from the redemption of the shares was paid out of the capital dividend account of the corporation.

Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Subsection 212(11) of the Income Tax Act ("Act") characterizes any amount paid or credited by a trust or an estate to a beneficiary or other person beneficially interested therein as income of the trust or estate for the purposes of paragraph 212(1)(c) of the Act.

Any capital distribution made by a trust or an estate is subject to Part XIII tax to the extent that it is an amount described in subparagraph 212(1)(c)(i) or (ii) of the Act.

Subparagraph 212(1)(c)(ii) of the Act provides that an amount that may reasonably be considered to be a distribution of, or derived from, a "dividend that is not a taxable dividend" (e.g. a capital dividend) received by the trust or estate on a share of the capital stock of a corporation resident in Canada is subject to Part XIII tax. Part XIII tax must be withheld by the payer and remitted on behalf of the non-resident in accordance with subsection 215(1) of the Act.

Pursuant to subsection 214(1) of the Act, the tax payable under paragraph 212(1)(c) is payable on the gross amounts described therein without any deduction from those amounts whatever.

Further information may be found in Information Circular 77-16R4, Non-Resident Income Tax and IT-465R, Non-Resident Beneficiaries of Trusts available at: http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/crrnt-eng.html.

We trust our comments will be of assistance to you.

Yours truly,

Phil Kohnen
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch