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: How to characterize a distribution from a foreign corporation for Canadian tax purposes
Position: The same two-step approach as set out in ITTN #38 will be used
Reasons: Recent case law
2011 CRA-TEI Liaison Meeting
December 6, 2011
Question 5 - Distributions from Foreign Corporations
At the May 2011 IFA roundtable CRA was also asked whether Technical Interpretation 2004-0060131I7 (October 21, 2004) continues to apply to distributions of share premium of a foreign affiliate. CRA confirmed its position in the interpretation and added that subsection 15(1) also applies to distributions. Under what circumstances will CRA apply subsection 15(1) to distributions of share premium? Assuming the August 19, 2011, foreign affiliate legislative provisions are enacted, would CRA still apply subsection 15(1) to distributions covered by the return of capital provisions?
In our view, the proper approach for determining the character of a distribution from a foreign corporation to a shareholder for Canadian tax purposes is the same two-step approach that is used for the classification of foreign entities for Canadian tax purposes as set out in ITTN #38. That is, the first step is to determine the characteristics of the distribution under foreign corporate law (not tax law), and then compare these characteristics with those of recognized categories of distributions under Canadian common law and corporate law in order to classify the distribution under one of those categories. This view is a slight change from the view that was expressed in document 2004-0060131I7 where we said that where the foreign corporate law specifies the character of a distribution, that characterization will generally be determinative for purposes of the Act.
However, the nature of a distribution under the foreign corporate law may contain nuances that do not exist in Canadian law. Therefore, as a practical matter, the CRA will adopt the following general guidelines:
- Where the distribution is a dividend or a return of legal capital under the foreign corporate law, that characterization will generally not be challenged by the CRA.
- Where the distribution is not a dividend or a return of legal capital under foreign corporate law, the distribution will be considered to be a dividend for purposes of the Act if it meets the basic common law requirements to be a dividend, such as being a pro rata distribution among shareholders of a particular class or series of shares.
- If the August 19, 2011 amendments are enacted as proposed, a pro-rata distribution after August 19, 2011 made by a foreign affiliate as described in new subsection 90(2) will be deemed to be a dividend. Taxpayers may also choose to apply a slightly modified version of new subsection 90(2) to a pro-rata distribution made by a foreign affiliate after February 27, 2004 and before August 20, 2011.
- Subsection 15(1) may apply if the distribution is not otherwise described above and is not one of the exceptions described in subsection 15(1).
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011