10 June 1986 Income Tax Severed Letter 5-1369

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Dear Sirs:

Re: Non-Resident Withholding Tax on Capital Gains from EPSP

This is in reply to your letter of April 1, 1986.

We confirm that the capital gains portion of payments or allocations from an EPSP to a non-resident beneficiary thereof is not considered "income from an estate or trust" under paragraph 212(1)(c) of the Income Tax Act (the "Act") in that subsection 144(4) of the Act provides that a capital gain of an EPSP is deemed to be the capital gain of the beneficiary to the extent that it has been allocated to him. You are therefore not required to withhold Part XIII tax on the capital gains portion of amounts paid or allocated to non-resident beneficiaries, nor are you required to file an information return under paragraph 202(1)(c) of the Income Tax Regulations (the "Regulations") with respect thereto.

You have also asked us to clarify the type, if any, of withholding that would be applicable to income and forfeiture allocations and payments made by the EPSP to a non-resident beneficiary. Any portion of an amount allocated to a non-resident beneficiary by an EPSP trustee as provided by section 144 of the Act, except for a capital gains allocation under subsection 144(4), that pertains to employment duties performed in Canada is includable in the non-resident's taxable income earned in Canada and therefore subject to Part I tax by virtue of the combined provisions of paragraphs 2(3)(a), 115(1)(a) and 6(1)(d) of the Act. This would apply for forfeiture allocations which are includable in a beneficiary's income under subsection 144(3) of the Act. It would also apply for the allocations of taxable dividends from taxable Canadian corporations which are includable in a beneficiary's income under subsection 144(8) and for the allocations of interest income which are includable in a beneficiary's income under subsection 144(8.2).

However, there is no provision that requires the trustee to withhold tax on a payment out of an EPSP if such payment represents an allocation to the beneficiary that was includable in his income from employment in Canada on the basis described above. Our reasons for stating this are as follows:

• 1) The provisions of paragraph 153(1)(a) of the Act and of sections 100 to 105 of the Regulations are concerned with payments of income.
• 2) The payment in question is not required to be included in income because of the exempting provisions of subsection 144(6) and paragraph 144(7)(b).
• 3) More particularly, paragraph 103(6)(a) of the Regulations includes in the definition of "lump sum payment" for purposes of subsection 103(4) thereof of a payment described in subparagraph 40(1)(a)(iii) of the Income Tax Application Rules, 1971, that is, "a single payment ... pursuant to an employee profit sharing plan in full satisfaction of all rights of the payee in or under the plan, to the extent that the amount thereof would otherwise be included in computing the payee's income for the year in which the payment was received" (underlining ours). If the payment in question is not required to be included in income because of the exempting provisions of subsection 144(6) and paragraph 144(7)(b) of the Act, i.e. because such payment is attributable to an allocation that was required to be included in income under subsections 144(3), 144(8) or 144(8.2), then such payment does not fall within the definition of a "lump sum payment" contained in paragraph 103(6)(a) of the Regulations.

We would point out that is is possible that a portion of a payment out of an EPSP must be included in income by virtue of subsection 144(7) of the Act, in which case such portion, in addition to being included in computing a non-resident recipient's taxable income earned in Canada pursuant to paragraphs 2(3)(a), 115(1)(a) and 6(1)(d) of the Act, would be subject to the withholding provisions of paragraph 153(1)(a) of the Act and sections 100 to 105, including subsection 103(4) by virtue of paragraph 103(6)(a), of the Regulations.

All of the allocations and payments discussed above must of course be reflected in the T4PS Supplementary issued by the EPSP trustee to the non-resident beneficiary.

We trust that the above satisfactorily answers your queries.