8 December 1986 Income Tax Severed Letter 5-2239 - [861208]

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.

M. Carsley (613) 957-2116

December 8, 1986

Dear Sirs:

This is in reply to your letter of September 23, 1986 in which you requested our opinion as to whether a payment in respect of a "jouissance right" from a wholly-owned German subsidiary to its Canadian parent company would be considered to be a dividend for the purpose of paragraph 1(b) of Article 23 of the Canada-German Income Tax Agreement (1981) (the "Treaty"). We also acknowledge your letter of December 1, 1986 in which you describe "jouissance rights" in general and the specific rights in your particular situation.

In your particular case, all the jouissance rights will be held by a Canadian corporation which is the sole common shareholder of a German company. The rights will be identical to those of the common shareholders, both with respect to participation in annual profits (i.e., they will share pro rata with common shares and will be entitled to distributions of profits as and when dividends are declared or, the common shares) and in "liquidation profits" (i.e., they will rank pari passu with the common shares on liquidation). Also, the jouissance rights will not be able to be disposed of separate from the common shares and will not entitle the holder to attend or vote at shareholders' meetings. The rights will be issued for no consideration and will be redeemable by the German company at any time without any payment to the holder. in the normal course of events, dividends will be declared and paid on the common shares and simultaneous pro rata payments will be made on the jouissance rights. The purpose for granting the jouissance rights relates to certain disclosure requirements under applicable rules of the German Commercial Code.

As the definition of dividends in paragraph 3 of Article 10 of the Treaty applies only to Article 10, in determining what the meaning of dividend is for the purpose of paragraph 1(b) of Article 23 of the Treaty we must look to Canadian income tax law, in accordance with paragraph 2 of Article 3 of the Treaty. In determining whether a payment is a dividend, we would consider two issues. First, if the payment is considered to be a dividend under the relevant corporate law it would probably be considered to be a dividend for Canadian income tax purposes. Second, as stated in paragraph 2 of IT-67R2 , "any distribution by a corporation of its income or capital gains made pro rata among its shareholders may properly be described as a dividend".

With respect to the first issue, a payment in respect of a "jouissance right" is not considered to be a dividend for purposes of German corporate law. With respect to the second issue, in your particular fact situation it is our opinion that payments in respect of the jouissance rights would be dividends based on our position in IT-67R2 .

It should be noted that this opinion in no way implies that any payment in respect of a jouissance right is a dividend. Payments in respect of jouissance rights will have to be considered on a case-by-case basis to determine in each situation how the payment shall be characterized.

We trust this information will be of assistance to you.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch