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.
Revenue Canada Revenu Canada Taxation Impôt
Head Office Bureau principal
Your file Votre reference Our file Notre reference D. Holtz (613) 995-1178
Attention:
April 2, 1985
Dear Sirs:
Re: Section 212.1 of the Income Tax Act Canada - U.S. Income Tax Convention (1942) Income Tax Convention Interpretations Act ------------------------------------------
This is in reply to your letter of February 15, 1985 wherein you requested confirmation of your understanding of the interaction of the above-referenced laws.
For purposes of explanation you pose the following hypothetical situation.
1. Company A, a U.S. corporation, owns 100% of the issued share capital of two other U.S. corporations ("USCO B" and "USCO C"). All three companies have December 31 year ends. USCO B does not have a permanent establishment in Canada, as that term is defined in and for the purposes of the 1942 Convention.
2. USCO B owns more than 50% of the issued share capital of a taxable Canadian corporation ("CANCO B"). The fair market value of USCO B's interest in CANCO B is $500. The paid-up capital and adjusted cost base to USCO B in respect of the shares in CANCO B is $100.
3. USCO C owns 100% of the issued share capital of another taxable Canadian corporation ("CANCO C").
4. CANCO B and CANCO C-each have a December 31 year end.
5. It is to be assumed that prior to January 1, 1986, USCO B will sell its CANCO B shares to CANCO C for a cash consideration of $500.
You submit that no Canadian income tax should be payable by USCO B in respect of the above-described transaction. (It is assumed, for purposes of this example, that none of the provisions of the 1984 Canada-United States Tax Treaty can be relied upon to provide relief against any Canadian income taxes otherwise payable).
Section 3 of the Interpretation Act applies only to a term of the 1942 Convention that is not defined or not fully defined therein. As dividends are "not fully defined" in the Convention, then the term dividend has the meaning it has for purposes of the Income Tax Act, which includes deemed dividends arising under section 212.1. Subsections 212.1(1) and 212(2) of the Income Tax Act and Article XII of the Canada-U.S. Tax Convention (1942) are applicable. Consequently, a withholding tax must be paid on the deemed dividend.
We trust that the above will be of assistance to you.
Yours truly,
Chief Corporate Reorganizations Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch
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