23 May 1990 Ministerial Correspondence 58474 F - German Corporation Tax Credit

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.

Dear Sirs:

Re: German Corporation Tax Credit

This is in response to your letters of July 31, 1989 and April 2, 1990 wherein you enquired about the Canadian tax treatment of the german corporation tax credit. Your enquiry involves the following set of facts:

24(1)

6.     Germany, pursuant to paragraph 4 of Article 10 of the Canada-Germany Income Tax Agreement (1981) (the "treaty") may tax the dividend in the hands of the taxpayer at full personal tax rates.

24(1)

Based on our review of the information you have submitted, we would conclude that the German corporations tax that has become creditable to the shareholder by virtue of the payment of the dividend (the "German corporation tax credit"), would represent constructive receipt of income by the shareholder. Therefore the amount of the dividend that would be brought into income for Canadian tax purposes would be the cash dividend grossed-up by the amount of the German corporations tax credit.

The amount of the income or profits tax that would be considered to have been paid by the taxpayer to the government of Germany in respect of the grossed-up dividend for the purposes of the Canadian Income Tax Act (the "Act") would be equal to the portion of the aggregate German income tax paid by the taxpayer for the year that can be reasonably be considered to have been paid on the amount of the grossed-up dividend. For these purposes the amount of income tax borne the corporation which became creditable to the taxpayer is simply treated as a payment on account of taxes owing in the same manner as instalment payments or withholding tax would be.  Such amounts are not taxes paid for the purpose of section 126 of the Act.

While we recognize that paragraph 4 of Article 10 of the treaty gives Germany the right to tax dividends effectively connected with a German permanent establishment under the provisions of Article 7 of that treaty at a rate in excess of 15%, we are of the view that the dividends are income from property to the shareholder and that the provisions of subsection 20(11) of the Act would apply.

We trust the above is the information you require.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch