31 August 1990 External T.I. 59470 F - Canada-U.K. Income Tax Convention on Dividend Payments

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.

Attention: 19(1)

August 31, 1990

Dear Sirs:

Re:  Subsection 258(3)

This is in reply to your letter dated January 26, 1990 whereby you requested that we provide our opinion as to the application of  subsection 258(3) of the Income Tax Act (Canada) (the "Act") and Article 21(1)(b) of the Canada-United Kingdom Income Tax Convention (the "Treaty") in respect of dividends (the "TPS Dividends") paid by a corporation resident in the United Kingdom (the "Foreign Affiliate") to a Canadian resident specified financial institution (the "SFI") on term preferred shares of the Foreign Affiliate acquired by the SFI in the ordinary course of the business carried on by it, such term preferred shares constituting all of the shares of a class of preference shares in the capital stock of the Foreign Affiliate.

In our opinion subsection 258(3) of the Act applies to the TPS Dividends such that the TPS Dividends received in a taxation year by the SFI and the amount of the tax credit referred to in paragraph 3(b) or 3(c) of the Article 10 of the Treaty arising in connection therewith are deemed to be interest received in the year and not a dividend.  Accordingly, the SFI is not entitled to any deduction under section 113 of the Act or under paragraph 21(1)(b) of the Treaty in respect of the TPS Dividends.

The term "dividend" as used in paragraph 21(1)(b) of the Treaty is not specifically defined in the Treaty.  In particular, the definition of the term "dividends" in paragraph 10(4) of the Treaty, by the terms of that paragraph, does not apply to the term as used in Article 21.  By virtue of paragraph 3(2) of the Treaty and Section 3 of the Income Tax Conventions Interpretation Act, to the extent a term used in the Treaty is not defined therein, it has the meaning it has under the laws of (Canada) relating to the taxes which are the subject of the Treaty. 

Under the Act, in particular subsection 258(3), the TPS Dividends are deemed and thus defined to be interest and not dividends.  Accordingly, the TPS Dividends are not "dividends" as that term is used in paragraph 21(1)(b) of the Treaty.

Paragraph 27(4) of the Treaty is not inconsistent with subsection 258(3) of the Act.  The purpose of paragraph 27(4) is to permit Canada to treat as a dividend the tax credit referred to in paragraph 3(b) or 3(c) of Article 10.  Subsection 258(3) of the Act only applies to what is for Canadian income tax purposes a dividend.  Paragraph 27(4) of the Treaty and subsection 258(3) of the Act can and do Go-exist and operate consistently together in order to give effect to the intent and purpose of each.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch