18 August 1989 External T.I. 73740 F - Taxability of Franked Dividends

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.

Subject: Taxability of "Franked" Dividends

This is in reply to your memorandum of March 14, 1989 in which you requested our opinion as to whether a Canadian resident is required to report franked dividends received from an Australian corporation for Canadian tax purposes.

The question was raised by 24(1) in a letter to you dated March 13, 1989.  We reviewed the copy of their letter and the reference material you submitted and we note that they are of the view that Australian franked dividends may be tax-free in Canada because they are tax-free in Australia. 24(1) have referred to a statement in a June 4, 1987 letter from 24(1) which states "Dividends paid by a company out of profits will have been taxed at the company rate of 49% will be described as "franked" dividends, will have an attached imputation credit and will be tax-free in the hand of the shareholder as the basis for their view.

It is our understanding that under Australian tax law dividends distributed by an Australian company after July 1, 1987 will qualify for imputation credits where they are paid out of company profits which have borne tax at the 49% rate.  To the extent that the dividends carry an imputed company tax they are referred to as "franked dividends".  Where a resident of Australia, other than a company, is paid a franked dividend he must include the amount of the dividend plus a gross-up amount in income.  The imputed tax credit attached to the franked dividend can then be claimed by an Australian individual as a credit against his Australian tax payable.

The law also provides that franked dividends paid to non- residents by a resident Australian company are not eligible for a refund of company tax paid by the company on profits out of which the dividends are paid.  In addition, dividends paid to a non-resident are exempt from withholding tax to the extent the dividends qualify as franked dividends.  Unfranked dividends will continue to be subject to withholding tax in Australia but subject to reduced rates under the Canada-Australia Income Tax Convention (Convention).

The fact that franked dividends are tax-free in Australia has no effect on how these amounts are treated for Canadian tax purposes. The Canadian Income Tax Act (the "Act") requires a Canadian resident to report his income from all sources for Canadian tax purposes.  Subsection 90(1) and paragraph 12(1)(k) of the Act specifically require a Canadian resident to include dividends from non-resident corporations in income.  Franked dividends received from an Australian corporation are dividends from a non- resident corporation and accordingly must be included in the calculation of income.  In addition, the terms of the Convention do not exempt Australian franked dividends from taxation in a Canadian resident's hands.

It should be noted that the total amount of tax paid on the equivalent franked and unfranked dividend will generally be the same since in the case of unfranked dividend Canada would generally be required to provide a foreign tax credit equal to the withholding tax paid to Australia on the dividend whereas no credit is available in Canada on franked dividends since they are not subject to withholding tax in Australia.

We trust this will be of assistance to you.

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