6 January 1992 Income Tax Severed Letter 9132507 - Royalties from U.S. trust to Canadian beneficiary

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: ROYALTIES FROM U.S. TRUST TO CANADIAN BENEFICIARY Section(s): ART 12, ART 13, ART 21]

January 6, 1992

MEMO FOR FILE

Rulings Directorate
Foreign Section
Jim Wilson

• 7- 913250

Article XII & XIII of the Canada-U.S. Income Tax Convention (the "treaty")

Facts:

On November 20, 1991 Doreen Guy (Ottawa D.0.) requested a technical interpretation regarding the above treaty articles. The matter was cleared by telephone (see T2020's in backup file). The information faxed to us by Ms. Guy is summarized as follows:

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Our Comments:

Pursuant to the technical explanation of Article XXII (other income) of the Treaty, paragraph 2 thereof is not applicable to such distributions. Although the U.S. imposes tax on certain domestic trusts and such trusts are residents of the U.S. for purposes of Article IV and paragraph 2 of Article XXII, paragraph 2 does not apply to distributions by such trusts because, pursuant to Code sections 667(e) and 662(b), these distributions have the same character in the hands of a non-resident beneficiary as they do in the hands of the trust. Thus a distribution by a U.S. trust is generally not a separate type of income for U.S. purposes. The treaty provision applicable will depend on the nature of the income being distributed.

Royalties are defined in paragraph 4 of Article XII of the treaty to include payments of any kind received as consideration for the use of, or the right to use any patent.

Furthermore, in the event such payments could otherwise be considered proceeds of disposition from the sale of an intangible asset, the definition of royalties in paragraph 4 states "notwithstanding the provisions of Article XIII (Gains), includes gains from the alienation of any intangible property or rights described in this paragraph to the extent that such gains are contingent on the productivity, use or subsequent disposition of such property or rights" It is clear that the more specific provision in the treaty dealing with this type of income is Article XII and not Article XIII.

The taxpayers U.S. representatives have come to the conclusion that paragraph 2 of Article XII applies from the U.S. perspective and limits the U.S. right to withhold from 30% to 10%. We agree with this aspect of their conclusion. However, the representatives also concluded that from the Canadian perspective paragraph 4 of Article XIII applies and Canada cannot tax such income. In our opinion, such an interpretation is incorrect. The more specific provision pertaining to such income is Article XII which does not affect Canada's right to tax. If such an interpretation were to stand, the result would be ridiculous in that an otherwise fully taxable royalty (ie. had it been distributed to U.S. beneficiaries or accumulated in the trust the U.S. would have taxed it at their maximum domestic rates) would be subject to a reduced U.S. withholding rate and no Canadian tax.

The argument could also be raised that paragraph 4 of Article XIII would not apply to such income even if paragraph 4 of Article XII did not exist. The intent of paragraph 4 of Article XIII would be to exempt from Canadian tax gains on the disposition of taxable Canadian property (other than real property as defined in paragraph 3 of Article XIII) where the U.S. trust disposed of the property. In these cases the trust would be exempt where they are otherwise subject to tax (ie. an accumulation trust) or the beneficiaries would be exempt on their share of the distribution of the gain.

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for Director
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