10 March 1992 Income Tax Severed Letter 9203725 - Policy Dividends Paid to a Non-resident

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: POLICY DIVIDENDS PAID TO A NON-RESIDENT Section(s): 148(2)(a)]

XXX 920372 T. Murphy (613) 957-3498

Attention: XXX

March 10, 1992

Dear Sirs:

Re: Policy Dividends Paid To a Non-Resident

This is in reply to your letter dated January 9, 1992, wherein you requested clarification of the tax treatment of policy dividends paid to a non-resident. All references to statute in this letter are references to the Income Act (the “Act”) unless otherwise indicated.

In your opinion Article X of the Canada-U.S. Income Tax Convention (1980) and Article X of the Canada-U.K. Income Tax Convention (1978) require tax to be withheld at the respective rates prescribed therein on the gross amount of the dividend paid notwithstanding that paragraph 148(2)(a) provides that an amount as, on account or in lieu of payment of, a policy dividend is deemed to be proceeds of disposition.

We note that paragraph 148(2)(a) applies only for purposes of subsection 148(1) and paragraph 148(9)(a). Subsection 148(1) determines the amount to be included in a policyholder's income in respect of the disposition of an interest in certain life insurance policies. If the policy is a life insurance policy in Canada, subparagraph 115(1)(a)(vi) provides that the amount that would have been required to be included in computing income by virtue of subsection 148(1) if the policyholder had been resident in Canada throughout the year, is part of the non-resident's taxable income earned in Canada. Paragraph 138(12)(g) defines a life insurance policy in Canada as a life insurance policy issued or effected by an insurer upon the life of a person resident in Canada at the time the policy was issued or effected.

Pursuant to subsection 118(5.3), the taxpayer acquiring the life insurance policy, the insurer under the policy by virtue of subsection 118(5.4), is liable to pay, on behalf of the non-resident, 50% of the amount, if any, by which the amount payable by the taxpayer for the property so acquired exceeds the amount fixed in the certificate, if any, issued under subsection 118(5.2). Therefore, if no certificate is obtained, the insurer is liable to pay, on behalf of the non-resident, an amount equal to 50% of the proceeds of disposition of the life insurance policy as determined under section 148. You may wish to refer to the attached copy of Information Circular 72-17R3 for more information.

The income tax conventions mentioned above provide for a reduced rate of withholding tax on dividend payments. However, since policy dividends are included in a nonresident's taxable income in Canada to the extent provided for in paragraph 148(2)(a), subsection 148(1) and subparagraph 115(1)(a)(iv), the income tax conventions are not relevant.

We hope our comments are of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch