4 March 1993 Income Tax Severed Letter 9303796 - Foreign Tax Credit—Re U. K. Stock 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.

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.

                                             March 4, 1993

     International Tax Programs              Rulings Directorate
       Directorate                           K.B. Harding
                                             (613) 957-2111

Attention: S. Claude Lemelin

                                             930379

Foreign Tax Credit-Stock Dividends

This is in reply to your memorandum of February 9, 1993 wherein you requested our comments concerning Article X (Dividends) of the Canada-U.K. Income Tax Convention (the "Convention") in the following fact situation.

A Canadian resident individual elected to receive a stock dividend from a U.K. corporation rather than a cash dividend in 1990. The information slips indicated a "notional dividend" totalling XXXXXXXXXX (Pounds). A "notional tax" of XXXXXXXXXX% (XXXXXXXXXX (Pounds)) was also shown on the information slips. This tax represents the tax paid by the corporation as an advance corporation tax (A.C.T.). Inland Revenue indicated in their letter of January 7, 1993 that the payee "is not entitled to a repayment of tax credit as the notional tax, although paid by the company, does not reflect an actual tax liability of the person receiving the shares".(Underlining for emphasis). In previous years when the Canadian individual received a cash dividend, he was in a position to recover the tax withheld in excess of 15% of the gross amount of the dividend (i.e. 10 % of such amount) from the U.K. authorities in accordance with Articles X and XXVII (Miscellaneous Rules) of the Convention.

In accordance with paragraph 12(1)(m) and subsection 90 of the Income Tax Act ( the "Act") amounts received by a taxpayer resident in Canada in the year as, on account or in lieu of payment of, or in satisfaction of, dividends on a share owned by him of the capital stock of a corporation not resident in Canada are included in computing his income for the taxation year. The definition of "dividend" in subsection 248(1) of the Act provides that such term would include most stock dividends. However, the term "amount" in paragraph 248(1)(c) of the Act provides that the amount of any stock dividend is the amount which the paid-up capital of the corporation that paid the dividend is increased by reason of the payment of the dividend. In such situations, we should assume that the value of the "notional dividend" provided by the payer represents the increase in the paid-up capital unless the taxpayer can provide adequate proof that some other figure is more valid.

Paragraph 3(b) of Article X of the Convention provides that "(a) resident of Canada who receives a dividend from a company which is a resident of the United Kingdom shall,...be entitled to a tax credit in respect thereof to which an individual resident in the United Kingdom would have been entitled had he received that dividend...". In accordance with section 230 and paragraph 4(b) of section 249 of the United Kingdom Income and Corporation Taxes Act 1988 (the "ICTA") an individual who is a resident of the United Kingdom will not be entitled to a refund of the A.C.T.. Accordingly, the Canadian resident will not be entitled to a foreign tax credit nor a refund of the A.C.T. from the U.K. authorities. This would appear to be the authority for the position taken in the letter of January 7, 1993 from the U.K. authorities that the Canadian resident is not entitled to a repayment of the notional tax.

Accordingly, in the above fact situation the taxpayer would be required to include in income the notional dividend of XXXXXXXXXX (Pounds), expressed in Canadian dollars, for Canadian taxation purposes subject to the comments re the term "amount" as set out above. Since the Canadian resident is not entitled to a refund of the A.C.T. when he is in receipt of stock dividends, there is no requirement to include the tax credit (i.e. the notional tax), pursuant to paragraph 4 of Article XXVII of the Convention, in income for Canadian tax purposes. In addition, since there was no tax paid on the stock dividend on behalf of the Canadian resident, he would not be entitled to claim a foreign tax credit nor a refund of the 10% from the U.K. authorities. This position is supported by the letter from the U.K. authorities referred to above.

We trust the above comments are adequate for your purposes.

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