18 May 1993 External T.I. 9308235 F - HA8192-1 - Interpretation of IT 372R Para 4.

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.

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Dear Sir:

This is in reply to your inquiry made to the Public Affairs Office of the Ottawa District Office concerning the rationale behind paragraph 4 of Interpretation Bulletin 372R (IT-372R). This paragraph discusses whether Part XIII taxes paid by a non resident trust can be applied against the Canadian beneficiary's Part I tax liability.

Facts

It is our understanding that you are concerned with a situation where a U.S. Citizen resides in Canada and he receives income from a non- resident trust located in XXXXXXXXXX We are advised that XXXXXXXXXX% of the investments held by the non-resident trust are Canadian investments and the taxpayer is the only beneficiary under the trust. Pursuant to paragraph 212(1)(a) of the Income Tax Act the Canadian bank withholds 15% tax on the funds before sending them to a brokerage firm in XXXXXXXXXX Your concern is based on the fact that the beneficiary must include the amount which is payable to him by the trust on his Canadian tax return, but is not entitled to claim either a foreign tax credit, or any withholding taxes as being an instalment of Part I taxes with respect to taxes withheld in Canada on payments made to the non-resident trust.

Our Comments:

Pursuant to paragraph 108(5)(a) of the Act, dividends interest and other types of income flowing through the non-resident trust to the Canadian resident beneficiary will lose its character and will be deemed to be income of the beneficiary from a property that is an interest in a trust, unless the provisions of subsections 104(19) (20, (21) (22) etc. of the Act are applicable. These subsections however do not apply in the situation you described since they are only applicable to a trust which was throughout the year a resident of Canada.

With respect to any Part XIII tax withheld on the payments of income to the U.S. trust, there are no provisions in the Act which permit such tax to be considered as an instalment payment made on behalf of the beneficiary's Part I tax liability nor does the Act provide for any flow through of Canadian withholding taxes paid by a non-resident trust on income which is subsequently distributed to a Canadian beneficiary.

In addition, the Canadian withholding taxes paid by the non-resident trust do not meet the conditions of subsection 104(22) or section 126 of the Act. Subsection 104(22) of the Act is not applicable since the trust was not throughout the year a resident of Canada and the taxes are not "foreign" taxes for the purposes of Section 126 of the Act since they were not paid to the government of a country other than Canada, therefore the taxpayer can not claim a foreign tax credit with respect to any withholding tax payments made.

The residence of a trust is a question of fact and you may wish to consider Interpretation Bulletin IT 447 to consider whether or not the trust established in XXXXXXXXXX is a resident of Canada or the United States.

It may be arguable that there is economic double taxation, that is two different persons are taxable in respect of the same income (i.e. the trust and its beneficiaries) however in the particular situation there is no double taxation with respect to the same individual. The situation outlined in your enquiry is not too dissimilar from the situation where a corporation is taxed on its business income and the shareholders are taxed a second time on the distribution of dividends by the company.

In summary, there are no provisions in the Act to permit the flow through of Canadian withholding taxes paid by the U.S. trust to the Canadian beneficiary nor to deem the Canadian withholding taxes to be a tax paid to a country other than Canada.

We trust these comments will explain the rationale behind IT 372R.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch