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.
Principales Questions:
Application of paragraph 212(1)(c) in conjunction with subsection 212(11) for a cappital gain realised by a trust. The trust is not a mutual fund trust.
Position Adoptée:
Subsection 212(11) does not recharacterize capital gains as some form of property income which would be fully taxable under part I. Income in the form of capital gains would only be taxed at 75% of the gross amount of the gain had the non resident been resident of Canada. Therefore, only that amount would be subject to withholding tax by virtue of 212(1)(c).
Raisons POUR POSITION ADOPTÉE:
5-932954
XXXXXXXXXX M. Séguin
Attention: XXXXXXXXXX
February 22,1994
Dear Sirs,
This is in reply to your letter dated October 13, 1993, wherein you ask us to confirm your understanding of the operation of paragraph 212(1)(c) of the Income Tax Act (the "Act") in conjunction with subsection 212(11) of the Act.
You presented in your letter two hypothetical situations for which you are requesting our confirmation.
Situation 1
Trust A's sole source of income for a particular taxation year is in the form of a taxable capital gain. The amount of the capital gain is payable to a non-resident beneficiary. The trust is not a mutual fund trust.
Your opinion
It is your understanding that only the taxable portion of the capital gain would be subject to withholding tax by virtue of paragraph 212(1)(c) of the Act. Although subsection 212(11) of the Act recharacterizes the entire payment as income, the wording of paragraph 212(1)(c) of the Act is such that the payment is taxed only "to the extent that such amount would" be taxed under Part I of the Act. In your view, subsection 212(11) of the Act does not recharacterize capital gains as some form of property income which would be fully taxable under Part I of the Act. Income in the form of capital gains would only be taxed at 75% of the gross amount of the gain, under subsection 104(13) of the Act, had the non-resident been resident in Canada. Therefore, you conclude that only 75% of the payment is subject to withholding tax by virtue of paragraph 212(1)(c) of the Act.
We agree with your interpretation of these provisions in that situation.
Situation 2
Same facts as in Situation 1 above, except that the trust is a mutual fund trust and the taxable capital gain of the trust is designated in respect of a non-resident beneficiary by virtue of subsection 104(21) of the Act.
Your opinion
It is your understanding that there would be no amount of tax required to be withheld from the payment of the capital gain to the non-resident beneficiary by virtue of the exception in subparagraph 212(1)(c)(i) of the Act. You indicate that subsection 212(11) of the Act would deem the whole payment to be on account of income. However, the exception in subparagraph 212(1)(c)(i) of the Act overrides this recharacterization and eliminates the requirement to withhold tax on the amount paid or payable to the non-resident beneficiary.
We are also in agreement with your interpretation in the second situation.
Purpose of the provision
Finally, you would like us to provide you with an explanation of the purpose of subsection 212(11) of the Act as its applies to amounts paid or credited by a trust to a non-resident beneficiary after July 13, 1990.
Subsection 212(11) of the Act deems all amounts paid or credited by a trust or estate to a beneficiary, regardless of the source, to have been paid or credited as income of the trust or estate. Without this provision, it might have been suggested that a taxable capital gain of a trust is a payment of capital and not income of the trust under trust law. Subsection 212(11) of the Act removes any uncertainty regarding which amounts need to be considered for the application of paragraph 212(1)(c) of the Act.
Aside from the general purpose indicated above, it is not clear whether subsection 212(11) of the Act was intended for any other purpose. In this regard, you may wish to communicate with the Department of Finance at the following address:
Department of Finance
L'Esplanade Laurier
140 O'Connor Steet
Ottawa, Ontario
K1A 0G5
Yours truly,
for Director
Reorganizations and Non-Resident Division
Ruling Directorate
Legislative and Intergovernmental
Affairs Branch
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