5 July 1994 Internal T.I. 9334557 F - Part XIII - Pooled Common Trust Funds

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.

July 5, 1994

International Tax     Rulings DirectoratePrograms Directorate     P. DiguerDevelopment of Audit Programs Section     (613) 957-8953Attention:  M. Thompson7-933455

Re: Part XIII tax implications in respect of certain payments to a U.S. Pooled Common Trust Fund

This is in reply to your memorandum of November 25, 1993. You requested our opinion on the application of Part XIII of the Income Tax Act (Canada) (the "Act") in respect of Canadian dividend and interest income paid to pooled common trust funds ("PCTF") as summarized in the following situation.  We apologize for the delay in responding to your request.

Situation

                    XXXXXXXXXX

                    XXXXXXXXXX

Taxpayer's Position

In summary, the taxpayer's representatives have stated that similarly to a Canadian trust operating in Canada, paying Canadian tax and distributing residual income to beneficiaries, a PCTF in the U.S. pays U.S. tax on income and distributes the residual income to investors.  According to paragraph 1, Article IV, of the Canada U.S. Income Tax Convention (1980) (the "Convention") a PCTF would therefore be a resident of the U.S. and as such, be entitled to the Convention rates applicable with respect to Canadian sourced dividend and interest income.

In addition, the taxpayer's representatives have pointed out that earlier, somewhat unrelated court cases involving Pan-American Trust and Trans Canada Trust found that funds (such as PCTFs) should be looked through.  In the event that the Department subscribes to this approach, it is their view that the dividend and interest income would be subject to Part XIII tax depending on the residency and tax status of the investor.

However, paragraph 4 of IT-372R describes a situation wherein a U.S. trust receives Canadian dividends and interest which are in turn flowed through to a Canadian beneficiary.  Part XIII tax is applied on the income in the hands of the U.S. trust and no look through is entertained.

Opinion Requested

You pose three questions and ask that we explain our answers.

Question 1

Is a PCTF a trust?

Comment

The question of whether a PCTF is a trust for Canadian income tax purposes and for the purposes of the Convention is a legal question upon which we are not prepared to offer a firm opinion without the advice of our legal counsel on the matter since this is a legal question.  However, based on our review of the Plan, we feel that there are good reasons for considering the PCTF to be a trust legally.  If the taxpayer's representatives insist that the PCTF should not be regarded as a trust or should be regarded essentially as a bare trust, you may wish to consider a request for a legal opinion.  The taxpayer should in that event be asked to submit written representations outlining the reasons for his position, as well as any supporting documentation that could assist our legal counsel.

We note that in Information Circular 73-13 dated May 16, 1973, the Department has indicated that it will accept to treat an investment club for income tax purposes essentially as if it were a partnership (par.5).  The position in the Circular applies to ordinary investment clubs where each member owns an undivided interest in each security or other asset held by the club and does not apply to clubs that are trusts (par.1).  Clearly, the position indicated in that circular does not apply here.

                    XXXXXXXXXX

The Fund appears to have some of the characteristics of a "unit trust" as defined in subsection 108(2) of the Act and discussed in Interpretation Bulletin IT-390.  To qualify as a unit trust however, a trust has to reside in Canada. Since this does not appear to be the case here, the Fund could not qualify as a unit trust.

Question 2

Is a PCTF a resident of the U.S.?

As stated in paragraph 1 of IT-447, a trust is generally considered to reside where the trustee who manages the trust or controls the trust assets resides.  Article IV of the Convention is designed to assign residence to one state or the other for purposes of the Convention.  Paragraph 1 of Article IV provides, inter alia, that a trust is considered to be a resident of a Contracting State only to the extent that income derived by such a trust is liable to tax in that State either in its hands or in the hands of its beneficiaries.  Assuming that PCTFs are taxable in the United States XXXXXXXXXX the Fund would be a resident of the U.S. pursuant to paragraph 1 of Article IV of the Convention.

Question 3

What are the Part XIII tax implications for  dividend and interest income paid to a PCTF from a Canadian source?

Comment

Pursuant to subsection 212(2) of the Act, a dividend payment or credit by a corporation resident in Canada to a resident of the U.S. will be subject to Part XIII tax in Canada. Similarly, pursuant to paragraph 212(1)(b) of the Act, interest arising in Canada and paid to a resident of the U.S. will, unless otherwise exempted, be subject to Part XIII tax in Canada.  Articles X (dividends) and XI (interest) of the Convention may apply to reduce the withholding tax rate of 25% imposed by subsection 212(2) (dividends) and paragraph 212(1)(b) (interest) of the Act to a rate of 15%. The taxpayer's representatives pointed out that in Pan-American Trust 49 DTC 672 (Ex. Ct.) and Trans Canada Investment Corp. Ltd., 55 DTC 1191 (S.C.C.), it was found that funds such as PCTFs should be looked through.  In those cases, it was understood that the taxpayers were the beneficial owners of the property whereas in the present case, beneficial ownership rests with the trust. Accordingly, the findings of the courts in those cases are not applicable to PCTFs in our view.

We trust this is the information you require.  If you have any questions, please feel free to call us.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch