29 July 1994 External T.I. 9411695 - DEEMED DIVIDEND ON REDEMPTION CANADA-U.K. TREATY

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.

Principal Issues:

- whether deemed dividend and U.K. advance corporation tax arising on the redemption of shares of a U.K. corporation should be treated as proceeds of disposition notwithstanding 27(4) of Canada-U.K. Convention

Position TAKEN:

Yes

Reasons FOR POSITION TAKEN:

				941169

XXXXXXXXXX		S. Leung

Attention: XXXXXXXXXX

July 29, 1994

Dear Sirs:

Re: Canada-U.K. Income Tax Convention (the "Convention")
Purchase for Cancellation of A Share of U.K. Corporation

We are writing in response to your letter of April 28, 1994 in which you requested our view on the Canadian tax treatment for a resident of Canada whose shares of a U.K. corporation are to be purchased for cancellation. In your letter, you outlined a hypothetical situation where a share of a U.K. corporation held by a resident of Canada is to be purchased for cancellation. You illustrated in an example that as the result of the purchase for cancellation, the net proceeds of the Canadian resident, after U.K. and Canadian taxes, would be less if paragraph 4 of Article 27 of the Convention applies than if there were no such Convention. This is because the application of paragraph 4 of Article 27 of the Convention in the manner described above would deny the taxpayer the exclusion of one-quarter of his capital gain.

Our Comments

It is our view that in general treaties such as the Convention are designed, primarily, in light of two objectives: the avoidance of double taxation and the prevention of fiscal evasion. Consequently, we agree that the object and spirit of tax treaties is to provide benefits (the avoidance of double taxation), not detriments (unless tax evasion is involved), to taxpayers governed by a particular tax treaty.

In the situation outlined in your letter, it is our view that both the amount of $101 representing the purchase price for cancellation and the U.K. tax credit of $25 would be considered to be proceeds of disposition of the share giving rise to a capital gain treatment. The Canadian resident would be allowed a foreign tax credit for the aggregate U.K. withholding tax of $18.75 levied on the purchase price of the share and the U.K. tax credit. In this regard, please note that we do not agree with your suggestion that the aggregate proceeds of disposition should be $107.25 and that no Canadian foreign tax credit should be allowed for the U.K. withholding tax.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch