21 April 1995 External T.I. 9422935 - FOREIGN TAX CREDIT (HAA 7988-1)

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 foreign tax credit is available to a Canadian resident beneficiary of a U.K. trust

Position TAKEN:

Yes, if the beneficiary is either a life tenant of a non-discretionary trust or a beneficiary of a discretionary trust who seeks to obtain relief from the U.K. Inland Revenue

Reasons FOR POSITION TAKEN:

U.K. tax law treat income from the trust as income of the beneficiary and tax paid by the trustees as tax paid by the beneficiary.

		942293
XXXXXXXXXX	S. Leung

Attention: XXXXXXXXXX

April 21, 1995

Dear Sirs:

Re: Foreign Tax Credit available to Canadian
Resident Beneficiary of U.K. Trust

We are writing in response to your letter of August 26, 1994 wherein you requested that we confirm our view with respect to the availability of a foreign tax credit to a beneficiary of a United Kingdom trust found in our memorandum of May 10, 1993 (file #922835) to one of the district taxation offices (the "Memo").

The position set out in the Memo is our current view on the subject matter described in the Memo. In the situation where a beneficiary is a life tenant (as defined under the U.K. trust law) of a U.K. trust (i.e. a non-discretionary trust), he or she is entitled to his or her appropriate share of each item of income as and when it arises. For U.K. tax purposes, the income of the trust in the life tenant's hand retains its individual income sources and income tax paid by the trust will be treated as income tax paid by the life tenant.

As to payments received by a beneficiary out of a U.K. discretionary trust, a "look through" approach has been adopted by U.K. Inland Revenue under Extra Statutory Concession B18 to look through the trust income to the underlying component parts of that income. The purpose of this "look through" is to allow the recipient of the income to claim any relief that would have been available under the U.K. domestic law or the Double Taxation Convention between U.K. and another country, had the income come directly to the beneficiaries instead of through the trustees. If relief is sought, under U.K. tax practices income tax paid by the trustees of a discretionary trust would be considered to have been paid by the beneficiaries to whom the trust payment is made.

In addition, where the beneficiary is resident in a country with which the U.K. has a double taxation agreement, as in the case of Canada, further relief from domestic withholding rates under the looking through principal may be available (e.g. interest at 10% of the gross amount, dividends at 15% of the gross amount, etc.). The beneficiary would be entitled to make a claim for relief (i.e. the tax is considered to be paid by the beneficiary) to the United Kingdom for the amount of the tax paid by the trustees in excess of the withholding rates provided under the Canada-United kingdom Income Tax Convention on each particular source of income. This excess must be refunded by the U.K. Authorities. The beneficiary is required to include in his income the grossed-up amount of each particular item of income from the trust. Canada will permit the beneficiary to claim a foreign tax credit up to the amount of tax that should have been withheld by the United Kingdom (i.e. 10% in case of interest, 15% in case of dividend, etc.). As under the U.K. tax law tax paid by the trustees in the above situations is treated as tax paid by the beneficiaries, we do not find subsection 104(22) of the Income Tax Act to have any relevancy.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch