10 November 1995 External T.I. 9523875 - CAPITAL GAIN DISTRIBUTIONS FROM A U.S. CORPORATION

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 a capital gains distribution from a U.S. corporation to a Canadian shareholder can be treated as a capital gain as apposed to a dividend.

Position:

No.

Reasons:

A distribution by any corporation to its shareholders on a pro-rata basis constitutes a diviend. Since it is a U.S. corporation, it cannot qualify as a "mutual fund corporation" and cannot elect to have paid a capital gains dividend.

		952387
XXXXXXXXXX	Jim Wilson
(613) 957-2123
Attention: XXXXXXXXXX

November 10, 1995

Dear Sirs:

Re: Capital Gains Distributions from a U.S. Corporation

This is in reply to your letter dated August 31, 1995, concerning the Canadian tax treatment of a capital gain distribution made to a Canadian shareholder of a U.S. corporation. More specifically, you have asked whether the Department would consider a capital gain distribution from a U.S. corporation to a shareholder who is a resident of Canada to be a capital gain as apposed to a dividend.

Where the U.S. entity is a corporation for Canadian tax purposes, any distribution by that corporation to its shareholders on a pro-rata basis would constitute a dividend for Canadian tax purposes. We are of the view that the full amount of the distribution, regardless that such distribution may be comprised solely of capital gains realized by the corporation, will be included in the Canadian shareholder's income as a dividend in accordance with subsection 90(1) and paragraph 12(1)(k) of the Income Tax Act (the "Act"). Subsections 126(1) or 20(12) of the Act would also apply to permit a foreign tax credit or deduction, as the case may be, with respect to any withholding tax paid on behalf of the Canadian shareholder in respect of such a distribution.

Since a U.S. corporation cannot qualify as a "mutual fund corporation" within the meaning assigned by subsection 131(8) of the Act, the capital gain distribution received by the Canadian taxpayer cannot be elected by the corporation under subsection 131(1) of the Act to be a capital gains dividend to the Canadian shareholder.

The file you refer to in your letter where you indicate that the Department has previously "taken the position that the treatment of income by a foreign taxing authority effects the Canadian tax treatment" was with respect to foreign tax credit issues regarding a Canadian beneficiary of a U.K trust. The Department has not suggested in that letter that the income received by the Canadian beneficiary from the U.K. trust would be re-characterized as something other than income from a trust.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of the Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Customs, Excise and Taxation, this is not an advance income tax ruling and is therefore not binding on the Department.

Yours truly,

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