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:
withholding tax on interest earned in a law firm's trust accounts
Position:
general position stated in 1990 round table
Reasons:
answer to round table
XXXXXXXXXX 5-952455
Attention: XXXXXXXXXX
November 3, 1995
Dear Sirs:
Re: Withholding Tax on Interest earned in a Law Firm's Trust Accounts
This is in reply to your letter of September 11, 1995 in which you request our opinion with respect to whether a law firm should withhold tax pursuant to subsection 212(1)(b) of the Income Tax Act (the "Act") on interest earned on amounts held in the law firm's trust accounts on behalf of non-resident clients.
Written confirmation of the tax implications inherent in particular proposed transactions are given by this Directorate only where the transactions are outlined in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2. Questions concerning actual fact situations should otherwise be directed to your district tax services office. Although we cannot provide a specific answer to your query, we offer the following general comments which are not binding on the Department.
In determining the proper withholding requirements for the non-resident, the source of the income has to be determined. It would appear from the details in your letter that the nature of a law firm's trust account would be a question of fact based on the terms of the contractual relationship between the client and the lawyer.
This issue was addressed at the 1990 Canadian Tax Conference, question #23, where the Department stated:
"The relationship between the involved parties would first have to be determined, and this determination can be made only upon a review of all relevant documentation.
Where the relationship is one of trust/beneficiary, the investment income would normally be included in the income of the client by virtue of subsection 75(2) of the Act. No trust return would be required since the investment income would be deemed under subsection 75(2) to be that of the client rather than of the trust, regulation 201(2) would be considered to apply to this type of situation. However, subsection 75(2) applies only to persons resident in Canada. Thus, where the client is a non-resident, the law firm is technically required under regulation 204(1) to file a T3 return. However, the Department is prepared to waive this requirement where the appropriate Part XIII tax is remitted pursuant to subsection 215(1) or (3).
Where litigation is involved and there is a trust, the Department's position remains as set out in paragraph 10 of Interpretation Bulletin IT-129R. That paragraph reads as follows:
Where funds deposited with a lawyer by a litigant or litigants for safekeeping and investment, pending a court order or settlement establishing their proper disposition, earn income the Department considers such income to be income of a trust and recognizes that the beneficial owner is the eventual recipient of the funds. Therefore, conditional upon waivers being filed by each of the litigants and the lawyer-trustee for the relevant taxation years, the Department will defer assessment of the income until the recipient is finally determined.
Where the beneficial owner is resident in Canada, the accumulated investment income should be included in the owner's income for the year in which beneficial ownership is determined. If the owner is a non-resident, the appropriate Part XIII tax should be remitted to the Department by the law firm in that year."
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1995
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1995
Email this Content