17 March 1997 External T.I. 9607505 - PART XIII - DIVIDENDS IN KIND

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:

Does Part XIII Tax Apply to Dividends in Kind

Position:

Yes

Reasons:

Clearly fall into the wording of subsection 212(2)

		960750
XXXXXXXXXX	David R. Senécal

Attention: XXXXXXXXXX

March 17, 1997

Dear Sirs:

Re: Dividends in Kind - Section 212 of the Income Tax Act

This is in reply to your letter of February 15, 1996, concerning the application of Part XIII of the Income Tax Act (the "Act") with respect to the payment of a dividend in kind to a non-resident of Canada. We apologize for the delay in responding to your enquiry.

You have provided us with the following hypothetical situation:

• ABC Ltd. ("ABC") is a Canadian corporation that is a public corporation as defined under section 89 of the Act.
• The shareholders of ABC consist of both Canadian residents and non-residents of Canada.
• ABC has a wholly owned subsidiary, DEF Ltd. ("DEF").
• DEF is a Canadian corporation as defined in section 89 of the Act.
• ABC proposes to distribute, by way of a dividend in kind, the shares of its wholly owned subsidiary, DEF, to its shareholders on a pro-rata basis. Therefore, DEF will become owned by the shareholders of ABC, including non-residents of Canada.

Comments

Our general comments with respect to the above-described situation are as follows:

Although the non-resident shareholders have not received a "cash" dividend, the preamble to subsection 212(2) of the Act states that "every non-resident person shall pay an income tax of 25% on every amount that a corporation resident in Canada pays or credits .... to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, a taxable dividend ....". In our view, these words clearly include a dividend in kind, as described above, and accordingly, such dividend would be subject to Part XIII tax at a rate of 25%, subject to any rate reduction afforded by the provisions of an applicable income tax convention.

We would also point out that, pursuant to subsection 215(6) of the Act, the resident payor is liable for Part XIII tax "where a person has failed to deduct or withhold any amounts as required by this section from an amount paid or credited or deemed to have been paid or credited to a non-resident person ....". Subsection 214(1) of the Act also indicates that the tax payable under section 212 of the Act is payable on the gross amount of the payment thus requiring that the tax be calculated on a "grossed-up" amount. How the resident payor finances the payment of the tax and/or recovers the amount paid on behalf of the non-residents receiving the dividend is a matter to be resolved by the payor and the non-resident recipients.

We trust that the above comments will be of assistance.

Yours truly,

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