23 July 1996 External T.I. 9612365 - ARTICLE XI(4) & "INCOME ASSIMILATED TO INCOME"...

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 payment by a credit union to a member, in respect of a share of its capital stock, which is deemed to be interest for purposes of the Act by virtue of subsection 137(4.1) would also be considered to be interest for purposes of article XI of the Canada-U.S. Income Tax Convention (1980) (the "Treaty").

Position TAKEN:

Yes. The amount deemed interest for purposes of the Act would also be considered "interest" for purposes of the Treaty.

Reasons FOR POSITION TAKEN:

Article XI(4) includes in the definition of interest, "income assimilated to income from money lent by the taxation laws of the Contracting State in which the income arises". Therefore, an amount deemed to be interest for purposes of the Act is considered to be interest for purposes of the Treaty. Since subsection 137(4.1) of the Act deems certain dividend payments by a credit union to be interest of purposes of the Act, it follows that they also constitute interest for purposes of the Treaty.

									5-961236
XXXXXXXXXX							P. Diguer

Attention: XXXXXXXXXX

July 23, 1996

Dear Sirs:

Re: Articles X(3) and XI(4) of the Canada-U.S. Income Tax Convention (1980)

This is in reply to your letter dated April 2, 1996 in which you requested the Department's opinion concerning the above referenced subject. Briefly, our understanding of the situation is as follows.

Situation

XXXXXXXXXX wishes to determine the correct rate of tax to be withheld under the Canada-U.S. Income Tax Convention (1980) (the "Treaty") when a credit union resident in Canada pays a dividend on its shares to a U.S. resident.

Until the implementation of the recent Canada-United States Income Tax Convention-Third Protocol (the "Protocol"), certain dividend payments and interest payments by a resident of Canada to a resident of the U.S. were both subject to a 15% withholding tax. However, as of January 1, 1996, the rate of tax on interest payments to a resident of the United States decreases to 10% by virtue of article 6(1) of the Protocol,

XXXXXXXXXX

Your position

Dividends paid on shares of the issued capital of a credit union are deemed to be interest by virtue of subsection 137(4.1) of the Income Tax Act (Canada) (the "Act"). However, in order to be subject to the 10% rate of tax applicable to interest under the Treaty, the amount must fit under the definition of "interest" in article XI(4). Dividends paid on credit union shares are not "income from debt claims". However, you mention that you are unsure of the implications of the reference to "income assimilated to income from money lent by the taxation laws of the Contraction State in which the income arises" as that expression appears in article XI(4) of the Treaty. In your view, dividends paid by a credit union that are not somehow described by that phrase are "dividends" as defined in article X(3) of the Treaty and as such would continue to be subject to a 15% rate of withholding tax.

Opinion requested

You ask that we review this matter and confirm the correct rate of tax to be withheld under the Treaty when a credit union in Canada pays a dividend on shares of the credit union to a U.S. resident.

Our comments

Subsection 137(4.1) of the Act provides, inter alia, that an amount paid by a credit union to a member thereof, on a share not listed on a prescribed stock exchange, shall, subject to certain exceptions, be deemed to be have been paid as interest and to have been received by the member as interest.

Subsection 137(4.2) of the Act provides, notwithstanding any other provision of the Act, that an amount that is deemed by subsection 137(4.1) to be interest shall be deemed not to be a dividend.

Thus, for purposes of Canadian domestic law, distributions to members by credit unions in respect of an unlisted share of the capital stock of the credit union will, with respect to persons resident in Canada, be subject to tax as deemed interest income (not as dividend income) by virtue of subsection 137(4.1) and paragraph 12(1)(c) of the Act and in the case of non-resident, be subject to a withholding tax by virtue of paragraph 212(1)(b) of the Act.

Income tax treaties are exclusively relieving and in this instance we look to the Treaty to determine what relief, if any, may be available to a non-resident member of a credit union situated in Canada in a situation similar to the present case.

Article XI(4) defines "interest" for purposes of article XI as

...income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation laws of the Contracting State in which the income arises. However, the term "interest" does not include income dealt with in Article X (Dividends).

(our emphasis)

The expression "income assimilated to income from money lent..." as it appears in article XI(4) of the Treaty would generally, in our view, include an amount deemed to be interest under the Act. Accordingly, a payment by a credit union to a member in respect of an unlisted share of the capital stock of the credit union which is deemed to be interest for purposes of the Act would be considered to be interest for purposes of the Treaty and, with respect to payments occuring after December 31, 1995, would be subject to a withholding tax at a rate of 10% by virtue of Article XI of the Treaty and Articles 6 and 21 of the Protocol.

The foregoing represents our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990 and the Special Release dated September 30, 1992 are not binding on Revenue Canada, Customs, Excise and Taxation.

Yours truly

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