17 February 1997 External T.I. 9625935 - SOURCE OF CANADIAN TRUST INCOME RE ART XXI(6)

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 U.S.source income received by a Canadian trust and distributed to a Canadian beneficiary would be treated as income arising in the United States for purposes of paragraph 6 of Article XXI of the Treaty.

Position:

Subsection 104(22) of the Act is necessary for Canadian foreign tax credit reasons but does not deem such distributions from the trust to be from a foreign source for all other purposes, particularly paragraph 6 of Article XXI of the Treaty. The general rule is found in paragraph 108(5)(a) of the Act which reads as follows:

"an amount included in computing the income for a taxation year of a beneficiary of a trust under subsection 104(13) or (14) or section 105 shall be deemed to be income of the beneficiary for the year from a property that is an interest in the trust and not from any other source".

Reasons:

The income to be recognized for purposes of paragraph 6 of Article XXI of the Treaty is the donor's (ie. the Canadian beneficiary) "income arising in the United States". Canada does not look through corporations and trusts, to determine the origin of the dividend or trust income, as the case may be, for purposes of paragraph 6 of Article XXI of the Treaty.

                                          		962593
XXXXXXXXXX								                                  Jim Wilson

Attention: XXXXXXXXXX

February 17, 1997

Dear Sirs:

Re: Article XXI(6) of the Canada-U.S. Income Tax Convention ("Treaty")
Subsection 104(22) of the Income Tax Act ("Act")

This is in reply to your letter of July 23, 1996 in which you requested our comments with respect to the interaction of the above-noted provisions. More specifically, you have described a situation where a trust resident in Canada has made a designation in accordance with subsection 104(22) of the Act with respect to U.S. source income earned by the trust and distributed to a beneficiary who is a resident of Canada. You have asked whether the U.S.source income received by the Canadian trust and distributed to the Canadian beneficiary would be treated as income arising in the United States for purposes of paragraph 6 of Article XXI of the Treaty. In this regard, we have been asked to assume that the Canadian beneficiary has made a donation to a U.S. charity.

Pursuant to paragraph 6 of Article XXI of the Treaty, gifts made by a resident of Canada to an organization which is resident in the United States, which is generally exempt from United States tax and which could qualify in Canada to receive deductible gifts if it were created or established and resident in Canada, shall be treated as gifts to a registered charity and are eligible for a tax credit to the extent they do not exceed 20%1 of income of the taxpayer from U.S. sources. In order to obtain the status that would permit it to receive deductible gifts, the U.S. charity must qualify under section 501(c)(3) of the U.S. Internal Revenue Code. In this regard we have attached a copy of a Registered Charities Newsletter regarding the procedures with respect to paragraphs 5 and 6 of Article XXI of the Treaty.

Subsection 104(22) of the Act recharacterizes foreign source income received by the trust solely for the purposes of that subsection, subsection 104(22.1) and section 126 of the Act. The general rule is found in paragraph 108(5)(a) of the Act which reads as follows:

"an amount included in computing the income for a taxation year of a beneficiary of a trust under subsection 104(13) or (14) or section 105 shall be deemed to be income of the beneficiary for the year from a property that is an interest in the trust and not from any other source".

Subsection 212(11) of the Act establishes a similar rule for distributions made by a trust to a non-resident beneficiary.

Paragraph 1 of Article XXII of the Treaty would apply to ensure that the income distributed by a Canadian trust to a Canadian beneficiary is taxable only in Canada. There are no provisions in the Treaty that would allow the Canadian beneficiary to look through the Canadian trust with respect to the characterization of his income therefrom.

In summary, subsection 104(22) of the Act is necessary for Canadian foreign tax credit reasons but does not deem such distributions from the trust to be from a foreign source for all other purposes, particularly paragraph 6 of Article XXI of the Treaty. The income to be recognized for purposes of paragraph 6 of Article XXI of the Treaty is the donor's (ie. the Canadian beneficiary) "income arising in the United States". Canada does not look through corporations and trusts, to determine the origin of the dividend or trust income, as the case may be, for purposes of paragraph 6 of Article XXI of the Treaty.

These comments are provided in accordance with the guidelines set out in paragraph 22 of Information Circular 70-6R3.

We trust you will find the above comments of some assistance.

Yours truly,

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

1 A Notice of Ways and Means Motion tabled on December 5, 1996 proposed to raise this limit to 50% for the 1996 and subsequent taxation years.