5 October 1998 External T.I. 9707015 - U.K. CONVENTION DEEMED DIVIDEND RULE

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 interest earned by a corporation resident in Canada on a loan to a subsidiary resident in the United Kingdom where the interest is treated as a dividend under U.K. income tax law must, pursuant to Article 27(4) of the Convention, be treated as a dividend for the purposes of the Act.

Position: Article 27(4) of the Convention does not apply to the interest.

Reasons: Article 27(4) applies only the U.K. advance corporation tax credit. Any other interpretation leads to inappropriate results.

		970701
XXXXXXXXXX 	Olli Laurikainen
(613) 957-2116
Attention:  XXXXXXXXXX 

October 5, 1998

Dear Sirs:

Re: Article 27(4) of the Canada - U.K. Income Tax Convention

This is in reply to your letter requesting our view in reference to the application of paragraph 4 of Article 27 of the Canada - U.K. Income Tax Convention (the “Convention”). You provide the following set of hypothetical facts.

1) Newco, a corporation resident in the United Kingdom, issues a debt instrument (the “Newco Debt”) to its Canadian parent (“Canco”) as consideration for shares of a related United Kingdom company.

2) The interest on the Newco Debt is not deductible in computing taxable income for United Kingdom income tax purposes.

3) The interest on the Newco Debt, when paid will be considered a distribution of a dividend for United Kingdom tax purposes which requires the payer (Newco) to withhold and remit advance corporations tax (“ACT”).

You point out that paragraph 4 of Article 27 reads as follows: “The aggregate of the amount or value of the dividend and the amount of the tax credit referred to in paragraph 3(b) and 3(c) of Article 10 of this Convention shall be treated as a dividend for Canadian income tax purposes”.

You submit that paragraph 4 of Article 27 of the Convention would deem the interest paid by Newco on the Newco Debt to be a dividend for the purposes of the Income Tax Act.

Our Comments

Paragraph 4 of Article 27 of the Convention while worded very broadly was in our view intended to deal only with the ACT credit referred to in paragraphs 3(b) and (c) of Article 10 of the Convention and to permit Canada to treat such tax credit as a dividend. Moreover, treatment as a dividend, of an amount (other than an ACT credit) which is not otherwise a dividend, generally leads to results under the Income Tax Act which are inappropriate and in many cases detrimental to a taxpayer resident in Canada. Accordingly, since it is the only interpretation consistent with the intent of the provision, it is our view that paragraph 4 of Article 27 of the Convention only applies to an ACT credit. Therefore, in the above circumstances, the interest paid on the Newco Debt would not be recharacterized as a dividend by paragraph 4 of Article 27 of the Convention for the purposes of the Income Tax Act.

We trust this is the information you require.

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