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.
Tax treatment of certain distributions made by a U.S. corporation to a Canadian shareholder.
Depends on the nature of the distribution.
In determining the question of fact as to the initial characterization of an amount received by a Canadian shareholder from a non-resident corporation, regard will be had to the foreign law governing the non-resident corporation.
XXXXXXXXXX Jim Wilson
January 16, 1998
This is in reply to your letter dated August 26, 1997 in which you asked for our comments concerning the Canadian tax treatment of certain distributions made to a Canadian resident shareholder by a corporation resident in the United States. The situations described in your letter were as follows:
A) U.S. corporation will pay a regular dividend on its common shares.
B) U.S. corporation will purchase for cancellation some of its common shares.
C) U.S. corporation will be wound-up.
In order to determine the proper tax treatment of any amount, it is necessary to first determine the proper characterization of the amount, e.g. proceeds of disposition, a dividend, a return of capital, etc. Generally, the proper characterization of an amount is essentially a question of fact. After this fact has been determined, the Income Tax Act (the "Act") will provide for the manner in which amounts of that character are subjected to tax.
In determining the question of fact as to the initial characterization of an amount received by a Canadian shareholder from a non-resident corporation, regard will be had to the foreign corporate law governing the non-resident corporation. For example, subject to the possible application of subsection 15(1) of the Act, the Department generally considers that any payment made by a non-resident corporation to its shareholders is a dividend unless the payment is made (i) on a formal reduction of capital in compliance with all applicable corporate law procedures respecting the reduction of capital, (ii) on a dissolution of the corporation, (iii) on the redemption or repurchase of shares of the corporation, or (iv) on a bona-fide commercial transaction (e.g. a repayment of debt). Whether the payment falls within exceptions (i) to (iii) will generally be determined having regard to the corporate law governing the corporation that made the payment.
Pursuant to subsection 90(1) of the Act, a shareholder who is a resident of Canada must include in his income dividends received from corporations not resident in Canada. Subsection 248(1) generally defines a dividend as including a stock dividend, other than a stock dividend paid to a corporation, but does not define the word beyond that; consequently, we must look to the accepted ordinary meaning of the term for the purposes of the Act. As mentioned above, generally, it is our view that a dividend can include any distribution of property by a corporation to its shareholders that is not one of the exceptions described above. For this purpose, it does not matter whether the corporation making the distribution is a Canadian resident or not. We find support for this position in Cangro Resources Limited (In Liquidation) v. Minister of National Revenue, 67 DTC 582. The tax treatment in the foreign jurisdiction of such distributions is not relevant for the purposes of subsection 90(1) of the Act.
On the redemption or purchase for cancellation of shares of a non-resident corporation, subsection 84(3) of the Act does not apply. The tax consequences to a Canadian shareholder, therefore, subject to subsection 93(1) of the Act, is on account of capital (i.e. proceeds of disposition). Pursuant to subparagraph (b)(i) of the definition of "disposition" in section 54 of the Act, the Canadian shareholder will be considered to have disposed of his shares and subsection 84(9) of the Act would apply, for greater certainty, to deem the Canadian shareholder to have disposed of the shares to the non-resident corporation. Again, as discussed above, whether a transaction should be characterized as a share redemption or purchase for cancellation is a question of fact based on the foreign corporate law and the tax treatment in the foreign jurisdiction on such a redemption or purchase for cancellation is not relevant for the purposes of the Act.
Subsection 84(2) of the Act does not apply on the winding-up of a non-resident corporation. Accordingly, subject to subsections 88(3) and 93(1) of the Act, if the non-resident corporation is dissolved and if the property of the non-resident corporation is distributed to the Canadian shareholder as part of such dissolution and the Canadian shareholder became entitled to receive such property by virtue of the dissolution proceedings, we are of the view that such property constitutes proceeds of disposition. The Department's position as to the timing of the disposition of the shares of the non-resident corporation would be as set out in paragraph 9 of Interpretation Bulletin IT-126R2. Subsection 69(5) of the Act would apply on the winding-up of a non-resident corporation.
Canada-United States Income Tax Convention (the "Treaty")
With respect to the Canadian shareholder, the Treaty would maintain Canada's right to tax the dividend or capital gain, as the case may be, under all of the above situations. The United States right to tax will depend on the nature of such amounts as determined under U.S. tax laws. For example, in situations B and C above, if the U.S. tax laws treat the Canadian shareholder as receiving a dividend in respect of those transactions, paragraphs 2 and 3 of Article X of the Treaty would provide the United States the right to tax at the reduced rates described therein. The Canadian shareholder would be entitled to a foreign tax credit, subject to any limitations in the Act with respect to foreign income taxes paid by a corporation in respect of income from a share of the capital stock of a foreign affiliate of the shareholder, for those taxes paid to the United States in accordance with the Treaty.
We trust you will find the above comments of some assistance.
Reorganizations and International Division
Income Tax Rulings and
Policy and Legislation Branch
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