1 April 1982 Income Tax Severed Letter RRR19 - Tax treatment of payments to non-resident beneficiaries of a trust

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.

Dear Sir:

Re: Payments to Non-Resident Beneficiaries

This is in reply to your letter of October 23, 1981, in which you requested an opinion on the appropriate treatment under Part XIII of the Income Tax Act (the Act) of certain payments made by a trust.

Your letter refers to "a number of trusts relating to the distribution of royalties from petroleum and gas exploration activities, which fall under the Petroleum and Gas Revenue Tax Act (PGRT)."

We have assumed that in fact, these trusts are in receipt of "resource royalties", as defined in subsection 79(1) of the PGRT, in respect of which a tax of 8% is payable and has been withheld therefrom in accordance with subsections 99(1) and 99(2) of the PGRT. As you are aware, under proposed amendments to the PGRT for 1982 and subsequent years, it must be determined whether such royalties received constitute "resource royalties" or "production royalties", which determination will result in different tax consequences to the trust under the PGRT. In computing the income of such trusts for the purpose of the Act, the gross amount of such royalties would be included; tax under the PGRT having been withheld by the payor on account of the recipient.

Our comments below are based on the assumption that the trusts to which you refer are in fact trusts for the purposes of the Act, and that such trusts are resident in Canada. On these assumptions all amounts paid or credited by such trusts to their non-resident beneficiaries (otherwise than on a distribution of capital), regardless of the source from which the trust derived it, are deemed to be paid or credited as income of the trust and are, accordingly, subject to tax under Part XIII of the Act (paragraph 212(1)(c) and subsection 212(11) of the Act).

Subsection 214(1) provides that tax payable under section 212 is payable on the amounts described therein without any deduction from those amounts whatever. However, in accordance with subsection 212(11.1) of the Act, in certain circumstances, all or part of an amount paid or credited by an inter-vinos trust to a non-resident beneficiary may be deemed, for purposes of paragraph 212(1)(c) of the Act, not to have been so paid or credited to that person. This provision exempts non-resident beneficiaries from Part XIIi tax on that portion of the income of the trust paid or credited to him which has already been subject to tax in the hands of the trust itself by virtue of the limitations in subsection 104(8), provided the trust designates such income in accordance with subsection 212(11.1) of the Act. The effect of subsection 102(8) of the Act is to tax the trust (rather than the beneficiary) on certain Canadian source income ("designated income", as defined in paragraph 108(1)(d.1)), to the extent that such income is payable to a non-resident beneficiary.

To summarize, amounts paid or credited by the trusts in question to non-resident beneficiaries (other than distributions of capital) are subject to tax under paragraph 212(1)(c) of the Act, except to the extent that subsection 212(11.1) of the Act deems such amounts not to have been paid or credited to the beneficiaries.

In connection with your reference to the OECD Model Convention, in our view amounts paid or credited by the trusts in question would conform to "Article 21: Other income" in the OECD Model Convention; "Article 6: Income from immovable property: would be applicable where the non-resident receives the income directly.

The above views are based solely on the information outlined above. Should you wish our opinions on the facts surrounding a particular taxpayer situation, we shall be pleased to provide such opinions on the basis of requests for advance income tax rulings.