CRA finds that Part XIII tax withheld on a capital dividend paid to a s. 94 trust is not recoverable otherwise than through a s. 227(6) refund claim

Although a Canadian corporation is required under s. 94(4)(c) to withhold on a dividend paid by it to a non-resident trust which is deemed to be resident in Canada for various purposes by s. 94(3)(a), s. 94(3)(g) permits the trust to treat the withholding tax effectively as a Part I tax instalment if "the particular amount has been included in the trust’s income." This means that if the dividend subject to the withholding was a capital dividend, s. 94(3)(g) will not work. However, resort may instead be made to s. 94(3)(a)(viii), which provides that the Trust is recognized as Canadian-resident for purposes of "determining the liability of the trust…under Part XIII on amounts paid or credited…to the trust" – so that "an application for a refund of taxes withheld under subsection 227(6) may be appropriate."

On the other hand, s. 94(3)(g) will work to treat the Part XIII tax withheld on an ordinary dividend paid to the trust as effectively a Part I instalment payment even if the Trust is not subject to tax on this dividend as a result of distributing it and taking a s. 104(6) deduction – as the dividend amount is considered to have been included in its income.

Neal Armstrong. Summary of 25 February 2015 T.I. 2014-0517511E5 under s. 94(3)(g).