11 March 1997 External T.I. 9703415 - DEEMED DIVIDEND PAYABLE TO BENEFICIARIES

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:

Are proceeds from a redemption of shares,(that create a deemed dividend under ss.84(3)) payable to non-resident beneficiaries of a trust, deductible under ss 104(6) given that the trustees have the discretion to designate the amount as paid out as income or capital under trust law?

Position:

Amounts made payable are deductible under 104(6)

Reasons:

As the trust had income for the year for "tax purposes" and it is this amount that is being paid out & will be included in a beneficiary's income under 104(13) (if the beneficiary were a Canadian resident), the payment is deductible under 104(6)

970341
XXXXXXXXXX L. Holloway
(613) 957-8953

Attention: XXXXXXXXXX

March 11, 1997

Dear Sirs:

Re: Subsections 104(6), 104(19) and 212(1)(c)

This is in reply to your letter dated February 6, 1997 concerning a situation whereby a taxable dividend received by a Canadian resident trust is allocated to a non-resident beneficiary. It appears that the interpretation you seek relates to specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

Where, by the application of subsection 84(3), a trust is deemed to have received a dividend, for the purposes of the Act, this dividend would be considered income of the trust for tax purposes. If the trustees of this same trust are empowered to and propose to pay the redemption proceeds to the beneficiaries (regardless of whether the trust indenture allows the trustees to designate the payment in respect of income or capital account for trust purposes) those redemption proceeds would be deductible under subsection 104(6) in computing trust income (and included in the income of a Canadian resident beneficiary under subsection 104(13)).

Subparagraph 212(1)(c)(i) provides that amounts paid or credited to a non-resident as income of or from an estate or trust will be subject to a withholding tax of 25%, to the extent that such amount would be included as income under Part I if that non-resident were a resident, except to the extent that such amount is deemed by subsection 104(21) to be a taxable capital gain of a non-resident investor in a mutual fund trust. As explained above, redemption proceeds paid to a Canadian resident beneficiary would be included in the beneficiary's income under subsection 104(13); hence subparagraph 212(1)(c) would be applicable to a non-resident beneficiary in such a case. The 25% rate is reduced to 15% in many tax treaties. Paragraph 212(1)(c) must be read together with subsection 212(11). Subsection 212(11) provides that any amount paid or credited by a trust or estate to a beneficiary or other person beneficially interested therein shall be deemed to have been paid or credited as income of the estate or trust for the purpose of paragraph 212(1)(c) regardless of the source from which the amount paid or credited was derived by the estate or trust. The effect of subsection 212(11) (subject to the exemptions in subsections 212(9) and (10)) is that amounts received from a trust by a non-resident that, if they had been received directly by the non-resident would have been exempt from Part XIII tax, will nonetheless be subject to the withholding tax under paragraph 212(1)(c), subject to any exempting provisions of a tax convention.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy
A/Section Chief
Resources, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch