4 December 1996 Internal T.I. 9639557 - EXCESS U.S. WITHHOLDING TAX

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.

NOTE - The taxpayer is not a U.S. citizen so that the treatment provided for in paragraph 5 of Article XXIV of the Convention is not an issue.

		                                  December 4, 1996

St. John's Tax Centre Rulings Directorate

Foreign Section
Attention: Glenn Snow J. Stalker
TIPR TC 98 (613) 957-2118

963955

Excess Withholding Tax

We are writing in response to your facsimile transmission of November 28, 1996 in respect of the deduction under subsection 20(11) of the Income Tax Act (the "Act") in respect of excess withholding tax. We understand that you are dealing with a taxpayer who is a Canadian citizen resident in Canada, who is not a U.S. citizen, and who has investments in the U.S. The U.S. payor is withholding more than 15% tax on the investment income paid to the Canadian resident and the taxpayer wishes to deduct the excess under subsection 20(11) of the Act.

OUR VIEW

Under paragraph 2 of Article X of the Canada-U.S. Income Tax Convention (the "Convention"), the U.S. may only tax dividends paid by a U.S. resident to a Canadian resident individual at a rate of 15% of the gross amount. Under paragraph 2 of Article XI of the Convention, the U.S. may only tax interest paid by a U.S. resident to a Canadian resident at a rate of 10% of the gross amount.

It is our view that, as the Convention has removed the legal obligation to pay the "excess" U.S. tax, the payment of such tax (i.e. U.S. tax paid not in accordance with the Convention) is a voluntary tax and would not be considered an income or profits tax. Accordingly, the "excess" U.S. tax is not deductible under subsection 20(11) of the Act. We note that this "excess" tax would be the tax in excess of 15% on dividends and in excess of 10% on interest and that it is not available for foreign tax credit purposes either.

However, the taxpayer may apply to U.S. tax authorities for a refund of any such excess U.S. tax paid. The IRS office at the U.S. Embassy in Ottawa has advised us that your client should file form "1040 NR" for the relevant year(s). The form for the 1996 year can be obtained by writing:

IRS
Eastern Area Distribution Centre
Box 25866
Richmond, Virginia
23289

U. S.A.

Forms for years prior to 1996 may be obtained by writing:

IRS
Western Area Distribution Centre
Rancho Cordoba, California
95743

U. S.A.

Please call the writer if you have any questions.

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch