28 October 1997 External T.I. 9711965 - RETURN OF CAPITAL FROM A U.S. CORPORATION

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:

Whether a cash distribution made to a Canadian shareholder of a U.S. corporation constituted a dividend or a return of capital for Canadian tax purposes?.

Position:

No conclusive opinion was given because we did not have the relevant information.

Reasons:

It is a question of corporate law, not U.S. tax law, that will determine the nature of the cash distribution for Canadian tax purposes. The information provided by the taxpayer pertained strictly to the U.S. tax treatment of such distributions.

                                      971196
XXXXXXXXXX		                          Jim Wilson
(613) 957-2123

October 28, 1997

Dear XXXXXXXXXX:

Re: Return of Capital from a U.S. Corporation

We are writing in response to your letters of May 1 and September 7, 1997 in which you requested our opinion on the tax treatment of certain distributions made to yourself, a Canadian shareholder, from XXXXXXXXXX, a corporation incorporated in the state of Maryland. You have received cash dividends from XXXXXXXXXX. However, you have been advised by XXXXXXXXXX that a significant portion of the dividends were in fact a return of capital for purposes of U.S. tax law.

Pursuant to subsection 90(1) of the Income Tax Act (the "Act"), a shareholder who is a resident of Canada must include in his or her income dividends received from corporations not resident in Canada. A distribution of property by a corporation to its shareholders can be either a dividend or a non-taxable return of capital. Whether a cash distribution is a dividend or a return of capital in any particular situation is a question of fact to be determined with regard to the relevant corporate law. The tax treatment in the foreign jurisdiction of such distributions is not relevant for the purposes of subsection 90(1) of the Act.

XXXXXXXXXX

The U.S. tax law regarding distributions from a corporation to its shareholders is similar but not identical to Canadian tax law. For example, as we understand it, under the Internal Revenue Code ("Code"), regardless that a distribution of a return of capital has been made to its shareholders under corporate law, the "earnings and profits" rules in the Code will consider that distribution to be a dividend to the extent of earnings and profits. In other words, the U.S. tax system, unlike Canada's tax system, generally does not allow the corporation the option of returning capital to its shareholders before retained earnings. Having said this, the "earnings and profits" rules under the code can also create situations where, as a question of U.S. tax law, certain distributions may be treated as a return of capital when in fact they are a dividend under corporate law. The latter would be the bigger concern in dealing with your enquiry.

As alluded to above, the question of whether the distribution you received from XXXXXXXXXX is a dividend or return of capital for Canadian tax purposes is not a simple issue. In order to be able to answer your enquiry with any degree of certainty, the Department would have to know the nature of the distributions from XXXXXXXXXX as a question of corporate law and not U.S. tax law.

XXXXXXXXXX

We would be glad to reconsider the issue again if you can provide the relevant information concerning XXXXXXXXXX corporate law and the nature of the distributions under such corporate law. We would have preferred to contact you by telephone to explain the issues raised by your enquiry, but you did not provide a telephone number. If you would like to discuss this matter further, you may call Jim Wilson at the above-noted telephone number.

We regret that our reply could not be more conclusive.

Yours truly,

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