12 June 1996 External T.I. 9619795 - MEANING OF "PAID OR CREDITED"

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.

							961979
XXXXXXXXXX								Jim Wilson

Attention: XXXXXXXXXX

June 12, 1996

Dear Sirs:

Re: Meaning of "paid or credited" - Part XIII of the Income Tax Act

This is in reply to your letter of March 12, 1996, addressed to the XXXXXXXXXX Tax Services Office ("TSO"), wherein you requested the Department's assistance on an issue involving rents paid to a U.S. resident. Since your letter did not include the names of the actual taxpayers involved, the TSO referred your letter to us to be dealt with as a request for a technical interpretation.

The situation that you have presented to us involves a dispute between a U.S. estate and a Canadian resident with respect to who is the beneficial and legal owner of a particular commercial rental property situated in Canada. The property was initially owned jointly between a Canadian and U.S. resident. However, upon the death of the U.S. resident, the U.S. estate and the Canadian resident are in dispute as to who is entitled to the deceased taxpayer's half interest in the property and the rents associated therewith. Both parties will have the matter concluded before the courts. In the meantime, the U.S. estate has not received any rents from the property. You wish to know whether the U.S. estate is liable for Part XIII tax on its potential share of rents prior to this mater being resolved by the courts.

Our Comments

Since the interpretation you seek relates, in part, to completed transactions undertaken by specific taxpayers, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to completed transactions involving specific taxpayers will only be provided by a tax services office. However, we can provide the following general comments.

The liability for Part XIII tax normally arises on amounts paid or credited by a person resident in Canada to a non-resident person. The Department's views on the meaning of "credited" are set out in paragraph 5 of Information Circular 77-16R4 and Roundtable Questions #17, #84 and #48 of the 1984, 1986 and 1991 Canadian Tax Foundation Conference Reports. In brief, an amount is "credited" where a resident of Canada has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident. An amount is unconditionally available to the non-resident person when the non-resident has the immediate right to receive the amount, for example, when the amount is recorded in the payer's books and is payable on demand.

We have not been provided details as to why the U.S. estate has not directly been paid or credited its potential share of the rent, whether the U.S. resident's potential share of rent is presently being placed in trust, what procedures were followed prior to the death of the U.S. resident with respect to the withholding obligations or how the Canadian resident is currently accounting for the rent received with respect to the U.S. estate's potential interest in the property (i.e. is the Canadian resident reporting such rent for purposes of Part I of the Act). Without all the relevant information we cannot provide any definitive comments on the issue of whether rent has been "paid or credited" to the U.S. estate. For example, prior to death, was the Canadian resident acting as agent for the U.S. resident and withholding the Part XIII tax himself pursuant to subsection 215(3) of the Act or was the withholding done directly by the Canadian tenant? In the latter case, we would have thought that since the ownership of the property is under dispute, the Canadian tenant would have continued to withhold Part XIII tax on rents it continues to pay in order to avoid any potential personal Part XIII liability.

It is quite possible, once the Department has had an opportunity to review all the facts, that no amount will be considered to have been "paid or credited" to the U.S. estate until the issue is resolved by the courts and the U.S. estate's share of rent has been actually "paid or credited" to it. However, based on the information available to us, we are unable to provide you any assurance on that issue at this time. We suggest that you provide the TSO with the full details, including the taxpayers' identity, so that they can assist you in resolving this matter. We would be available to help the TSO should they require our assistance.

In the event an amount would be considered to have been "paid or credited" to the U.S. estate prior to the "ownership" issue being resolved by the courts, paragraphs 1 and 2 of Article XXVI of the Canada-U.S. Income Tax Convention ("Convention") would provide some relief to the U.S. estate as it effectively provides for a six year period (as opposed to a two year period under subsection 227(6) of the Act) in which to request a refund of tax in respect of taxation not in accordance with the Convention.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of the aforementioned Information Circular this is not an advance income tax ruling and is therefore not binding on Revenue Canada, Taxation.

We trust you will find the above comments of some assistance.

Yours truly,

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