18 May 1993 External T.I. 9301315 F - Dividends Owned During Accounting Period

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sir:

TECHNICAL INTERPRETATION - CANADA-JAPAN TREATY

This is further to your request for a technical interpretation with respect to the application of Paragraph 2 of Article 10 of the Canada- Japan Income Tax Convention (the "Convention") in the following hypothetical situation.

Facts

A Japanese Corporation ("Japanco"), a resident of Japan for purposes of the Convention, held all the issued and outstanding shares of a Canadian Corporation ("Canco"), a resident of Canada for purposes of the Convention, from December 23, 1988 to December 31, 1992.

Japanco also holds all the issued and outstanding shares of an American Corporation ("USco") a US resident corporation.

On December 31, 1992, Canco declared two separate dividends to its common shareholder of record of the same date, and it also issued a non interest bearing promissory note with respect to the "first dividend" to effect "payment" of that dividend.

The first dividend was declared to be an amount equal to its retained earnings as of December 31, 1991 minus the amount of any dividend paid by Canco to Japanco for the period of January 1, 1992 to December 30, 1992, (referring to the second dividend). The resolution of the directors of Canco specifically indicated that the First dividend was paid out of retained earnings as of December 31, 1991.

The second dividend was declared to be for an amount equal to its net earnings after tax computed in accordance with generally accepted accounting principles for the financial year commencing on January 1, 1992 and ending on December 31, 1992. The exact amount of the second dividend was not known at the time the dividend was declared (December 31, 1992). Canco expected the amount of the second dividend to be determined by January 31, 1993. It also was intended that as soon as the amount for the second dividend was ascertained, that Canco would issue to Japanco a non-interest bearing demand promissory note of an amount equal to that of the second dividend to effect payment of the second dividend.

On January 1, 1993, Japanco transferred all the issued and outstanding shares of Canco to USco.

Canco intends to remit the Part XIII tax required under the Act, when the dividends are paid on January 15, 1993 in the case of the first dividend and for the second dividend, on the 15th day of the month when the amount of the second dividend is ascertained.

You requested our technical interpretation on Article 10 of the Canada - Japan Treaty (hereinafter "convention") with respect to the applicable rate of withholding tax to the First dividend and the Second dividend.

Our Comments:

Article 10 of the Convention provides;

(1)     Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State.

(2)     However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting state, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed.

(a)     10 percent of the gross amount of the dividends if the beneficial owner is a company which owns at least 25 percent of the voting shares of the company paying the dividends during the period of six months immediately before the end of the accounting period for which the distribution of profits takes place.

Provided the retained earnings arose after Japanco acquired its shares of Canco it is our opinion that both the first and second dividend will qualify for the 10% rate of withholding tax set out in paragraph 2(a) of Article 10 of the Convention.

We trust this response is adequate for your purposes.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch