31 January 2003 External T.I. 2002-0166085 - Foreign Tax Credit

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: para. 30 of IT-270R2

Position: provided general comments

Reasons:

XXXXXXXXXX D. Yuen
2002-016608
January 31, 2003

Dear XXXXXXXXXX:

Re: Interpretation Bulletin IT-270R2 ("IT-270R2")

We are writing in response to your letter dated September 27, 2002, wherein you requested our comments on paragraph 30 of IT-270R2. Unless otherwise stated, all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c.1, as amended.

Paragraph 30 of IT-270R2 reads as follows:

Where a resident of Canada receives a dividend on shares of a corporation which is resident in a foreign country and not resident in Canada, the dividend will normally be recognized as being from a source in that foreign country. However, where a company incorporated in a foreign jurisdiction is resident in Canada, the payment of dividends by that corporation to non-residents of that foreign country (including Canadian residents) may require the payment of a withholding tax to the foreign jurisdiction. In these circumstances, the dividend paid to a resident of Canada is generally not considered as income from sources in that foreign jurisdiction but as income from Canada.

Your Questions

You have asked us to provide the following

1. an example of a firm whose dividends would qualify;

2. an explanation of whether the dividend would be treated the same as a Canadian dividend; and

3. how would the withholding tax be dealt with.

Our Comments

1. If a resident of Canada receives a dividend on shares of a corporation which is resident in a foreign country and not resident in Canada, the dividend will normally be recognized as being from a source in that foreign country. As the determination of a corporation's country of residence is a question of fact, consideration should be given to the provisions in an income tax treaty between Canada and that country, if any, that are used to determine residency for purposes of the treaty. In addition, subsection 250(5) in conjunction with such a treaty may deem that corporation to not be resident in Canada. In your particular situation, if you are uncertain, you may wish to contact the corporation directly for information on its residency status.

2. Dividends from a Canadian resident corporation are included in the taxpayer's income under subsection 82(1) and paragraph 12(1)(j). Pursuant to paragraph 82(1)(b), a dividend received by an individual from a Canadian resident corporation is increased by 1/4 (the "gross up") and the individual will, pursuant to section 121, be entitled to a deduction from tax otherwise payable of 2/3 of the amount of the gross up (the "dividend tax credit").

Dividends from a non-resident corporation are included in the taxpayer's income under section 90 and paragraph 12(1)(k). The gross up and the dividend tax credit provisions do not apply to a dividend received from a non-resident corporation.

3. Where a corporation resident in a foreign country pays a dividend to a Canadian resident, in order to avoid double taxation on the dividend a foreign tax credit in respect of any withholding taxes paid to the government or political subdivision thereof of a foreign country is allowed as a deduction from Part I tax otherwise payable on the dividend in Canada. For further information concerning foreign tax credits, please refer to form T2209 Federal Foreign Tax Credits and the General Income Tax and Benefits Guide.

These Comments are provided in accordance with the guidelines set out in paragraph 22 of Information Circular IC 70-6R5 dated May 17, 2002, issued by the Canada Customs and Revenue Agency (the "CCRA") and are not considered binding on the CCRA.

Yours truly,

Olli Laurikainen
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch