7 April 1991 Income Tax Severed Letter - Designating Dividends to Non-residents

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.

Subject: Designating Dividends to Non-Residents Your File #HAV 9586-1

This is in reply to your memorandum of April 3, 1991 wherein you requested our opinion as to whether or not a trust resident in Canada can designate taxable dividends to non-resident beneficiaries.

Subsection 104(19) of the Income Tax Act (the "Act") provides that a trust may designate taxable dividends to a beneficiary, in accordance with the provisions of the subsection and for the purposes of the Act other than Part XIII. The subsection does not in any way limit the designation to resident beneficiaries.

IT-524, on the other hand, states that it only deals with the taxation of dividends designated to Canadian beneficiaries and we would, accordingly, not expect it to comment on the designation of dividends to non-residents. This is not to say however that such designations can not be done.

While it is not clear from your memorandum, it appears to us that you have some concerns as to whether or not testamentary trusts are or may unduly reducing their taxes payable through the designation of dividends to non-resident beneficiaries. However, from our limited analysis we have not been able to reach such a conclusion.

In example:

• • a Canadian (Manitoba) trust has a sole non-resident beneficiary
• • the net income of the trust as calculated for non-tax purposes is "payable" to the beneficiary after expenses but before taxes and defines dividends as being income for this purpose.
• • the beneficiary has a right to demand payment of all income annually.

- the trust receives net taxable dividends of $300.00

- gross-up available $75.00

- tax credit available $50.00

- trust expenses $100.00

Therefore:

(ignoring other taxes)

CASE 1 NO DESIGNATION

- trust net income:
dividends received $300.00
gross-up 75.00
(expenses) (100.00)
sub-total $275.00
less allocation to beneficiary (amount payable) (200.00)
- Trust Net Income $75.00

- Trust Flat Tax Payable (2%) $ 1.50

- Tax Credit ( 50.00)

- Part XIII tax Payable [212(1)(c)] 25% * 200.00 $ 50.00

DIVIDEND TAX CREDIT IS RETAINED BY TRUST AND CAN BE APPLIED TO REDUCE FEDERAL TAX PAYABLE

CASE 2 FULL DESIGNATION

- trust net income:
dividends received $300.00
less designated maximum = amount payable (200.00)
Deemed dividends received $100.00
gross-up 25.00
(expenses) (100.00)
sub-total $ 25.00
less allocation to beneficiary (amount payable*) ( 25.00)
*not exceeding trust income [104(6)(b)]
- Trust Net Income NIL

- Trust Tax Payable NIL

- Part XIII tax Payable [212](1)(c)] 25% *200.00 $ 50.00

DIVIDEND TAX CREDIT OF $16.67 IS AVAILABLE TO THE TRUST BUT IT HAS NO TAXES FOR IT TO BE APPLIED TO. DIVIDEND TAX CREDIT OF $33.33 IS "PASSED" TO THE BENEFICIARY WHO CAN NOT APPLY IT

Various other scenarios could be described which would fall within these extremes. In our opinion these would all fall within the class of "judicious choice of distributions and designations" referred to in our previous memorandum of December 1982 as supplied by you.

If our understanding of your concerns is incorrect, we would be pleased to reconsider this issue upon your further clarification.