11 March 1981 Income Tax Severed Letter

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.

March 11, 1981

Kevin J. Donnelly

XXXX

Re: Canada-United Kingdom Convention Article X

We would appreciate your assistance in obtaining clarification of United Kingdom taxation of dividends received by a discretionary trust when they are subsequently distributed to a Canadian beneficiary.

Enclosed is a copy of a letter we recently received from an accounting firm. Could you please comment on the information set out in the letter, in particular:

1. What is the nature of the $156 of income received by the Canadian beneficiary - is it dividend income or income from a trust?

2. If the $156 is dividend income, and we understand it is for United Kingdom tax purposes, then is there any advance corporation tax to be paid by the trust in respect of that distribution? It would appear to us that in the example, the "gross-up for foreign taxes paid" is not the same as the "tax credit" referred to in Article X of the Convention.

3. Is a United Kingdom discretionary trust required to actually withhold tax on payments to Canadian beneficiaries? What is the tax rate and is it applied to the amount paid or to a grossed-up amount?

4. For Canadian tax purposes, our initial conclusion with respect to the tax position of the Canadian beneficiary is

(a) the $156 is dividend income;

(b) the $144 is not a "tax credit" for purposes of Articles X and XXVII of the Convention; and

(c) for foreign tax credit purposes in Canada we will recognize foreign tax paid in respect of the dividend of 15% of $156. Any withholding tax paid by the Canadian beneficiary in excess of 15% of $156 will be allowed only as a deduction in computing income pursuant to subsection 20(11) of the Income Tax Act.

In addition to providing us with your comments on the foregoing, would you please confirm that, for purposes of Article X of the Convention, United Kingdom tax at 15% is in fact payable by Canadian shareholders on United Kingdom dividends and that this tax is paid by the Canadian shareholder in the year the dividend is paid by way of offset against the Canadian shareholder's "tax credit".

Yours sincerely,

Director Provincial. and International Relations Division

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KJD/jb