6 April 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.

April 6, 1981 Revenue Canada, Taxation, Head Office Assessing Division, 875 Heron Road, Ottawa, Ontario K1A 0L9

Attn: J. Hartwick

Dear Mr. Hartwick:

New Canada-U.K. Tax Treaty:

Further to our discussion of March 31, I have decided to follow your advice and am writing to request the comments of your division in respect of U.K. dividends received by Canadian individuals.

In particular, I would like to have confirmation as to whether Revenue Canada agrees with the interpretation that Articles 27(4) and 10(3) of the New CanadaU.K. Treaty, ratified in December, 1980, require Canadian individuals to report U.K. dividends at a grossed-up amount. The grossed-up amount would be the sum of the dividend plus the related U.K. advance corporation tax (ACT). For 1980 the U.K. ACT is $30 for every $70 dividend. Therefore, the grossed-up amount of a U.K. dividend would be $100 for every $70 of actual dividends declared. If this is the appropriate procedure, it should also mean that a Canadian individual would be entitled to claim a foreign tax credit based on foreign taxes of $15 paid for every $100 of gross U.K. dividends reported. This would follow since a Canadian individual is entitled, under the new treaty, to claim a refund of the U.K. ACT but is subject to a 15% withholding tax on the gross amount of the dividend. Continuing with our example of a $70 dividend, the tax on the gross amount would be $15. This sum would be withheld from the total ACT of $30, leaving the individual with a right to claim a refund of $15.

In contrast to the foregoing, I would also appreciate your division's comments as to whether it is possible (notwithstanding the new treaty provisions, which I believe to be fairly clear) for a Canadian individual to report U.K. dividends received in 1980 on a net basis only. That is, only the actual amount of the dividend as declared would be reported for Canadian tax purposes and no account would be made of either the refundable or withheld portions of the ACT. I suggest that a filing position on this basis might be supported by a liberal interpretation of paragraph 4 of Article 28 of the new treaty. That provision is of course the "grandfather" clause in the new treaty whereby provisions of the superseded treaty may be held to apply for a limited period of time providing they are more beneficial than provisions in the new treaty.

Thank you in advance for your consideration of these issues. As you know, we are currently in the midst of our annual personal tax preparation work and, therefore, we would appreciate a response at your earliest convenience. I would be most pleased to further discuss these issues with you by telephone if this can expedite their resolution.

Yours very truly,

XXXX