21 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 21, 1981

Kevin J. Donnelly (613) 995-0038

XXXX

Dear Sirs:

This is in reply to your letter of January 12, 1981 and confirms information provided to you recently by telephone concerning United Kingdom taxation of distributions from a United King- dom resident discretionary trust.

We have been in contact with the United Kingdom Inland Revenue, Policy Division, and have received the following information:

1. Under the provisions of Section 16, Finance Act 1973, income arising to the trustees of a discretionary trust is subject to tax at the additional rate (15 per cent) as well as the basic rate, but the trustees are able to claim double taxation relief in respect of foreign tax already paid on the income.

2. Under the provisions of Section 17, Finance Act 1973, a distribution of income under the trust is treated as a payment from which tax has been deducted at the aggregate of these two rates in force for the year of assessment.

3. Under United Kingdom law a discretionary payment is an item of income on its own and such income is not dealt with in any Article of the treaty.

4. As regards a foreign resident beneficiary of a discretionary or accumulation trust administered in the United Kingdom the strict interpretation is that the beneficiary would not be able to claim repayment of any part of the basic and additional rate tax paid on the trust income. In practice, however, the United Kingdom tax authorities allow the beneficiary to "look through" to the underlying income represented by the payments to him. Any income originating outside the United Kingdom would be fully relieved from tax whilst the appropriate Article of the Convention would be applied to any income originating in the United Kingdom.

Referring to the example in your letter, there is no disagreement with the calculations on the first page. However, the United Kingdom withholding tax rate on the $300 trust income distributed to the non-resident Canadian beneficiaries will be limited to 15%, the rate under the Convention on United Kingdom source dividends and interest. Thus page 2 of your example should read:

Tax applied at 15% on              $300 - $ 45
Less tax paid                       144
Refund for beneficiary             $ 99
Foreign source trust income        $300 
Non-business tax (treated as paid 
at the time of distribution) for 
purposes of S.S. 126(1) of the Income
Tax Act                            $ 45

We trust the foregoing is the information you require.

Yours sincerely,

Director Provincial and International Relations Division

O.P.R.U. - Canada-United Kingdom Convention Articles 10 and 11

KJD/jb