21 September 1988 Income Tax Severed Letter 5-6612 - [880921]

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.

P. Mason (613) 957-4364

November 29, 1988

Dear Sirs:

We are writing in response to your letter dated September 21, 1988. In that letter, you asked us to confirm your understanding of the application of paragraph 2 of Article XXII of the Canada-US Tax Convention 1980 so far as it applies to the provisions of paragraph 212(1)(c) and subsection 212(11) of the Income Tax Act (the "Act") (as amended by Bill C-139). The relevant facts were set out as follows:

Your client (the "Trust") is a "unit trust" (but not a "mutual fund trust") as defined in subsection 108(2) of the Act and is resident in Canada. The assets of the Trust are invested entirely in a portfolio of public traded US securities. Currently, all the participants, or unit holders, are also resident in Canada. A US pension trust, not resident in Canada, has applied to acquire units in the Trust and you wish us to confirm your understanding of the following:

1. Non-resident withholding tax will not be exigible under paragraph 212(l)(c) of the Act on income paid or payable to the US pension trust in the year pursuant to paragraph 2 of Article XXII to the extent such income is derived from US source dividends, interest or taxable capital gain. Although paragraph 2 refers to "income distributed by an estate or trust" you asked us to confirm that the exemption applies even if the income is not actually distributed provided the income is "payable in the particular year to the beneficiary" for the purposes of subsection 104(13) and 104(24) of the Act.

You also asked us to confirm that "income" referred to in Article XXII includes taxable capital gains.

2. Although a unit of the trust will constitute "taxable Canadian property" to a non-resident unit holder pursuant to subparagraph 115(l)(b)(vii) of the Act, Article XIII, paragraph 4 of the Convention will, in your view, exempt a non-resident unit holder from Canadian tax on any gain realized on the disposition of the unit. However, it would appear that the clearance procedures in section 116 of the Act would still have to be complied with.

Your request appears to involve a contemplated proposed transaction. Confirmation of the tax consequences of proposed transactions will only be provided in response to a request for an advance income tax ruling applied for in accordance with Information Circular 70-6R. We can however provide the following comments relative to your request.

Paragraph 2 of Article XXII of the Canada-US Income Tax Convention (1980) exempts from Part XIII tax any portion of a trusts' income paid or credited to a beneficiary who is resident of the United States that can be shown to be out of income received from sources outside Canada. For this purpose income received from sources outside Canada would include taxable capital gains credited to a US resident beneficiary from the disposition of securities outside Canada. This exemption from Part XIII tax applies to income credited to a US resident beneficiary which includes income "payable in the particular year to the beneficiary" for the purposes of subsections 104(13) and 104(24) of the Act, provided the person to whom it was payable was entitled in that year to enforce payment thereof.

Paragraph 4 of Article XIII of the Canada US Income Tax Convention (1980) exempts gains from the alienation of an interest in a unit trust by a resident of the US from tax an any gain realized on disposition of the interest in that unit trust; however, the clearance procedure in section 116 of the Act would still need to be complied with.

The above comments are opinions and not rulings, as explained in paragraph 24 of Information Circular 70-6R.

Yours truly,

Original Signed By

for Director Bilingual Services and Resource Industries Division Rulings Directorate