Principal Issues: What are the Canadian tax reporting requirements for payments under certain financial contracts that reference U.S. equity securities?
Position: Canadian tax reporting is based on the legal nature of the payment under the contract.
Reasons: U.S. tax treatment is irrelevant in determining the nature of the income for Canadian tax purposes.
XXXXXXXXXX 2016-065344 Kimberly Duval, CPA, CA October 24, 2017
Dear XXXXXXXXXX:
Canadian Tax Reporting of U.S. Dividend Equivalent Amounts
We are writing in response to your email of June 13, 2016 wherein you requested our views on the Canadian tax treatment of various deemed dividend amounts under U.S. tax law. As a result of subsequent communications with you, it was agreed that we would narrow our comments to the Canadian tax reporting requirements with respect to amounts considered “dividend equivalent amounts” by the U.S. under new section 871(m) of the Internal Revenue Code (the “Code”).
Our comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (the Act). It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
It is our understanding that the Internal Revenue Service (the “IRS”) issued final regulations under section 871(m) of the Code in the fall of 2015 governing the withholding on certain notional principal contracts, derivatives and other equity-linked instruments with payments that reference dividends on U.S. equity securities. Of particular concern for you and your clients is the fact that a payment made under a Canadian financial contract (i.e. a contract between an entity resident in Canada and a Canadian-resident investor) could possibly be viewed as a dividend equivalent amount under these new rules and be subject to U.S. withholding tax.
In our view, for the purposes of Canadian income tax reporting, in particular subsections 201(1) and (2) of the Income Tax Regulations, the characterization of payments received by a taxpayer should be based on the legal nature of the contract under which the payment is made, irrespective of the tax treatment in a foreign jurisdiction. As such, we can confirm that the U.S. tax treatment of these payments is not relevant for Canadian tax reporting purposes. Thus, amounts received by Canadian residents under such contracts should be reported for Canadian tax purposes the same way they were before the enactment of section 871(m) of the Code.
We trust our comments will be of assistance.
Yours truly,
Dave Beaulne
Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch