An entity (the “Tax Exempt Entity”) that is a resident of Norway per Art. 4(1) of the Treaty and that is exempt from income tax liability under Norway income tax law, maintains an investment fund (the “Fund”) whose assets are held by it directly but segregated from its other assets. Through the Fund, it invests in a trust (the “REIT”) that is a REIT under ITA s. 122.1(1). Art. 22(2) of the Treaty provided:
“Where such income is income from a trust, other than a trust to which contributions were deductible, the tax so charged shall, provided that the income is taxable in the Contracting State in which the beneficial owner is a resident, not exceed 15 per cent of the gross amount of the income.”
Is the 25% withholding under s. 212(1)(c) on the taxable REIT distributions made to the Fund reduced to 15% under Art. 22(2)? CRA stated:
if a distribution from a Canadian-resident trust would otherwise be included in the Norwegian resident’s taxable income, but the recipient itself is, under Norwegian tax law, exempt from the imposition of income taxation, we would consider that the “income is taxable” for the purpose of paragraph 2 of Article 22. In contrast, if the distribution were made to a Norwegian resident that was otherwise taxable under Norwegian tax law but entitled under Norwegian tax law to exclude the distribution from income, the requirements of paragraph 2 would not be met.
Based on our understanding of the facts, the Taxable Distributions are recognized under Norwegian income tax law and generally included in a resident’s income for tax purposes.
The reason no Norwegian income tax is imposed on Tax Exempt Entity in respect of the Taxable Distributions is because Tax Exempt Entity is exempt from the imposition of income tax under Norwegian tax law, and not the result of a specific exclusion from income. As a result, paragraph 2 of Article 22 of the Treaty would apply to lower the withholding rate on the Taxable Distributions to 15%.