Principal Issues: Can a taxpayer reduce their Departure tax in respect of shares of a corporation by the 15% Canadian withholding tax applied on a subsequent wind-up of that corporation through the use of subsection 126(2.21)?
Position: No.
Reasons: Section 126(2.21) can only be applied in respect of foreign taxes.
XXXXXXXXXX 2011-042721 W. Doiron February 6, 2012
Dear XXXXXXXXXX :
Re: Recovery of Departure Tax
This letter is in response to your email in which you ask whether a taxpayer can reduce their Departure tax in respect of shares of a corporation by the 15% Canadian withholding tax applied on a deemed dividend arising on a subsequent wind-up of that corporation through the use of subsection 126(2.21) of the Income Tax Act (the "Act").
The tax credit provided by subsection 126(2.21) is computed as the lesser of two amounts:
- 126(2.21)(a) - the total of the foreign taxes paid in respect of the disposition of the property that can reasonably be considered to relate to the portion of the gain or profit in question that arose before the individual's emigration from Canada; and
- 126(2.21)(b) - the amount of the individual's tax under Part I of the Act for the year of emigration that is attributable to the deemed disposition of the particular property under 128.1(4)(b) of the Act. In determining this amount, previous applications of subsection 126(2.21) are taken into account.
The Canadian withholding tax applied on the deemed dividend arising on the wind-up of the corporation is levied under Part XIII of the Act and not a foreign tax paid in respect of the disposition of the property. Therefore, subsection 126(2.21) would not apply in this case. Where there is a departure tax on emigration and the Canadian private corporation is subsequently wound up after departure, there is no relief under the Act for Part XIII tax that may be exigible on a winding up dividend.
We trust these comments will be of some assistance.
Yours truly,
Lita Krantz
Assistant Director
International Division
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch