| 19(1) | File No. 5-7609 |
| O. Laurikainen | |
| (613) 957-2125 |
June 19, 1989
Dear Sirs:
Re: Paragraph 212(1)(c) of the Income Tax Act (the "Act")
This is in response to your letter of February 20, 1989. You have indicated that under the revised paragraph 212(1)(c) of the Act, capital dividends distributed by a Canadian trust to a non-resident beneficiary may be subject to withholding tax. In your view the explanatory notes to Bill C-139 suggest that this result was not intended.
It is our view that under the revised paragraph 212(1)(c) of the Act, a Canadian resident trust may distribute capital dividends which it has received to its non-resident beneficiaries free of Canadian withholding tax. What may not be clear is that the operation of subsections 104(6), 104(13) and paragraph 212(1)(c) of the Act in an example where the trust has taxable income and has also received capital dividends in a particular year but wishes only to distribute the capital dividends. Since capital dividends are not included in the income of a trust for tax purposes, any trust payment that is a distribution of such dividends would not meet the deductibility requirements of paragraph 104(6)(b) of the Act. Similarly, such a distribution would not be required to be included in the income of a Canadian beneficiary under paragraph 104(13)(a) of the Act and would therefore not be subject to Part XIII withholding tax under paragraph 212(1)(c) of the Act if paid to a non-resident beneficiary.
We trust that you will find our comments helpful.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch