5-910445
Dear Sirs:
We are replying to your letter of February 13, 1991, concerning, subsection 104(22) of the Income Tax Act and the availability of the foreign tax credit to a Canadian beneficiary of a U.K. trust.
It is our view that the amendment to subsection 104(22) of the Act taxation years commencing after 1987 did not signify a change in the law but merely clarified that the provision applies only to resident trusts. Nevertheless, in the situation described by you, there may be relief available to a discretionary beneficiary of a U.K. trust notwithstanding that subsection 104(22) does not apply to taxes paid by the trust on its income.
The Canadian beneficiary may apply directly to the U. K. Inland Revenue for a repayment of the tax paid by the trust in excess of the rate of tax set by the Canada-U.K. Income Tax Convention (1978) (if applicable) or other rate of withholding tax normally applied on payments to non-residents. Thus, for example, if the U.K. trust paid tax of 45% on its income and subsequently withheld 10% on distribution to the beneficiary although the beneficiary would be entitled to declare a credit on the Canadian Return of Income under section 126 only with respect to the 10% withholding tax, he/she could apply to Inland Revenue for a refund of some or all of the 45% tax. The refund, whether received by the Canadian beneficiary directly or indirectly through the trust, will be treated as income from the trust.
For further information concerning the procedure to be followed to obtain the refund noted above, refer to the U.K. Inland Revenue Statement of Practice 3/86.
We trust the foregoing advice is helpful.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate