MEMORANDUM
DATE MAR 6 1989
TO TORONTO DISTRICT OFFICE R.J. Rousseaux Group Head Source Deductions Audit
FROM HEAD OFFICE M.J. Loveday Rulings Directorate Tel. (613) 957-8961
SUBJECT: Subsection 153(4) Unclaimed Interest
We are writing in reply to your memorandum of December 21, 1988 concerning the withholding of tax on interest credited to dormant bank accounts. All references to statutes are to the Income Tax Act, unless otherwise stated.
In our view, neither the chartered banks nor the Bank of Canada are required to withhold tax under subsection 153(4) on amounts credited to dormant accounts. This opinion is based on our understanding of the meaning of the terms "unknown", "in respect of ...interest" and "received", as used in that subsection.
1. "The person... is unknown"
In the case of stock brokers dealing with unclaimed dividends, the owner is considered unknown. Although the broker is able to verify ownership if required, he cannot say offhand to whom the dividends belong. In most of these cases the stocks are in street form (registered in the broker's name), and in practice the broker will keep the dividends unless the owner comes forward to make a claim. These amounts have been subject to subsection 153(4) withholding tax on the basis that the broker did not know to whom the dividends belonged. So in the historic application of this subsection, "unknown" referred primarily to identity, rather than location.
2. "An amount ... in respect of ... interest"
Subsection 153(4) requires the taxpayer to withhold on amounts it receives "as or in respect of dividends, interest or proceeds of disposition". On the transfer of funds from the chartered bank to the Bank of Canada it would be the Bank of Canada, as the recipient who could be subject to subsection 153(4). It was suggested that the total amount of interest credited and accumulated over the dormancy period be subject to tax at this time.
This lump sum amount received by the Bank of Canada represents the balance owed by the chartered bank to its accountholder. The balance arose from a sum of principal to which was added the amount of interest credited each year. However, the interest credited to the account is considered received by the accountholder for tax purposes; and thus would seem to become part of the principal of the account. Therefore it should not retain its identity as interest.
Accordingly, we would tend to view the lump sum payment to the Bank of Canada as an amount in respect of the chartered bank's liability to their accountholder, rather than an amount, in respect of interest.
3. "An amount received by the taxpayer"
It has also been suggested that the chartered banks should withhold 50% of the amount of interest that they credit to dormant accounts each year. After discussion with Legal Services it was determined that this assessment would be questionable. The problem in this case is that the chartered bank would probably not be considered to have "received" any amount in respect of crediting the account.
In conclusion we do not believe that the chartered banks or the Bank of Canada should be required to withhold under subsection 153(4) of the Act. It is questionable whether a person is "unknown" simply because the bank does not have their current address. We also have doubts whether the lump sum payments to the Bank of Canada can be considered to be "in respect of interest". In addition, it seems unlikely that the amount of interest credited by the chartered banks to the dormant accounts would be considered "received" by those same banks.
In closing, we would like to inform you that we intend to provide our views on this matter to XXXX later this month. If you wish to discuss any of these issues, we would appreciate hearing from you as soon as possible.
Financial Institutions Section
c.c.: E. Gauthier
H. Ramien