Revenue Canada Taxation Head Office
G. Thornley (613) 957-2130
April 9, 1987
Dear XXXX
Re: Section 12(1)(c) of the Income Tax Act (the "Act")
This is in reply to your letter of March 17, 1987 concerning a non- resident of Canada who returns to Canada holding a number of compound interest bonds, some of the interest of which has been reported on the accrual basis both in Canada and in the U.S..
You ask if the words in paragraph 12(1)(c) of the Act that read, "to the extent that such interest was not included in computing his income for a preceding taxation year" may be interpreted to exclude interest previously reported on the accrual basis in the U.S..
Our Comments
In our view, interest income from Canadian sourced compound bonds reported in the U.S. while a taxpayer was a non-resident of Canada is not excluded by the exclusion referred to above and thus the interest not previously included in his Canadian income must be reported when received in Canada pursuant to paragraph 12(1)(c) of the Act.
The above view stems from the fact that paragraph 12(1)(c) of the Act and the preamble to subsection 12(1) of the Act refer to a "taxpayer". Later in paragraph 12(1)(c) of the Act it refers to a "taxation year". In our view a non-resident who has no reportable income from any source in Canada in a particular year is not liable to pay tax in Canada and thus he is not a "taxpayer" nor would he have a "taxation year" for purposes of the Act as required by subsection 249(1) of the Act. In regard to these comments you may wish to review the recent Federal Court of Appeal judgment rendered in February, 1987 in the case of Oceanspan Carriers Ltd. v. MNR.
It should also be noted that persons leaving Canada who own interest bearing investments are not required by section 48 of the Act to report accrued interest to the date of leaving Canada. Thus they avoid the payment of Part I Canadian tax on that interest when it is received while a non-resident of Canada. Conversely persons becoming resident of Canada will be taxable on interest received while resident of Canada even though the bulk of the interest may have been earned while a non-resident.
If you feel that your client has been subjected to double taxation you may wish to make a submission to "Competent Authority". Guidelines for requests for Competent Authority are outlined in Information Circular 71-17R.
We trust the foregoing comments will prove helpful.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch