26 June 2000 External T.I. 1999-0012535 - Par. 2 Article XXII of Canada-US Treaty

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Meaning of the word "distributed"-as used in p.2 of Article XXII of the Canada-U.S. Convention

Position: word distributed also applies to amounts credited in this case

Reasons: as 214(3)(f) deems amounts to be paid or credited & does not differentiate between the two amounts, therefore an amount deemed to be paid or credited would be subject to p.2 of Article XXII

XXXXXXXXXX  							L. Holloway
								1999-001253
Attention:  XXXXXXXXXX 

June 26, 2000

Dear Sirs:

This is in reply to your letter dated October 4, 1999 followed by your subsequent correspondence dated February 22, 2000. We apologize for the delay in our response.

Your question involves the meaning of the word "distributed" as used in paragraph 2 of Article XXII of the Canada-U.S. Income Tax Convention (the "treaty") in the following scenario:

After the death of the income beneficiary, the trust disposes of its sole asset, a piece of U.S. real estate at a gain. Most of the funds are retained as a "holdback" pending the obtaining of a Canadian income tax clearance and a U.S. estate tax closing letter with a minimal amount being distributed to the non-resident beneficiaries.

Paragraph 2 of Article XXII of the treaty provides that trust income distributed to a U.S. beneficiary is exempt from tax in Canada to the extent that it arises outside of Canada. You ask whether Article XXII of the treaty applies in the above scenario such that where amounts have become payable they in fact will be considered distributed for purposes of the treaty.

Your second letter of February 22, 2000 notes that paragraph 214(3)(f) may be relevant to the above scenario. Paragraph 214(3)(f) provides that for purposes of Part XIII, where subsection 104(13) would, if Part I were applicable, require an amount payable to the beneficiary to be included in income, this amount will be deemed to have been paid or credited to the beneficiary on the earlier of 90 days following the end of the taxation year of the trust or the date it is actually paid.

Our Comments

Paragraph 214(3)(f) is designed to ensure that Part XIII tax cannot be indefinitely deferred where a trust obtains a deduction under subsection 104(6) for an amount that is not paid or credited to the beneficiary until sometime later. As paragraph 2 of Article XXII of the treaty provides for either a reduction in the withholding rate or an exemption from withholding tax altogether, it is logical to conclude that the word "distributed" found in paragraph 2 refers at a minimum to amounts "paid" by an estate or a trust on which withholding is required under subsection 212(1). Whether the word "distributed" also applies to amounts "credited" is debatable; however, paragraph 214(3)(f) deems amounts payable to be "paid or credited" and does not differentiate between the two deemed amounts. Hence, in our opinion an amount deemed to be paid or credited would be subject to the application of paragraph 2 of Article XXII of the treaty as an amount distributed.

Subsection 104(24) provides that an amount is not payable to a beneficiary in a taxation year unless the beneficiary is entitled to enforce payment of the amount. Consequently, whether a capital gain realized by a trust is payable to its beneficiaries is a question of fact determined by the terms of the trust. In the situation described in your letter, as the trust is non-discretionary and the residual beneficiaries are entitled to the residue of the trust, it is likely that all income (including taxable capital gains) arising after the death of the income beneficiary is payable to the residual beneficiaries assuming that they are otherwise entitled to enforce payment of this income. If these residual beneficiaries were resident in Canada they would have an income inclusion under subsection 104(13), hence paragraph 214(3)(f) and paragraph 2 of Article XXII would have application as explained above.

We trust the above comments will be of assistance to you.

Yours truly,

T. Murphy
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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