22 October 1997 External T.I. 9707835 - DIST. OF CAPITAL FORM A CAN. TRUST TO A SWISS BENEFICARY

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.

5-970783
XXXXXXXXXX Michel Lambert

Attention: XXXXXXXXXX

October 22, 1997

Dear Sir\ Madam:

Re: Distribution of Capital from a Canadian Trust to a Swiss Beneficiary

This is in reply to your letter dated March 19, 1997 wherein you requested our opinion regarding a fact situation where a trust resident in Canada pays an amount to a beneficiary who is a resident of Switzerland. We apologize for the delay in responding to your request.

In the situation described in your letter, the trust previously held shares in a Canadian resident investment corporation. The shares held by the trust were redeemed by the corporation for cash proceeds paid to the trust. The corporation elected that the deemed dividend arising on the redemption of the shares be paid out of the corporation's capital dividend account.

Application of the Income Tax Act (the "Act").

In our opinion, if all or part of the deemed dividend received by the trust is a capital dividend pursuant to subsection 83(2) of the Act, the capital dividend will not be income of the trust under Part I of the Act. However, as stated in paragraph 36 of Information Circular 77-16R4, where an amount paid or credited by a trust to a non-resident beneficiary may reasonably be considered to be a distribution of a capital dividend received by the trust on a share of the capital stock of a corporation resident in Canada, that amount is subject to Part XIII tax under subparagraph 212(1)(c)(ii) of the Act.

Application of the Canada-Switzerland Tax Treaty (the "Treaty")

Article XXI of the Treaty provides that the capital of a Swiss resident may only be taxed in Switzerland (except for immovable properties and movable properties used in specific businesses mentionned in the Treaty).

As you mentioned, "capital" is not defined in the Treaty. As such, you are of the opinion that the traditional trust law definition of "capital" should apply in interpreting Article XXI of the Treaty.

Considering section 3 of the Income Tax Conventions Interpretation Act,⁽¹⁾ we are of the view that we must consider the definition of "capital" for tax purposes rather than for trust law purposes when interpreting a tax treaty. This section reads as follows:

Sec. 3. Meaning of undefined terms — Notwithstanding the provisions of a convention or the Act giving the convention the force of law in Canada, it is hereby declared that the law of Canada is that, to the extent that a term in the convention is

(a) not defined in the convention,

(b) not fully defined in the convention, or

(c) to be defined by reference to the laws of Canada,

that term has, except to the extent that the context otherwise requires, the meaning it has for the purposes of the Income Tax Act, as amended from time to time, and not the meaning it had for the purposes of the Income Tax Act on the date the convention was entered into or given the force of law in Canada if, after that date, its meaning for the purposes of the Income Tax Act has changed.

For the purpose of paragraph 212(1)(c) of the Act, subsection 212(11) of the Act provides that an amount paid by a trust to a beneficiary is deemed to be paid as income of the trust. This subsection reads as follows:

An amount paid or credited by a trust or an estate to a beneficiary or other person beneficially interested therein shall be deemed, for the purpose of paragraph (1)(c) and without limiting the generality thereof, to have been paid or credited as income of the trust or estate, regardless of the source from which the trust or estate derived it.

We are of the opinion that subsection 212(11) of the Act is relevant in determining whether an amount will be considered capital or income for purposes of applying the Treaty. Therefore the amount paid from the trust to the beneficiary will be deemed an amount paid as income of the trust regardless of the source from which the trust derived the funds.

Yours Truly

Marc Vanasse, CA
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

ENDNOTES

1.R.S.C. 1985, Chapter I-4 as amended by R.S.C. 1985 (1st Supp.) c.48; S.C. 1991, c.49; S.C. 1993 c. 24.