Words and Phrases - "capital"
14 December 2023 External T.I. 2019-0820291E5 - Meaning of "Capital"
The 1,000 common shares of Canco (a Canadian-resident corporation), which had an aggregate fair market value (FMV) and stated capital of $1,000 and $100, respectively were owned equally by five shareholders, and an Israeli corporation held 100,000 preferred shares with an FMV and stated capital of $1,000,000 and $100, respectively, which were redeemed in its hands.
Article 10(2)(a) of the of the Canada-Israel Treaty provided for a reduced withholding rate of 5% on dividends paid by a company resident in Canada to a resident of Israel where “the beneficial owner of the dividends is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends.”
After referring to para. 15, of the 2014 OECD commentary to Article 10, which stated inter alia that “[a]s a general rule … the term “capital” … should be understood as it is understood in company law,’ CRA stated:
Accordingly, the stated capital of the Class A preferred shares of Canco held by IsraeliCo is the amount that should be used for the purpose of determining if the conditions in Article 10(2)(a) of the Treaty are met. Since IsraeliCo holds less than 25% of Canco’s capital computed on that basis, IsraeliCo does not qualify for the 5% withholding tax rate on the $999,990 deemed dividend pursuant to Article 10(2)(a) of the Treaty.
CRA also noted that, in light of Art. 7(1) of the MLI, the 15% Treaty-reduced rate of 15% might not be available if the principal purposes of any person involved in the transaction included obtaining the benefits of Article 10 of the Treaty.
13 August 2002 External T.I. 2002-0143255 F - Par. 70(6)(b)
Mr. X's will provided a testamentary trust for Ms. X, who was entitled to all the income, with their children as the capital beneficiaries on her death. Ms. X chose not to receive all of the trust income, so that the undistributed income was taxed in the trust’s hands. In the event of her incapacity, Mr. X's will provided that expenses incurred by Ms. X for her daily maintenance, health care, housing, etc. would be paid directly by the trustee rather than distributed to her committee for payment thereof by him or her.
Regarding the income-retention arrangement, CCRA indicated:
- such amounts formed part of the trust's capital for subsequent taxation years for s. 70(6)(b) purposes; and
- such addition to the trust’s capital would not, in itself, disqualify the trust as a testamentary spousal trust within the meaning of s. 70(6)(b).
- any distribution of those amounts by the trust in a subsequent taxation year would constitute a distribution of capital for purposes of the Act.
Regarding the direct payment of expenses, CCRA stated:
[T]he payment of any income from the trust to a person other than the spouse or common-law partner, according to the will or a provision of the will dealing with the payment, does not disqualify a trust that otherwise qualifies as a spousal trust to the extent that those amounts are used solely for the benefit of the spouse or common-law partner and that the spouse or common-law partner (or their legal representative, as the case may be) has expressly or implicitly given his or her consent.