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New rules affect non-resident withholding taxes
The Tax Court of Canada decision in Richard Lewin Re: The J.J. Herbert Family Trust #1 v. The Queen, (2011) made it very difficult for Canada Revenue Agency (CRA) to enforce withholding taxes on payments from Canadian resident trusts to non-resident beneficiaries. The Department of Finance felt the decision frustrated the intention of the law and, on July 25, it proposed legislative amendments.
Herbert Family Trust is an interesting decision. The trust in issue, although set up in the Bahamas, was resident in Canada and filed Canadian income tax returns. It had three trustees: J.J. Herbert (a non-resident), Richard Lewin (the appellant) and another individual. In 2001, the trust received a preferred share dividend of slightly more than $2.2 million, which was to be paid to Herbert when he required it. The trust included the dividend in its 2001 income and deducted the same amount on the basis it was "payable in the year to a beneficiary.” No taxes were withheld because the amount was not paid out; the CRA disagreed and litigation ensued.
The Tax Court decision stressed the distinction between the terms "payable” in section 104 of the Income Tax Act and "pays or credits” in section 212. The court gave an analysis of the meaning of this latter term and the distinction between a resolution creating an obligation and a resolution that authorizes the fulfilment of that obligation. Because there was no payout in 2001, there were no withholding taxes.
Parliament was not impressed.
In response, the Department of Finance amended paragraph 214(3)(f) of the Act to ensure the proper application of Canadian withholding taxes in circumstances in which an income amount becomes payable by a Canadian resident trust and the trust later becomes non-resident but before the income amount is actually paid or credited.
The provision will now deem the income amount to be paid or credited at the earliest of the times currently described in the paragraph and, if the trust’s year ends after July 25, 2012, because of subsection 128.1(4), the time that is immediately before the end of the trust’s year. Accordingly, trustee’s must be diligent when authorizing distributions to non-resident beneficiaries, so as not to be caught owing the unremitted withholding taxes.
Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.
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