Internal Revenue Service
Revenue Ruling
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smRev. Rul. 57-348
1957-2 C.B. 434
Sec. 901
IRS Headnote
The 15 percent tax withheld by a Canadian corporation under the provisions of section 106(1)(a) and 109(1) of The Income Tax Act of Canada, with respect to the portion of the distribution of assets in liquidation deemed a dividend under section 81 of that Act, falls within the United States concept of an income tax and will be allowed as a credit against the United States income tax of a shareholder to the extent provided by section 901 of the Internal Revenue Code of 1954, subject to the limitations contained in section 904 of the Code.
Full Text
Rev. Rul. 57-348
Advice has been requested whether the tax imposed by section 106(1)(a) of The Income Tax Act of Canada, Revised Statutes of Canada, 1952, as amended, with respect to the portion of a corporate distribution in liquidation deemed a dividend under section 81 of the Act, falls within the United States concept of an income tax and is allowable as a credit against Federal income tax under section 901 of the Internal Revenue Code of 1954.
A Canadian personal holding company has sold its fixed assets, inventory, good will, and prepaid items to another Canadian corporation. The holding company will dissolve and distribute all its remaining assets to its shareholders, some of whom are citizens or residents of the United States. At the time of distribution, the holding company will have on hand undistributed income.
The pertinent sections of The Income Tax Act of Canada, Chapter 148, Revised Statutes of Canada, 1952, as amended, read as follows:
SEC. 81. UNDISTRIBUTED INCOME ON HAND.
(1) Where funds or property of a corporation have, at a time when the corporation had undistributed income on hand, been distributed or otherwise appropriated in any manner whatsoever to or for the benefit of one or more of its shareholders on the winding-up, discontinuance or reorganization of its business, a dividend shall be deemed to have been received at that time by each shareholder equal to the lesser of
(a) the amount or value of the funds or property so distributed or appropriated to him, or
(b) his portion of the undistributed income then on hand.
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(5) Undistributed income reduced. Where, under this section, a dividend has been deemed to have been received, the corporation's undistributed income on hand shall be deemed to have been reduced by the amount that the shareholders are so deemed to have received.
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SEC. 106. NON-RESIDENTS TAX.
(1) Tax. Every non-resident person shall pay an income tax of 15%on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him, as, on account or in lieu of payment of, or in satisfaction of,
(a) Dividends. * * *
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SEC. 109. DEDUCTION AND PAYMENT OF TAX.
(1) When a person pays or credits or is deemed to have paid or credited an amount on which an income tax is payable under this Part, he shall, notwithstanding any agreement or any law to the contrary, deduct or withhold therefrom the amount of the tax and forthwith remit that amount to the Receiver General of Canada on behalf of the non-resident person on account of the tax and shall submit therewith a statement in prescribed form.
Under the provisions of section 901 of the Internal Revenue Code of 1954, a citizen of the United States and a domestic corporation may be allowed a foreign tax credit, subject to the limitation of section 904, with respect to the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States.
Under section 81 of the Income Tax Act of Canada, supra , a shareholder in a Canadian corporation, which dissolves and distributes its assets in liquidation, is deemed to have received a dividend equal to his portion of undistributed income on hand, as defined by the Statute, to the extent such portion does not exceed the value of the distributed assets. Pursuant to sections 106(1)(a) and 109(1) of the Act, supra , a corporation is required, in the case of each nonresident person who is a shareholder, to withhold 15 percent of the taxable portion of the distribution in liquidation deemed a dividend under section 81. The tax withheld is imposed on the shareholder and is paid on his behalf by the corporation to the Canadian government.
Accordingly, it is held that the 15 percent tax withheld by a Canadian corporation under the provisions of section 106(1)(a) and 109(1) of The Income Tax Act of Canada, with respect to the portion of the distribution of assets in liquidation deemed a dividend under section 81 of the Act, falls within the United States concept of an income tax and will be allowed as a credit against United States income tax to the extent provided by section 901 of the Internal Revenue Code of 1954, subject to the limitation contained in section 904 of the Code.