The Art. IV(7)(b) anti-hybrid rule does not apply to interest paid by a check-the-box Delaware LP on “debt” held by Canadian partners

Reminders and observations of Carderelli and Keenan on the anti-hybrid rules in the Canada-U.S. Treaty include:

  • The "two-step" solution to the denial in Art. IV(7)(b) of reduced dividend withholding by a ULC (increase PUC and then distribute it IV(7)(b)) is not recognized by CRA as being effective where the sole shareholder of the ULC is an LLC.
  • The accepted solutions to the application of Art. IV(7)(b) to the payment of interest by a ULC on a loan from its U.S. corporate shareholder (USCo) are for: say, 10% of the shares of ULC to be held instead by a U.S. subsidiary of USCo (USSub) with which it files a consolidated return; USCo to hold all of the shares of ULC through USSub but hold the loan to ULC directly; and for the loan to be made by USSub to ULC which is held 100% by USCo.
  • The Art. IV(7)(a) rules produces a harsh result for a Canadian pension plan investing in an LLC portfolio investment company given that dividends and interest on a directly held portfolio would have been exempt.
  • The uncertainty as to whether the Art. IV(7)(a) rule applies to effectively impose U.S. branch profits tax at a 30% rather than 5% rate on the business profits of an LLC has had a "chilling effect" on Canadian corporations investing in U.S. businesses through an LLC.
  • It would appear that Art. IV(7)(b) does not apply to interest paid by a check-the-box Delaware LP on "debt" held by Canadian partners.

Neal Armstrong. Summaries of Corrado Cardarelli and Peter Keenan, "Planning around the Anti-Hybrid Rules in the Canada-US Tax Treaty," draft paper for the 2013 Conference Report (CTF annual conference) under Treaties –Art. 4.