CRA finds that 25% Part XIII tax applies to interest paid by a transparent ULC (held through a QSSS by an S-Corp) to the S-Corp

Where an S-Corp makes an interest-bearing loan to a Nova Scotia ULC held by it through a qualified Subchapter S subsidiary, the interest paid on the loan will not be eligible for Treaty benefits under the anti-hybrid rule in Art. IV, 7(b): the interest will be disregarded for U.S. purposes, given the fiscally transparent nature of the ULC and QSSS; whereas the interest would be regarded for such purposes if the ULC were not transparent, i.e., the hybrid status of the ULC and QSSS affects the Code treatment of the interest.

This written response is clearer than an oral response given at the 26 May IFA Roundtable, which referred to the S-Corp parent as being “fiscally transparent” and to the “interest…effectively being paid by the U.S Parent (or its members) to itself.” Thus, in contrast to the oral response, which potentially was confusing on this count, the written response is consistent with the longstanding CRA view that S Corps can qualify for Treaty benefits (assuming that, unlike this example, Art. IV, 7(b) does not apply.)

Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 9, 2016-0642131C6 under Treaties – Art. 4.