Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the "Retiree Medical Benefits Trust", as a section 501(c)(9) entity, which is exempt from income tax in the US, qualifies for an exemption of Part XIII withholding tax on dividend and interest income earned by the trust.
Position: Only dividend or interest income that is not in respect of income from carrying on a business.
Reasons: The Retiree Medical Benefits Trusts meets the requirement in paragraph 2 of Article XXI of the Canada- US Treaty; however paragraph 2 is subject to paragraph 4 which excludes any income that is income from carrying on a business or income from a related person who is not a person who is also exempt under Article XXI.
November 8, 2011
Policy & Legislative Research
Taxpayer Services and Debt Management Branch Income Tax Rulings
Attention: MaryAnn McNulty Directorate
Shelley Helmer
(613) 957-2118
2011-041753
Exemption for XXXXXXXXXX Retiree Medical Benefits Trust
This is in response to your email of August 5, 2011 wherein you inquired whether XXXXXXXXXX Retiree Medical Benefits Trust (the "RMB Trust") qualifies for an exemption from Canadian taxation pursuant to paragraph 2 of Article XXI of the Canada-United States Tax Convention (the "Convention").
Background
The RMB Trust is a trust resident in the United States (the "US"). The purpose of the RMB Trust is to pool the investment of assets of three separate retiree accounts, XXXXXXXXXX (collectively, the "Retiree Accounts") to provide economy of scale for the group of independent members and XXXXXXXXXX members who administer the XXXXXXXXXX (collectively, the "Plans"). The Retiree Accounts exists to provide retirement medical benefits to the eligible members of the Plans and pursuant to paragraphs 3.3 and 6.3 of the RMB Trust agreement (the "Trust Agreement") are exclusively used to provide such benefits. The Plans may provide any benefit permissible under section 501(c)(9) of the Internal Revenue Code (the "Code") and section 3(1) of the Employee Retirement Income Security Act of 1974 (Pub.L. 93-406, 88 Stat. 829, enacted September 2, 1974).
Article XXI of the Tax Treaty provides under paragraph 2, subject to paragraph 4 (discussed below), dividend and interest income derived by a trust, company, organization or other arrangement that is resident of the US, generally exempt from taxation in a taxation year in the US and operated exclusively to administer or provide pension, retirement or employee benefits shall be exempt from income taxation in that taxable year.
In order for the dividend and interest income of an organization to be exempt from tax in Canada under paragraph 2 of Article XXI, an organization has to meet all of the four following tests:
(a) Income test: such income must also be exempt in the US
(b) Purpose test: the purpose of the organization must be to administer one of the following: pension, retirement or employee benefits.
(c) Residence test: the organization must be resident in the US; and
(d) Source test: the dividend and interest income must not be income from carrying on a trade or business or income from a related person other than a person referred to in (b) above.
In the case of the RMB Trust, clearly the condition in (a) is met because these organizations are treated as organizations exempt from U.S. tax under section 501(c)(9) of the Code. Pursuant to section 512(b)(1) of the Code, the US excludes the RMB Trust's dividend and interest income from federal income tax.
Condition (c) is also met because the RMB Trust is resident in the US. The issue is whether the RMB Trust can be said to satisfy the tests described in (b) and (d) above, i.e., whether the RMB Trust organized exclusively to administer or provide pension, retirement or employee benefits for the purpose of paragraph 2 of Article XXI of the Convention and whether the income of such organization is income from carrying on a trade or business or from a related person.
RMB Trust has obtained a letter from the IRS stating that it is treated by the IRS as an organization exempt from U.S. tax under section 501(c)(9) of the Code. In order to qualify under section 501(c)(9) of the Code the RMB Trust must be an organization organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries if no part of the net earnings of the association inures to the benefit of any private shareholder or individual. In addition, paragraph 3.1 the Trust Agreement provides that the RMB Trust is established for the purpose of providing benefits to the participants (i.e. an eligible retiree) and beneficiaries designated by the participant in accordance with each of the Plans. Pursuant to paragraph 6.3 of the Trust Agreement the trustees shall discharge their duties for the exclusive purpose of providing such benefits.
With respect to (d), above, pursuant to paragraph 4 of Article XXI of the Convention, income earned in Canada by the organization from carrying on a trade or business, or income from a "related person" other than a person referred to in paragraphs 1, 2 or 3 of Article XXI of the Convention would not be exempt from taxation. Income of these types may be subject to Canadian withholding taxes. Whether income is from carrying on a business is a question of fact.
In conclusion, it is our view that only interest and dividend income that is not in respect of income from carrying on a business or, in the case of income from a related person, only income from a person who is exempt under Article XXI, will qualify for the exemption from Part XIII withholdings pursuant to paragraph 2 of Article XXI of the Convention.
We trust these comments are of assistance.
Shelley Lewis LL.B.
for Director
International Section II
International and Trusts Division
Income Tax Rulings Directorate
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