CRA finds that capital for purposes of determining a Canadian Treaty-reduced dividend withholding rate of 5% references stated capital

An Israeli company held 100,000 preferred shares of Canco with an FMV and stated capital of $1,000,000 and $100, respectively, whereas the other five shareholders held 1,000 common shares with an FMV and stated capital of $1,000 and $100, respectively. Article 10(2)(a) of the of the Canada-Israel Treaty provided for a reduced withholding rate of 5% on dividends paid by a company resident in Canada to a resident of Israel where “the beneficial owner of the dividends is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends.”

After referring to para. 15 of the 2014 OECD commentary to Article 10, which stated inter alia that “[a]s a general rule … the term “capital” … should be understood as it is understood in company law," CRA found that the 25%-of-capital test should be applied on the basis of the shares’ stated capital, so that this test was not satisfied by the preferred shares.

Neal Armstrong. Summary of 14 December 2023 External T.I. 2019-0820291E5 under Treaties – Income Tax Conventions – Art. 10.