CRA’s published position on the imposition of branch tax on U.S. LLCs with non-resident U.S.-citizen members may not reflect its assessing practice
In response to a recent post on the hybrid rules in the Canada-U.S. Treaty, a correspondent suggested that the reference made in the post to the published CRA position on the imposition of Canadian branch tax on U.S. LLCs with a Canadian business does not reflect CRA’s actual assessing practices. Art. X(6) provides:
“Nothing in this Treaty shall be construed as preventing [Canada] from imposing a tax on the earnings of a company attributable to permanent establishments in [Canada], in addition to the tax which would be chargeable on the earnings of a company which is a resident of [Canada], provided that any additional tax so imposed shall not exceed [5%]… .”
Because Article X(6) only refers to “companies”, CRA has stated that it does not operate to reduce the branch profit tax rate on income that is deemed to have been derived by non-corporate LLC members through the LLC.
The point made was that, contrary to this view, Art. X(6) is not a relieving provision, but is instead an exception to Art. XXV which, inter alia, prevents Canada from subjecting U.S. nationals (e.g., U.S. citizens or companies) to taxation in Canada that is more burdensome than that imposed on Canadian nationals – as signalled by the Art. X(6) preamble, which states that it applies notwithstanding anything else in the Convention (i.e., Art. XXV) (thereby permitting the 5% branch tax to be imposed on U.S. companies).
A December 2013 article on this point states:
[T]he alternative interpretation advocated in this article, to the effect that Article X(6) serves as an exemption to the non-discrimination provisions contained in Article XXV of the Treaty and only permits Canada to impose a 5% branch profits tax on corporations, is, we would submit, entirely consistent with both the text and the spirit of the Treaty.
We are aware of several instances recently (either at the audit or the objection stage) where the CRA has backed away from its published views on the branch profits tax provisions, and instead opted to apply the interpretations advocated herein.
Neal Armstrong. Summary of Carl Irvine and Todd Miller, "Canadian Branch Profits Tax - Challenging the Denial of Treaty-Benefits for US LLCs," Newsletter - TerraLex Connections, 26 December 2013 under Treaties – Income Tax Conventions – Art. 4.