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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether the 5% reduced withholding rate pursuant to A.X(2)(a) of the Canada-U.S. Convention applies to a dividend payment from a corporation resident in Canada (Canco) through a DRUPA general partnership (XXXXXXXXXX ) that is regarded as a flow through and that is the parent of Canco, to a DRULPA limited partnership (XXXXXXXXXX ) that is a XXXXXXXXXX % limited partner in XXXXXXXXXX , where Canco issues preferred voting shares to XXXXXXXXXX in order to comply with the formal requirement in A.X(2)(a) that XXXXXXXXXX be the beneficial owner of the dividends that owns at least 10% of the voting stock of Canco.
Position: The 5% reduced withholding rate applies.
Reasons: XXXXXXXXXX is a resident of the U.S. pursuant to A.IV(1) of the Convention. XXXXXXXXXX is also the beneficial owner of the dividend from Canco and the acquisition of the preferred shares is not an abuse of the Act pursuant to subsection 245(2) or an abuse of the Convention pursuant to A.XXIX-A(7).
XXXXXXXXXX 2003-003292
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Canco")
We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of Canco, XXXXXXXXXX and XXXXXXXXXX ("Usco") (collectively, the "Taxpayers") in respect of the proposed transactions described below.
To the best of your knowledge, and that of the Taxpayers involved, none of the issues contained herein is:
i) in an earlier income tax return of the Taxpayers or a related person;i)
ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed income tax return of the Taxpayers or a related person;
iii) under objection by the Taxpayers or a related person;
iv) before any Court; and
v) the subject of a Ruling previously considered by the Income Tax Rulings Directorate.
Herein "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supplement), as amended to the date hereof and "Convention" means the Canada-United States Income Tax Convention (1980).
Facts
1. Canco is a "taxable Canadian corporation", as defined in subsection 89(1) of the Act, and a resident of Canada for purposes of the Convention. Canco was incorporated on XXXXXXXXXX under the name XXXXXXXXXX and changed its name to XXXXXXXXXX.
2. Canco is engaged in the business of XXXXXXXXXX.
3. Canco's authorized share capital consists solely of an unlimited number of common shares.
4. All of Canco's issued common shares (the "Common Shares") are owned by XXXXXXXXXX.
5. XXXXXXXXXX is a general partnership organized under the Delaware Revised Uniform Partnership Act (the "DRUPA"). XXXXXXXXXX has a separate legal personality, it is the owner of partnership property, it is not a taxable entity for U.S. tax purposes and it is not a resident of the U.S. for purposes of the Convention.
6. XXXXXXXXXX is an operating partnership that XXXXXXXXXX. XXXXXXXXXX does not have a "permanent establishment" (as defined in the Convention) in Canada.
7. The partners of XXXXXXXXXX are XXXXXXXXXX (XXXXXXXXXX%) and Usco (XXXXXXXXXX%).
8. Usco is a company incorporated under the laws of XXXXXXXXXX and a resident of the United States for purposes of the Convention. It is wholly-owned by a corporation incorporated under the laws of XXXXXXXXXX.
9. XXXXXXXXXX is a limited partnership formed under the Delaware Revised Uniform Limited Partnership Act (the "DRULPA") in 1984 and governed by the DRULPA and, where not inconsistent therewith, the DRUPA. XXXXXXXXXX has a separate legal personality and is the owner of partnership property. XXXXXXXXXX has never elected, pursuant to the "US check the box regulations" for entity classification, to be treated as a corporation for purposes of the United States Internal Revenue Code (the "Code"). However, pursuant to the U.S. regulations in existence prior to the introduction of the "US check the box regulations", XXXXXXXXXX has been and continues to be treated as a domestic corporation for purposes of the Code and, as such, is taxable in the United States on its worldwide income. This is confirmed by a private letter ruling from the Internal Revenue Service. The worldwide income of XXXXXXXXXX that is taxable in the United States includes its share of dividends paid by Canco on Common Shares owned by XXXXXXXXXX, for which there is no corresponding deduction available to XXXXXXXXXX. XXXXXXXXXX can claim a foreign tax credit in the United States for the taxes withheld in Canada from such dividend payments to the extent that it has Canadian source income.
10. XXXXXXXXXX does not have a permanent establishment in Canada. XXXXXXXXXX.
11. XXXXXXXXXX has two partners. The general partner of XXXXXXXXXX is XXXXXXXXXX. It owns a XXXXXXXXXX % interest in XXXXXXXXXX. XXXXXXXXXX is the limited partner and owns a XXXXXXXXXX% interest in XXXXXXXXXX. XXXXXXXXXX.
12. Canco has not paid a dividend on the Common Shares since XXXXXXXXXX. At the time, the Common Shares, on which a dividend was paid, were owned by XXXXXXXXXX. Canco withheld tax on the payment of such dividend at a rate of 10% pursuant to Article X(2)(b) of the Convention.
Proposed Transactions
13. The following transactions will be undertaken:
A. Canco will authorize the issuance of XXXXXXXXXX voting preferred shares (the "Preferred Shares").
B. XXXXXXXXXX will subscribe for XXXXXXXXXX Preferred Shares, representing XXXXXXXXXX% of the voting shares of Canco, for a total subscription price of $XXXXXXXXXX.
C. Usco will subscribe for XXXXXXXXXX Preferred Shares, representing XXXXXXXXXX % of the voting shares of Canco, for a total subscription price of $XXXXXXXXXX.
D. Canco will use the share subscription proceeds received from XXXXXXXXXX and Usco for general corporate purposes.
E. Canco will pay dividends from time to time on the Common Shares held by XXXXXXXXXX.
Purpose of the Proposed Transactions
14. The purpose of the proposed transactions is for each of XXXXXXXXXX and Usco to own at least 10% of the voting stock of Canco. If the proposed transactions are implemented, XXXXXXXXXX and Usco will be entitled to claim the benefit of the 5% reduced withholding tax rate under Article X(2)(a) of the Convention on dividends paid by Canco on the Common Shares held by XXXXXXXXXX.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule that:
A. Provided that at the time a particular dividend is paid by Canco on its Common Shares held by XXXXXXXXXX, each of Usco and XXXXXXXXXX are treated as a domestic corporation for purposes of the Code and own at least 10% of the voting shares of Canco, dividends paid by Canco on the Common Shares held by XXXXXXXXXX will be subject to Part XIII withholding tax at a 5% rate pursuant to Article X(2)(a) of the Convention; and
B. The application of the reduced withholding tax rate under Article X(2)(a) of the Convention to dividends paid by Canco on the Common Shares held by XXXXXXXXXX will not be denied pursuant to subsection 245(2) of the Act or Article XXIX-A (7) of the Convention.
The above rulings are given subject to the general limitations and qualifications stated in Information Circular 70-6R4 dated January 29, 2001, and is binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which could have an effect on the provided rulings if enacted into law.
Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions other than those specifically set out in the Rulings Given. In particular, nothing in this Ruling should be construed as implying that the CCRA has agreed to or reviewed whether any benefit issues arise on the issuance of the Preferred Shares as described in paragraphs 13(B) and (C) above.
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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