8 January 2004 External T.I. 2003-0049781E5 - Article IV of the Canada-US Convention

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: Are the members/shareholders of a US LLC the beneficiaries of a US Trust?

Position: No.

Reasons: US LLC is the beneficiary, not the members/shareholders of US LLC.

XXXXXXXXXX 							2003-004978

January 8, 2004

Dear Sir:

Re: Article IV of the Canada-United States Income Tax Convention

We are writing in response to your correspondence of November 20, 2003 concerning Article IV of the Canada-United States Income Tax Convention (the "Treaty") to a U.S. trust ("UST") in the following situation:

1. UST would be formed in the U.S. and have U.S. trustees. It would not carry on business in Canada. It would not be treated as resident in Canada. It would be treated as a flow-through entity in the U.S. and thus, would not be liable to tax in the U.S. Instead, the income of UST would be "attributed" to its sole beneficiary.

2. UST would be the sole shareholder of a Canadian resident company that would be a Nova Scotia Unlimited Liability Company ("NSULC").

3. The sole beneficiary of UST would be a U.S. Limited Liability Company ("U.S. LLC"). U.S. LLC would be incorporated in the U.S., have U.S. directors, and its mind and management would be in the U.S. It would neither carry on business in Canada nor be treated as resident in Canada. While U.S. LLC would be viewed as a corporation for Canadian tax purposes, it would be viewed as a flow-through entity in the U.S. and thus would not be liable to tax in the U.S. Instead, the income of U.S. LLC would be "attributed" to its members/shareholders.

4. All members/shareholders of U.S. LLC would be U.S. resident citizens who are liable to tax in the U.S. on an annual basis with respect to their share of the income of U.S. LLC.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following general comments.

Pursuant to Article IV of the Treaty, an estate or trust is only resident in a Contracting State "to the extent that income derived by the estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries."

As neither UST nor U.S. LLC are liable to tax in the U.S., you ask whether the members/shareholders of U.S. LLC could be viewed as the beneficiaries of UST so as to conclude that UST meets the requirements of Article IV of the Treaty. In your view, if it is intended that a trust can obtain the benefit of the Treaty if the income is essentially taxed in the U.S., then this structure meets that intention.

In our view, it is clear that the members/shareholders of U.S. LLC are not beneficiaries of UST; it is U.S. LLC that is the beneficiary of UST. As neither UST nor U.S. LLC are liable to tax in the U.S., UST would not be resident in the U.S. under Article IV of the Treaty and would not be entitled to the reduced rate of withholding provided for in the Treaty. Similarly, the reduced rate of withholding provided for in the Treaty would not be available to U.S. LLC if it invested directly in NSULC.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

Yours truly,

T. Murphy
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate