19 July 2005 External T.I. 2004-0074241E5 - 212(13.1)(b) and ITAR 10(6)

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: Interaction between paragraph 212(13.1)(b) of the Income Tax Act and subsection 10(6) of the Income Tax Application Rules

Position: The specified treaty rate will apply.

Reasons: Because generally we look through the partnership to the partners in a treaty country with respect to withholding rate under Part XIII of the Income Tax Act.

XXXXXXXXXX
2004-007424
S. Leung
July 19, 2005

Dear XXXXXXXXXX:

Re: Paragraph 212(13.1)(b) of the Income Tax Act (the "Act") and
Paragraph 10(6)(a) of the Income Tax Application Rules ("ITAR")

We are writing in reply to your email transmission of April 23, 2004 in which you requested our view on the interaction between paragraph 212(13.1)(b) of the Act and paragraph 10(6)(a) of the ITAR. Specifically, you enquired whether a tax treaty (as defined under subsection 248(1) of the Act overrides the effect of paragraph 212(13.1)(b) of the Act and allows a Canadian payer to withhold tax at the treaty rate on taxable dividends (within the meaning assigned by subsection 89(1)) paid or credited to a partnership, the members of which are resident in a tax treaty country for the purposes of the tax treaty.

Our Comments

The following analysis is based on the assumption that the partnership is a flow-through, and is not a resident of any tax treaty country for the purposes of Article 4 (the Residence Article) of a tax treaty.

Paragraph 212(13.1)(b) of the Act reads as follows:

"For the purposes of this Part, other than section 216,

(a) ...

(b) where a person resident in Canada pays or credits an amount to a partnership (other than a Canadian partnership within the meaning assigned by section 102), the partnership shall be deemed, in respect of that payment, to be a non-resident person."

As a result of the application of paragraph 212(13.1)(b) of the Act, subsection 212(2) of the Act applies and the partnership being deemed to be a non-resident person is liable to tax at the rate of 25% on the dividends paid or credited to it by the Canadian payer. Subsection 215(1) of the Act also applies and the payer is required to deduct and withhold the amount of tax that is payable on the dividends under Part XIII of the Act, notwithstanding any agreement or law to the contrary. Consequently, generally, the amount of tax that is required to be deducted and withheld by the payer with respect to dividends paid or credited to the partnership is 25% of the dividends.

However, where a member of a partnership is a resident of a country for the purposes of the tax treaty that Canada has with that country, it is the position of the Canada Revenue Agency ("CRA") that for the purposes of determining the beneficial owner of the dividend for the purposes of applying the tax treaty, the partnership would be disregarded and moreover the dividends would be considered paid or credited to the members of the partnership. Where under Article 10 (the Dividend Article) of the tax treaty a rate of tax is specified on the dividends, Canadian tax on the portion of a dividend that is beneficially owned by a member of the partnership who is a resident of the tax treaty country would be limited to the specified rate. For example, under Article X of the Canada-United States Income Tax Convention, the specified rate on the dividend paid by a Canadian payer to an individual who is a resident of the U.S. is 15%. The above view is not applicable in the determination of whether any of the corporate partners owns a particular percentage of the capital stock of the corporation paying the dividend. This is a matter of partnership law and such law would generally not permit one to conclude that a particular partner by himself owns any property (for example, a share of the capital stock of a corporation) of the partnership. As a result, it follows that a partner cannot own a particular percentage of the shares of a Canadian corporation where such shares are held by the partnership.

Paragraph 10(6)(a) of the ITAR reads as follows:

"Notwithstanding any provision of the amended Act, where an agreement or convention between the Government of Canada and the government of any other country that has the force of law in Canada provides that where an amount is paid or credited....to a resident of that other country the rate of tax imposed thereon shall not exceed a specified rate,

(a) any reference in Part XIII of the amended Act to a rate in excess of the specified rate shall, in respect of such an amount, be read as a reference to the specified rate; and

(b) ..."

Because of the position of the CRA to look through the partnership to the partners as set out above in applying the reduced withholding rates set out in a tax treaty, where the partners are resident in the tax treaty country for the purposes of the tax treaty, paragraph 10(6) of the ITAR applies. As a result of the application of that paragraph, in the example provided above, the rate of 25% stipulated in Part XIII of the Act would be reduced to 15% and that is the amount that a U.S. resident partner of the partnership is liable to. Hence, the withholding under subsection 215(1) of the Act is reduced from 25% to 15%.

In summary, in the situation described above, because of our long-standing position to look through a partnership to the partners in determining withholding rates in a tax treaty, we are of the view that the combined application of paragraph 212(13.1), subsection 212(2) and subsection 215(1) of the Act set out the requirement for the liability as well as the withholding of tax with respect to the dividends and paragraph 10(6) of the ITAR applies to reduce the normal withholding of 25% to the specified rate referred to in the tax treaty. However, there are circumstances where in practice the company paying the dividends would not be in a position to determine whether, or what portion of, the dividend paid to a partnership is beneficially owned by a resident of a particular treaty country. In such case it will be necessary for the relevant partners to apply for a refund of the tax withheld in excess of the treaty rate.

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Revenue Agency.

Yours truly,

Olli Laurikainen
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch

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