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: Can an S Corporation be considered fiscally transparent under Article IV(6) of the Fifth Protocol to the Canada-US Income Tax Convention?
Position: Yes
Reasons: See below
2007-026191
July 18, 2008
Re: IFA 2008 Annual Conference
Question: It is argued that an S Corporation could be considered fiscally transparent. Under these circumstances, it appears that paragraph 6 of Article IV of the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital Signed on September 26, 1980, as amended by the Fifth Protocol signed on September 21, 2007, (the "Treaty") would also apply to a dividend paid from a Canadian company to a U.S. shareholder that is an S Corporation. What is the appropriate rate of withholding tax to be applied on the dividend paid to the S Corporation?
CRA Response:
Pursuant to paragraph 6 of Article IV of the Treaty, for the purposes of the Treaty, any Canadian source income received by the S Corporation will be considered to be derived by the shareholders of the S Corporation (and not by the S Corporation). However, since Canada treats the S Corporation itself as a resident of the U.S. for purposes of the Treaty, Canada grants benefits under the Treaty to the S Corporation in its own right. As a result, pursuant to subparagraph 2(a) of Article X of the Treaty, the Canadian withholding tax rate is limited to 5% of the gross amount of the dividends provided that firstly, the S Corporation is the beneficial owner of the dividends and owns 10 % or more of the voting stock of the company paying the dividends and secondly, the S Corporation is a "qualifying person" for purposes of Article XXIX A (LOB provision) of the Treaty.
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