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: Whether the interposition of a Partnership will result in USco, which would otherwise be a qualifying person for the purposes of clause XXIX A (2)(e)(i) of Canada - US Tax Convention (because all of its shares are effectively held by qualifying persons), being disqualified for those purposes. A similar question arises if the partnership were a limited liability corporation.
Position: Despite the interposition of the Partnership, USco will satisfy the test in clause XXIX A (2)(e)(i) of the Canada-US Tax Convention. Similarly, despite the interposition of a limited liability corporation, USco will satisfy the test in clause XXIX A (2)(e)(i) of the
Reasons: See reasons below
XXXXXXXXXX Angelina Argento
2007-026214
April 15, 2009
Re: Canada -United States Tax Convention- Limitation on Benefits Provision
This is in reply to your letter dated December 3, 2007 regarding the above-mentioned provision.
FACTS
1. A corporation ("US Co") is a resident of the United States for the purposes 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 "Canada-US Treaty").
2. All of the issued and outstanding shares of US Co are held by a partnership existing in the United States (the "Partnership").
3. Each of the partners (collectively, the "Partners") is a "qualifying person" within the meaning of paragraph 2 of Article XXIX A of the Canada-US Treaty.
4. US Co will receive interest payments from a non-arm's length taxable Canadian corporation ("Canco").
ISSUE
The first issue to be considered is whether the interposition of the Partnership will result in US Co, which would otherwise be qualifying person for the purposes of clause XXIX A (2)(e)(i) (Limitation of Benefits) of the Canada-US Treaty (because all of its shares are indirectly held by qualifying persons), being disqualified for those purposes.
The second issue to be considered is whether the interposition of a limited liability company ("LLC") (instead of a Partnership) will result in US Co, which would otherwise be a qualifying person for the purposes of clause XXIX A (2)(e)(i) (Limitation of Benefits) of the Canada-US Treaty (because all of its shares are indirectly held by qualifying persons), being disqualified for those purposes.
In considering both of these issues we are not taking an opinion on whether US Co satisfies the base erosion test in clause (2)(e) of Article XXIX A of the Canada-US Treaty.
Despite the interposition of the Partnership, since 50% or more of the aggregate vote and value of the shares of USco are not owned, directly or indirectly by persons other than qualifying persons, USco will satisfy the test in Clause 2(e)(i) of Article XXIX A of the Canada-US Treaty.
If instead, an LLC were interposed between US Co and Canco, then on a restrictive interpretation of the words thereof, the LLC would not satisfy the test in Clause 2(e)(i) of Article XXIX A of the Canada-US Treaty. However, by application of the comments in the Technical Explanation to the Canada-US Treaty, we can conclude that, despite the interposition of a fiscally transparent LLC, since 50% or more of the aggregate vote and value of the shares of US Co are not owned, directly or indirectly by persons other than qualifying persons, US Co will satisfy the test in Clause 2(e)(i) of Article XXIX A of the Canada-US Treaty.
In particular, clause 2(e)(i) of Article XXIX A ("Limitation of Benefits") (the "LOB" Article) of the Canada-US Treaty, states as follows:
"For the purposes of this Article, a qualifying person is a resident of a Contracting State that is:
...
(e) (i) a company, 50 percent or more of the aggregate vote and value of the shares of which and 50 percent or more of the vote and value of each disproportionate class of shares (in neither case including debt substitute shares) of which is not owned, directly or indirectly, by persons other than qualifying persons; or
(ii) a trust, 50 percent or more of the beneficial interest in which and 50 percent or more of each disproportionate interest in which, is not owned, directly or indirectly, by persons other than qualifying persons;
where the amount of the expenses deductible from gross income (as determined in the State of residence of the company or trust) that are paid or payable by the company or trust, as the case may be, for its preceding fiscal period (or, in the case of its first fiscal period, that period) directly or indirectly, to persons that are not qualifying persons is less than 50 percent of its gross income for that period;" (emphasis added).
Thus, in order for US Co to be a Qualifying Person within the meaning of Clause (2)(e)(i) of Article XXIX A of the Canada-US Treaty, 50% or more of the aggregate vote and value of US Co's shares must not be owned, directly or indirectly, by persons other than qualifying persons.
Situation 1: Interposition of a Partnership
Our understanding is that 100% of the vote and value of US Co's shares are directly owned by the Partnership. Clause 1(e) of Article III of the Canada-US Treaty states that the term "person" includes any other body of persons. Thus, the Partnership is a person for purposes of the Canada-US Treaty. However, clause 2 of Article XXIX A does not list a partnership as a qualifying person.
Under the common law, the partners are the collective owners of the partnership property, not the partnership. Therefore, the partners are considered to collectively own the shares of US Co; however, no particular partner owns outright any particular property, which is held through the Partnership.
The Technical Explanation to Article XXIX A provides that "the principles of new paragraph 6 of Article IV are to be taken into account when applying the ownership and base erosion provisions of Article XXIX A". Therefore, an entity that is viewed as fiscally transparent under the domestic laws of the State of residence (other than entities that are resident in the State of source) is to be ignored when applying the ownership and base erosion rule.
Accordingly, if the Partnership is viewed as a fiscally transparent entity under the taxation law of the United States (i.e the State of residence), then the members of the Partnership (who are all qualified persons) will be regarded as the owners of the shares of USco for purposes of the ownership test. In the facts of this example, US Co would satisfy Clause 2(e)(i) of Article XXIX A since 50 percent or more of the aggregate vote and value of the shares of US Co are not owned, directly or indirectly, by persons other than qualifying persons.
As a result, provided the base erosion test clause 2(e) of Article XXIX A is satisfied, US Co will be entitled to the benefits of the Canada-US Treaty.
Situation 2: Interposition of a Limited Liability Company
In this situation we understand that 100% of the vote and value of US Co's shares are directly owned by LLC and the members of the LLC are qualifying persons (within the meaning of paragraph 2 of Article XXIX A of the Canada-US Treaty).
The Technical Explanation to Article XXIX A provides that "the principles of new paragraph 6 of Article IV are to be taken into account when applying the ownership and base erosion provisions of Article XXIX A". Therefore, an entity that is viewed as fiscally transparent under the domestic laws of the State of residence (other than entities that are resident in the State of source) is to be ignored when applying the ownership and base erosion rule.
Accordingly, as in Situation 1, if the LLC is viewed as a fiscally transparent entity under the taxation law of the United States (i.e the State of residence), then the members of the LLC (who are all qualified persons) will be regarded as the owners of the shares of US Co for purposes of the ownership test. In the facts of this example, US Co would satisfy Clause 2(e)(i) of Article XXIX A since 50 percent or more of the aggregate vote and value of the shares of US Co are not owned, directly or indirectly, by persons other than qualifying persons.
As a result, provided the base erosion test clause 2(e) of Article XXIX A is satisfied, US Co will be entitled to the benefits of the Canada-US Treaty in respect of the interest earned from Canco.
We trust the above is of assistance to you.
Yours truly,
Olli Laurikainen, CA
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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