18 July 2008 Roundtable, 2008-0272871C6 - Canada-US Income Treaty

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 a US "master limited partnership" that is taxed under the Internal Revenue Code as a corporation is entitled to Treaty benefits?

Reasons: See below

2008 IFA Conference

Question:

Does the current Canada-US Treaty, or the Fifth Protocol provide relief (in the form of access to treaty benefits from Canadian tax) for those US partnerships, which are treated for purposes of the Code as corporations, and therefore are fully subject to US tax on worldwide income? Article III(1)(f) provides that ("[F]or the purposes of this Convention, unless the context otherwise requires") "the term 'company' means any body corporate or any entity which is treated as a body corporate" Accordingly, it appears that a US partnership which is treated for the purposes of the Code as a corporation and is subject to US tax on its worldwide income is a resident of the US within the meaning of paragraph 1 of Article IV of the Treaty because, it is a person who, under the laws of the US is liable to tax in the U.S. by reason of its "domicile, residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature". Does the CRA, nevertheless, look to the partners of such partnerships as the taxpayers in respect of amounts earned or realized by such partnership, rendering useless the treatment of the partnership as a resident of the US for the Treaty? Nothing in the Protocol (e.g. Article IV(6)) addresses or redresses this matter.

CRA Response:

It is our understanding that a US Partnership which "checks the box" will be taxable as a US domestic C corporation and would be liable to US tax on its worldwide income. Accordingly, we agree that unless paragraph 6.2 of the Income Tax Conventions Interpretations Act has application, a US Partnership that is treated for the purposes of the Internal Revenue Code as a corporation would be treated as a resident of the US pursuant to paragraph 1 of Article IV of the Canada-US Treaty. Consequently, provided that the US Partnership is a "qualifying person" as defined in Article XXIX A (LOB) of the Treaty, the partners can claim treaty benefits based on the US Partnership's eligibility for such benefits under the Treaty.

However, it should be noted that since the US Partnership is treated as a partnership for Canadian tax purposes, where a partner of the US Partnership is entitled to greater treaty benefits than the US Partnership, provided that partner is itself a "qualifying person" as defined in Article XXIX (A), the CRA is prepared to look through the US Partnership and allow that partner to claim treaty benefits based on its own eligibility.