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: Is the determination of whether persons are related for purposes of paragraph 4 of Article XXI of the Treaty determined at the LLC or US Tax Exempt level?
Position: The determination of whether persons are related for purposes of paragraph 4 of Article XXI of the Treaty is determined at the US Tax Exempt level.
Reasons: See below.
IFA 2009: QUESTION 1
US Tax Exempts
Assume that shares of an LLC are held by a number of U.S resident persons and that no single shareholder is related to any other shareholder. Further, no single shareholder has a controlling interest in the LLC. The LLC owns all the shares of a Canadian resident corporation (Canco).
(1) Will interest and/or dividends paid by Canco to the LLC be exempt from withholding tax to the extent that any portion of the interest and/dividends are considered to be derived (by virtue of paragraph 6 of Article IV) by a shareholder that is a tax exempt entity described in paragraph 2 or 3 of Article XXI? In particular, is the determination of whether the tax exempt entity is "related" to Canco (for purposes of paragraph 4 of Article XXI) made at LLC level or at the shareholder level?
(2) Would your answer be the same if the LLC were a partnership?
(1) The definition of "related person" in section 251 of the Act will be used to determine if a shareholder of the LLC is related to Canco. The CRA will not attribute the relationship between the LLC and Canco to any of the shareholders of the LLC. Instead, where the conditions of paragraph 6 of Article IV of the Treaty are satisfied in respect of the amount derived by a shareholder through the LLC, the CRA will determine whether that shareholder is related to a subsidiary of the LLC on the same basis that we would determine if a shareholder of any other corporation were related to a subsidiary of that corporation.
(2) The CRA will apply the same approach with partnerships (i.e, the CRA will not attribute the relationship between the partnership and Canco to any of the members of the partnership).
August 5, 2009
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