9 October 2009 Roundtable, 2009-0327031C6 F - REER et CR - art. IV(7)(b) Conv. Canada - É.-U.

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: 1- Comment concilier les dispositions du 5e Protocole avec l'article XVIII de la Convention Canada-É.-U. ?

2- Est-ce que la présomption prévue à l'Article IV(7)(b) de la Convention Canada-É.-U. s'appliquera à un versement provenant d'un REER effectué en faveur d'un résident américain, empêchant ce-dernier de bénéficier des avantages de la convention ?

3- Est-ce que la présomption prévue à l'Article IV(7)(b) de la Convention Canada-É.-U. s'appliquera à un versement provenant d'une convention de retraite effectué en faveur d'un résident américain, empêchant ce-dernier de bénéficier des avantages de la convention ?

Position: 1- Commentaires généraux.

2- Généralement non.

3- Généralement non.

Reasons: 1- Principes d'interprétation des conventions fiscales internationales.

2 et 3- Application des principes d'interprétation et analyse technique des dispositions de la Convention Canada-É.-U.

Table ronde sur la fiscalité des stratégies financières et des instruments financiers APFF - Congrès 2009

Question 8 - Les REER, les conventions de retraites et les entités transparentes sur le plan financier selon le Protocole entre le Canada et les États-Unis.

Le 5e Protocole (" Protocole ") à la Convention fiscale entre le Canada et les États-Unis (" Convention ") ne définit pas les termes entité ou transparente sur le plan financier (ci-après " ETPF "). Toutefois, l'explication technique du Protocole modifiant la Convention (" Explication technique ") (endnote 1) indique qu'une ETPF est généralement une entité, dont le revenu est imposé au niveau de ses membres, bénéficiaires ou participants. Pour fins fiscales américaines, une ETPF inclut les " grantor trusts ". Un REER ou une convention de retraite canadienne semblent être des ETPF aux fins américaines lorsqu'elles sont des " grantor trusts ".

Pour fins fiscales canadiennes, l'ARC s'est fait poser la question sur son interprétation de l'expression transparente sur le plan financier, et la réponse était (endnote 2) :

The CRA is of the view that an entity is "fiscally transparent" if the income it earns is taxed at the beneficiary, member, or participant level. Entities that are subject to tax, but with respect to which tax may be relieved under an integrated system, are not considered "fiscally transparent".

• Entities that are fiscally transparent for US tax law purposes include limited liability companies that do not check the box.
• Entities that are fiscally transparent for Canadian tax law purposes include partnerships. A trust that is not disregarded for Canadian tax purposes would generally not be considered to be an entity that is "fiscally transparent".

Selon cette interprétation technique, nous sommes d'avis qu'un REER et une convention de retraite canadienne ne seraient pas des ETPF aux fins fiscales canadiennes. Les fiducies qui se qualifient au titre de REER aux fins de la L.I.R. dont les fiducies présumées selon le paragraphe 248(3) L.I.R. ne devraient pas être considérées comme étant transparentes puisqu'elles sont exonérées d'impôt sous un système que nous percevons intégré. Pour leur part, les conventions de retraites ne sont pas exonérées d'impôt.

Les notes explicatives relatives au paragraphe 7(b) de l'Article IV de l'Explication technique indiquent :

Subparagraph 7(b) provides that an amount of income, profit or gain is not considered to be paid to or derived by a person who is a resident of a Contracting State (the residence State) where the person is considered under the tax law of the other Contracting State (the source State) to have received the amount from an entity that is a resident of that other State (the source State), but by reason of the entity being treated as fiscally transparent under the laws of the Contracting State of which the person is resident (the residence State), the treatment of such amount under the tax law of that State (the residence State) is not the same as the treatment would be if that entity were not treated as fiscally transparent under the laws of that State (the residence State). (endnote 3)

Les conditions énoncées dans ce paragraphe semblent être respectées lors du retrait des sommes d'un REER ou d'une convention de retraite, qui sont des ETPF aux fins fiscales américaines, mais non transparentes aux fins fiscales canadiennes:

• Le revenu est dérivé d'un pays source (Canada)
• Il est payé à un résident du pays de résidence (les États Unis)
• Par une entité résidente du pays source (le REER au Canada), et
• Cette entité est considérée comme étant transparente sur le plan financier sous la fiscalité du pays de résidence (États-Unis) et le traitement aurait été différent si l'entité n'avait pas été transparente sur le plan financier en vertu des lois du pays de résidence (États-Unis).

La conséquence prévue au paragraphe 7(b) de l'article IV de la Convention est de ne pas considérer le gain comme étant payé à une personne ou dérivé d'une personne du pays de résidence (les États Unis), donc de priver le bénéficiaire de la réduction de taux prévue à la Convention.

Questions à l'ARC

1- Comment concilier les dispositions du Protocole avec l'article XVIII sur les pensions de la Convention ?

2- Pourriez-vous préciser si les versements provenant des REER, qui sont des ETPF aux fins fiscales américaines mais pas aux fins canadiennes, pourront profiter des avantages de la Convention relativement au taux d'impôt qui doit être retenu à la source lorsqu'ils sont payés à des résidents américains ?

3- Pourriez-vous préciser si les versements provenant de convention de retraites, quand il s'agit d'ETPF aux fins fiscales américaines mais pas aux fins canadiennes, pourront bénéficier d'un taux d'impôt retenu à la source réduit selon la Convention lorsqu'ils sont payés à des résidents américains ?

Réponses de l'ARC

Les amendements apportés à la Convention par le Protocole doivent être interprétés selon les principes généraux d'interprétation applicables. À cet égard, une interprétation libérale doit être adoptée afin que la Convention soit appliquée conformément aux véritables intentions des États contractants. Il est notamment possible de recourir à des documents extrinsèques afin d'identifier les objectifs recherchés par les États contractants aux fins de la conclusion de l'entente. Plus précisément, soulignons que le gouvernement du Canada souscrit de façon générale au contenu de l'Explication technique, tel qu'indiqué dans la partie introductive de ce document.

Même si un " grantor trust " est considéré comme une ETPF en vertu de la législation fiscale des États-Unis, les notes explicatives relatives au paragraphe 7(b) de l'Article IV de l'Explication technique ne comportent aucune indication à l'effet que les États contractants avaient l'intention que cette disposition s'applique de façon à limiter les bénéfices de la Convention pouvant être invoqués par un résident américain à l'égard de paiements provenant de REER, de convention de retraite, ou d'autres mécanismes de retraite semblables. De plus, nous ne sommes pas convaincus que le paragraphe 7(b) de l'Article IV de la Convention trouverait généralement application d'un point de vue technique à l'égard de paiements provenant de REER ou de conventions de retraite.

L'ARC entend donc généralement appliquer les dispositions de l'Article XVIII de la Convention à de tels paiements. Ainsi, nous sommes d'avis qu'un résident américain, qualifié de " personne admissible " au sens de l'Article XXIX-A de la Convention, qui reçoit un versement provenant d'un REER ou d'une convention de retraite pourra invoquer le bénéfice de la Convention à l'égard du taux de retenue à la source canadien applicable, et le paragraphe 7(b) de l'Article IV n'aurait généralement pas pour effet de réputer que le résident américain n'a pas tiré un revenu ou réalisé un profit ou un gain aux fins de l'application de la Convention.

Yannick Roulier
613-957-2134
Le 9 octobre 2009
2009-032703

Question 8 - RRSPs, Retirement Compensation Arrangements and Fiscally Transparent Entities in accordance with the Protocol between Canada and the United States

The Fifth Protocol ("Protocol") to the Canada-United States Tax Convention ("Convention") does not define the terms fiscally transparent or entity (hereafter "FTE"). However, the technical explanation of the Protocol amending the Convention ("Technical Explanation") (endnote 4) indicates that a FTE is in general an entity the income of which is taxed at the beneficiary, member, or participant level. For U.S. tax purposes a FTE includes "grantor trusts". A RRSP or a Canadian retirement compensation arrangement appears to be FTEs, for American purposes, when they are "grantor trusts".

For Canadian tax purposes, the CRA was asked the question about its interpretation of the expression "fiscally transparent", and the response was (endnote 5) :

"The CRA is of the view that an entity is "fiscally transparent" if the income it earns is taxed at the beneficiary, member, or participant level. Entities that are subject to tax, but with respect to which tax may be relieved under an integrated system, are not considered "fiscally transparent".

• Entities that are fiscally transparent for US tax law purposes include limited liability companies that do not check the box.
• Entities that are fiscally transparent for Canadian tax law purposes include partnerships. A trust that is not disregarded for Canadian tax purposes would generally not be considered to be an entity that is "fiscally transparent"."

According to this technical interpretation, we are of the view that a RRSP and a retirement compensation arrangement would not be FTEs for Canadian tax purposes. Trusts that qualify as RRSP for the purposes of the ITA, which include deemed trusts in accordance to subsection 248(3) of the ITA, should not be considered as being transparent since they are exempt from tax under a system which we perceive to be integrated. For their part, retirement compensation arrangements are not exempt from tax.

The explanatory notes relating to subsection 7(b) of Article IV of the Technical Explanation indicate:

"Subparagraph 7(b) provides that an amount of income, profit or gain is not considered to be paid to or derived by a person who is a resident of a Contracting State (the residence State) where the person is considered under the tax law of the other Contracting State (the source State) to have received the amount from an entity that is a resident of that other State (the source State), but by reason of the entity being treated as fiscally transparent under the laws of the Contracting State of which the person is resident (the residence State), the treatment of such amount under the tax law of that State (the residence State) is not the same as the treatment would be if that entity were not treated as fiscally transparent under the laws of that State (the residence State)." (endnote 6)

The conditions stated in this paragraph appear to be met at the time of the withdrawal of the amounts from a RRSP or from a retirement compensation arrangement, that are FTEs for American tax purposes, but which are not transparent for Canadian tax purposes.

• The revenue is derived from the source State (Canada)
• It is paid to a resident of the residence State (the United States)
• By an entity that is a resident of the source State (the RRSP in Canada), and
• This entity is considered as being fiscally transparent under the tax laws of the residence State (United States) and the treatment would have been different if the entity would not have been fiscally transparent pursuant to the laws of the residence State (United States).

The consequence of subsection 7(b) of Article IV of the Convention is that the gain is not considered to be paid to or derived by a person of a residence State (the United States), therefore, it prevents the beneficiary from being entitled to the rate reduction provided by the Convention.

Questions to the CRA

1- How should the provisions of the Protocol be reconciled with Article XVIII of the Convention dealing with pensions?

2- Could you clarify if the payments from RRSPs, when they are paid to American residents and which are FTE for American tax purposes but not for Canadian tax purposes, will be entitled to the benefits of the Convention with respect to the withholding tax rate?

3- Could you clarify if the payments from retirement compensation arrangements, when they are paid to American residents and which are FTEs for American tax purposes but not for Canadian tax purposes, will be entitled to a reduced withholding tax rate, in accordance with the Convention?

CRA Response

The amendments to the Convention by the Protocol must be interpreted according to the applicable general principles of interpretation. In this respect, a liberal interpretation must be adopted so that the Convention is applied in accordance with the true intention of the contracting States. Particularly, it is possible to refer to extrinsic documents in order to determine the intentions of the contracting States for purposes of concluding the agreement. More specifically, we note that the government of Canada, generally, subscribes to the content of the Technical Explanation, as indicated in the introduction of this document.

Even if a "grantor trust" is considered as a FTE pursuant to the tax legislation of the United States, the explanatory notes relating to subsection 7(b) of Article IV of the Technical Explanation do not include any indication that the contracting States had the intention of having this provision apply so as to limit the benefits of the Convention that can be invoked by an American resident with respect to payments from a RRSP, a retirement compensation arrangement or other similar pension arrangement. Moreover, we are not convinced that subsection 7(b) of Article IV of the Convention would generally technically apply with respect to payments from a RRSP or a retirement compensation arrangement.

Therefore, the CRA intends to generally apply the provisions of Article XVIII of the Convention to such payments. Thus, we are of the opinion that an American resident, who is a "qualifying person" within the meaning of Article XXIX-A of the Convention, and who receives a payment from a RRSP or a retirement compensation arrangement, could invoke the benefit of the Convention with respect to the applicable Canadian withholding tax rate, and subsection 7(b) of Article IV, would generally not result in deeming that the American resident did not derive income, profit or gain for purposes of the application of the Convention.

Yannick Roulier
613-957-2134
October 9, 2009
2009-032703
ENDNOTES

1 DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE PROTOCOL DONE AT CHELSEA ON SEPTEMBER 21, 2007 AMENDING THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND CANADA WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL DONE AT WASHINGTON ON SEPTEMBER 26, 1980, AS AMENDED BY THE PROTOCOLS DONE ON JUNE 14, 1983, MARCH 28, 1994, MARCH 17, 1995, AND JULY 29, 1997.

2 Canada Revenue Agency document number 2007-0261901C6, Article IV(6) "fiscally transparent", July 17 2008.

3 Explication technique, page 7.

4 DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE PROTOCOL DONE AT CHELSEA ON SEPTEMBER 21, 2007 AMENDING THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND CANADA WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL DONE AT WASHINGTON ON SEPTEMBER 26, 1980, AS AMENDED BY THE PROTOCOLS DONE ON JUNE 14, 1983, MARCH 28, 1994, MARCH 17, 1995, AND JULY 29, 1997.

5 Canada Revenue Agency document number 2007-0261901C6, Article IV(6) "fiscally transparent", July 17, 2008.

6 Technical Explanation, page 7.