28 June 2010 External T.I. 2009-0329511E5 - United States - Dividend Withholding Rate

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 dividends paid by a Canadian corporation (Canco) to a US limited liability company owned by an U.S. S-Corp owned by a US resident individual are entitled to the 5% withholding rate under Article X(a) of the Canada-United States Tax Convention (Treaty)

Position: The 5% rate is applicable where the S-Corp is, pursuant to Article X(2)(a), considered to own at least 10% of the shares of Canco, the dividends are considered to be derived by the S-Corp pursuant to Article IV(6), and the S-Corp is eligible for benefits under Article XXIX A of the Canada-United States Tax Convention (Treaty).

Reasons: Article IV(6), X and XXIX A of the Treaty.

XXXXXXXXXX
									2009- 032951
									Ross Kauffman
June 28, 2010

Dear XXXXXXXXXX :

Re: Dividend Treatment under the Canada-U.S. Tax Convention

This is in reply to your letter of June 24, 2009 in which you asked for our comments on the application of Canada-U.S. Tax Convention (Treaty) in the circumstances described below.

A U.S. resident citizen is the sole shareholder of a U.S. Subchapter S corporation (S-Corp). The S-Corp is the sole shareholder of a U.S. limited liability corporation (US LLC). US LLC in turn is the sole shareholder of a Canadian corporation (Canco). The US LLC is fiscally transparent under the taxation laws of the United States.

Canco pays a dividend to US LLC on or after February 1, 2009.

You have asked us:

(a) Whether the Treaty would apply to limit Canada's taxation to 5% of the gross amount of the dividend; and

(b) Whether the S-Corp would be considered a qualifying person under Article XXIX A of the Treaty.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments which we hope will be of some assistance.

For the purposes of providing our comments, we have assumed that, under the taxation law of the United States, Canco is not fiscally transparent and that the treatment under the taxation laws of the United States of the dividends derived by the S-Corp through the LLC is the same as if the dividends had been received directly by the S-Corp.

Article IV(6) of the Treaty, enacted as part of the Fifth Protocol, provides that:

An amount of income, profit or gain shall be considered to be derived by a person who is a resident of a Contracting State where:

(a) The person is considered under the taxation law of that State to have derived the amount through an entity (other than an entity that is a resident of the other Contracting State); and

(b) By reason of the entity being treated as fiscally transparent under the laws of the first-mentioned State, the treatment of the amount under the taxation laws of that State is the same as its treatment would be if that amount had been derived directly by that person.

The CRA generally treats an S-Corp as a corporation and a resident of the United States under the Treaty. In the circumstances described in your letter, the dividends paid by Canco to US LLC would, pursuant to Article IV(6), be considered to be derived by the S-Corp and, subject to Article XXIX A, eligible for benefits under Article X of the Treaty.

Subparagraph 2(a) of Article X of the Treaty provides, that for the purpose of determining whether the beneficial owner of a dividend is a corporation that is a resident of a Contracting State that owns at least 10% of the voting stock of the company paying the dividend,

. . . a company that is a resident of a Contracting State shall be considered to own the voting stock owned by an entity that is considered fiscally transparent under the laws of that State ... in proportion to the company's ownership interest in that entity

Under subparagraph 2(a), the S-Corp would be considered to own the shares of Canco owned by the US LLC. As the owner of all the shares of Canco, the S-Corp would be entitled to the 5% withholding rate provided that the S-Corp is a qualifying person, as defined in Article XXIX A(2) of the Treaty, or otherwise eligible for benefits under Article X by reason of Articles XXIX A(3), (4) or (6) of the Treaty.

The S-Corp will be a qualifying person if it satisfies the ownership and base erosion tests set out in clauses 2(e)(i) and (ii) of Article XXIX A. As 50 percent or more of the aggregate vote and value of the shares of the S-Corp are not owned, directly or indirectly, by persons other than qualifying persons, the ownership test in clause 2(e)(i) is met. However, whether or not the base erosion test in clause 2(e)(ii) of the Article XXIX A is met is a question of fact that can only be determined after an examination of the gross income and the deductible expenses of the S-Corp for the relevant time period.

We trust our comments are of some assistance.

Yours truly,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch