2009 Ruling 2009-0341681R3 - Canada-US Tax Convention ("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: 1) Whether a subsection 84(1) deemed dividend is a dividend within the meaning of Article X(3) of the Treaty; 2) Whether Article IV(7)(b) of the Treaty applies to treat the dividend as not being paid to or derived by a resident of the United States

Position: 1) Yes; 2) No

Reasons: 1) Definition of "dividends" in Article X(3) is broad enough to include a subsection 84(1) deemed dividend; 2) Article IV(7)(b) does not apply because the deemed dividend is subject to the same treatment under the taxation laws of the U.S. as it would be if the dividend payer were not fiscally transparent

XXXXXXXXXX 								2009-034168

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayers")

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above-noted taxpayers.

To the best of your knowledge and that of the taxpayers, none of the issues involved in this ruling:

(i) has been considered in an earlier return of the taxpayers or any persons related to the taxpayers,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or any person related to the taxpayers,

(iii) is under objection by the taxpayers or any person related to the taxpayers,

(iv) has been the subject of a ruling previously issued to the taxpayers by the Income Tax Rulings Directorate, or

(v) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Unless otherwise stated, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supplement) (the "Act"), as amended to the date of this advance income tax ruling.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below.

Definitions

(a) "Canco" means XXXXXXXXXX .;

(b) "Canco2" means XXXXXXXXXX ;

(c) "Companies Act" means the XXXXXXXXXX ;

(d) "CRA" means the Canada Revenue Agency;

(e) "fiscal period" has the meaning assigned by subsection 249.1(1) of the Act;

(f) "Foreign Jurisdiction" means the State of XXXXXXXXXX ;

(g) "Foreign Legislation" means the XXXXXXXXXX ;

(h) "Investors" means the individuals who are members of the Partnership;

(i) "Mr. X" means XXXXXXXXXX ;

(j) "paid-up capital" has the meaning assigned by subsection 89(1) of the Act;

(k) "Partnership" means XXXXXXXXXX

(l) "Province" means the Province of XXXXXXXXXX ;

(m) "S Corp" means XXXXXXXXXX .;

(n) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(o) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(p) "taxation year" has the meaning assigned by subsection 249(1) of the Act;

(q) "Treaty" means the Convention Between Canada and the United States of America With Respect to Taxes on Income and Capital Signed on September 26, 1980 as Amended by the Protocols Signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007; and

(r) "United States" means the United States of America.

Facts

1. Mr. X is a citizen of the United States and a resident of the United States for the purposes of the Treaty.

2. Each of the Investors is:

(a) an individual;

(b) a citizen of the United States; and

(c) a resident of the United States for purposes of the Treaty.

3. S Corp was incorporated under the Foreign Legislation. XXXXXXXXXX Mr. X owns all of the issued and outstanding shares of S Corp. S Corp has elected to be an S Corporation for purposes of the income tax law of the United States. S Corp is a "qualifying person" as defined in Article XXIX-A(2)(e) of the Treaty.

4. The Partnership is a limited partnership organized under the laws of the Foreign Jurisdiction. S Corp is a member of the Partnership and holds an interest in the Partnership which entitles it to XXXXXXXXXX % of the income and distributable assets of the Partnership. The Investors hold the remaining XXXXXXXXXX % interest in the Partnership. The Partnership does not carry on business in Canada. The Partnership is not treated as a corporation under the taxation laws of the United States (i.e., the Partnership is fiscally transparent) and is not a resident of the United States for the purposes of the Treaty.

5. The members of the Partnership do not hold their interests in the Partnership or receive any income or distribution from the Partnership for or on behalf of any other person.

6. Canco is a taxable Canadian corporation formed under the Companies Act as an unlimited liability corporation. Canco is the manager and the trustee of various mutual fund trusts established under the laws of the Province. Canco also performs XXXXXXXXXX throughout Canada. The majority of Canco's revenue is derived from fees, which are charged as a percentage of the net assets of the accounts under its management.

7. Canco is treated as a disregarded entity under the taxation laws of the United States (i.e., Canco is fiscally transparent).

8. Canco2 is a taxable Canadian corporation formed under the Companies Act as an unlimited liability corporation. Canco2 is a single-purpose financing entity which has borrowed money from an unrelated Canadian financial institution and on-loaned the borrowed funds to Canco for use in Canco's business operations.

9. The Partnership owns all of the issued and outstanding shares of Canco and Canco2.

10. Canco files its tax returns with the XXXXXXXXXX Taxation Centre under Business Number XXXXXXXXXX and its Canadian tax affairs are administered by the XXXXXXXXXX Tax Services Office.

11. The Partnership, S Corp and Canco each have a fiscal period that begins on XXXXXXXXXX and ends on XXXXXXXXXX .

Proposed Transactions

12. During its XXXXXXXXXX taxation year, Canco will, in lieu of declaring and paying a cash dividend:

(a) increase, in accordance with the provisions of the Companies Act, the paid-up capital in respect of its shares held by the Partnership by an amount equal to the amount of cash that it wishes to distribute to the Partnership;

(b) reduce, as soon as practicable, the paid-up capital of those shares, in accordance with the provisions of the Companies Act, by an amount equal to the amount of the increase described in subparagraph (a); and

(c) distribute an amount in cash, as a return of paid-up capital on its shares held by the Partnership, equal to the amount of the reduction referred to in subparagraph (b).

Additional Information

13. Notwithstanding that the proposed transaction described in subparagraph 12(a) will, pursuant to subsection 84(1) of the Act, result in a deemed payment of a dividend on the shares of Canco, no amount of income, profit or gain will arise or will be recognized under the taxation laws of the United States as a result of that transaction. Similarly, no amount of income, profit or gain would arise or be recognized in the United States as a result of that transaction if Canco were not fiscally transparent under the taxation laws of the United States.

14. The proposed transaction described in subparagraph 12(a) will not affect the tax treatment in the United States of any subsequent distribution on the Canco shares, including the return of paid-up capital referred to in subparagraph 12(c).

Purpose of the Proposed Transactions

15. The purpose of the proposed transactions is to distribute earnings from Canco's Canadian operations to the Partnership for the benefit of S Corp and the Investors in a manner that avoids the application of Article IV(7)(b) of the Treaty.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. To the extent that Canco is deemed to have paid, and the Partnership is deemed to have received, a dividend pursuant to subsection 84(1) of the Act, that dividend will be a taxable dividend described in paragraph 212(2)(a) of the Act.

B. For the purpose of applying Article X of the Treaty, the amount of the dividend referred to in Ruling A will be considered to be:

(a) income as described in the definition "dividends" in Article X(3) of the Treaty; and

(b) derived by S Corp and the Investors in proportion to their respective shares of the income of the Partnership, as set out in paragraph 4 above.

C. For the purposes of Article X(2) of the Treaty, S Corp will be considered to own that number of the voting shares of Canco in proportion to its ownership interest in the Partnership.

D. Each member of the Partnership will be entitled to the same benefits under Article X(2) of the Treaty that the member would be entitled to if the dividend referred to in Ruling A were paid as a cash dividend and the Treaty were read without reference to Article IV(7)(b).

E. Article IV(7)(b) of the Treaty will not apply to treat the dividend referred to in Ruling A as not having been paid to or derived by the members of the Partnership.

F. Subsection 245(2) of the Act will not apply to redetermine the tax consequences described in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX .

The above-noted rulings are based on the Act and the Treaty in its present form and do not take into account any proposed amendments to the Act or the Treaty which, if enacted, could have an effect on the rulings provided herein.

Caveat

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, the CRA has not confirmed or made a determination in respect of:

(a) whether the Partnership and/or Canco are fiscally transparent under the taxation laws of the United States;

(b) whether any member of the Partnership holds its interest in the Partnership or any income from the Partnership for or on behalf of any other person;

(c) whether the deemed dividend resulting from the proposed transaction referred to in subparagraph 12(a) is disregarded under the taxation laws of the United States or would be disregarded if Canco were not fiscally transparent under the taxation laws of the United States; and

(d) the relative ownership interests of the members of the Partnership or the share of any particular member of the Partnership to the income of the Partnership.

Yours truly,

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