8 December 2009 TEI Roundtable Q. 4, 2009-0347701C6 - Qualifying person & multiple shares

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 corporations that have multiple classes of voting shares are "qualifying persons" under subparagraph 2(c) of Article XXIX-A of the Canada-U.S. Tax Convention where one or more of the classes of shares is thinly traded, or does not trade.

Position: Possibly not.

Reasons: Each class of shares must be considered separately for purposes of satisfying the "regularly traded" test.

December 8, 2009 TEI - CRA Liaison Meeting

Question 4 - Definition of "Qualifying Person" under the Canada-U.S. Treaty

Paragraph 1 of Article XXIX-A of the Convention between Canada and the United States of America, signed on September 26, 1980, as amended by the Fifth Protocol on December 15, 2008 (hereafter "the Treaty"), contains a limitation on benefit (LOB) clause that states that only a "qualifying person" is entitled to all benefits of the Treaty. Under subparagraph 2(c) of Article XXIX-A, a "qualifying person" includes a company whose principal class of shares is primarily and regularly traded on one or more recognized stock exchanges. The term "principal class of shares" is defined under subparagraph 5(e) of Article XXIX-A as shares that represent the majority of the voting power and value of the company. Where no single class of shares represents the majority of the aggregate voting power and value of the company, the "principal class of shares" consists of the classes that in the aggregate represent a majority of the aggregate voting power and value of the company. Once the several classes of shares have been aggregated to constitute the principal class of shares, the deemed principal class of shares must be considered regularly traded in order to satisfy the definition of qualifying person.

The term "regularly traded" is not defined in the Treaty, but the Technical Explanation (TE) provides that the term is defined by reference to the domestic tax laws of the respective countries. In the case of the United States, the term has the meaning given by U.S. Treas. Reg. § 1.884-5(d)(4)(i)(B). Under the regulation, a class of shares is considered to be "regularly traded" if (i) trades of the class of shares are made in more than de minimis quantities on at least 60 days during the taxable year (hereafter the "de minimis test"), and (ii) the aggregate number of shares in the class traded during the year is at least 10 percent of the average number of outstanding shares during the year (hereafter the "10-percent test").

The TE states that, subject to the adoption of other definitions by Canada, the U.S. interpretation of "regularly traded" will apply, but with modifications as circumstances require for purposes of Canadian taxation. In Canada, many publicly traded companies have multiple classes of voting shares. If each class of shares must be considered separately for purposes of satisfying the de minimis or 10-percent tests in the U.S. tax regulations, very few Canadian corporations with multiple classes of voting shares will be considered "qualifying persons" for purposes of the LOB clause. Would CRA issue guidance clarifying when Canadian resident public corporations with multiple classes of voting stock are deemed to satisfy the "regularly traded" requirement so that they might qualify for the intended Treaty benefits?

CRA Response

The CRA is currently of the view that each class of shares must be considered separately for the purposes of satisfying the de minimis and the 10 percent test. We understand that this interpretation is in line with the views of the U.S. tax authorities. We suggest that those Canadian resident corporations that are not qualifying persons under the above interpretation should seek relief from the relevant competent authority under paragraph 6 of Article XXIX-A.

We appreciate that the relieving provision in paragraph 6 of Article XXIX-A may not represent a satisfactory solution to corporations that ought to be qualifying persons but technically are not under the above interpretation. Accordingly, we have initiated dialogue with the US Competent Authority in hopes of reaching a solution that will allow affected taxpayers to gain treaty benefits in appropriate circumstances without the need to make a request under paragraph 6 of Article XXIX-A. The CRA is currently awaiting the reaction of the U.S. Competent Authority.