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 the branch tax reduction in Article X(6) of the Canada-US Tax Convention is available to a fiscally transparent LLC that is wholly-owned by US-resident individuals
Position: No
Reasons: Article X(6) only applies if, by reason of Article IV(6), the branch profits of the LLC are considered to be the profits of a company
2010 Canadian Tax Foundation Annual Conference
November 30, 2010
17. Article X(6) of the Canada-US Tax Convention - Branch Tax Relief
Assume that two US-resident individuals own all the interests in a fiscally transparent US LLC. The LLC carries on business in Canada through a branch. Under Article IV(6) of the Convention, the Canadian source business profits of the LLC are considered to be derived by the US-resident individuals. However, because they are individuals, the CRA is of the view that the LLC will not be allowed the 5% branch tax rate under Article X(6).
Based on the decision of the Tax Court of Canada in TD Securities (USA) LLC v. The Queen, there seems to be an argument that the LLC itself could claim treaty benefits. Also, since individuals are not subject to branch tax if they carry on business directly in Canada, it seems unduly harsh to say that they should now be subject to branch tax at a 25% rate. If the LLC were an S corporation, the 5% treaty rate would be available.
Question
What is the CRA's position in this regard, given the decision in TD Securities (USA) LLC v. The Queen?
CRA Response
It is the CRA's position that Article IV(6) of the Treaty establishes the parameters under which the benefits of the Treaty may be claimed by a fiscally transparent LLC. Treaty benefits under Article X(6) of the Convention may be claimed by an LLC on behalf of its members with respect to an amount of profit attributable to a Canadian branch only if the amount is considered to be derived, pursuant to Article IV(6), by a US-resident company that is a "qualifying person" or by a US-resident company that is entitled, with respect to the amount, to the benefits of the Treaty pursuant to Article XXIX A(3). In the example set out above, the earnings of the LLC are considered to be derived by US-resident individuals. Accordingly, Article X(6) does not apply.
Daryl Boychuk
2010-038639
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