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: How the CRA will treat an interest payment from Canco to its parent USCo (a non-qualifying person) where Canco has both income connected to, and income unconnected to, the active conduct of a trade or business of USCo in the United States.
Position: For the purposes of paragraph 3 of Article XXIX A, the interest payment will be treated as derived from Canada by USCo in connection with its active trade or business in the United States in the circumstances described below.
Reasons: Wording of paragraph 3 of Article XXIX A.
2010 Canadian Tax Foundation Conference
November 28, 2010
Article XXIX A(3) of the Canada-US Income Tax Convention
Question 12
Can the CRA comment on whether interest paid by Canco (a Canadian corporation) to its parent USco (a non-qualifying person) on a debt owing to USco would be eligible for benefits pursuant to article XXIX A(3) of the treaty (the "active conduct of a trade or business" test)? For this purpose, assume that USco carries on an active trade or business in the United States and that Canco is a wholly owned subsidiary of USco. Canco has both qualifying active business income from a Canadian business that is connected with USco's active trade or business (the connected business) and non-qualifying income of some kind (that is, from a business that is not connected to USco's active trade or business and/or dividends received by Canco on shares of a foreign affiliate).
Response 12
The CRA will treat an interest payment from Canco to USco as being derived by USco in connection with USco's active trade or business in the United States if
1) the payment is in respect of indebtedness that was incurred exclusively for the purpose of earning income from Canco's connected business, or
2) Canco can establish that the interest payment was funded out of the earnings of the connected business.
Sanjeev Sivarulrasa
2010-038700
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