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 treaty benefits are available under Article XXIX-A(3) to a US resident corporation that disposes of its shares of a US holding company that owns shares of a Canadian corporation, where the shares of the US holding company are "taxable Canadian property" to the US resident, and in particular, whether the gain would be considered income derived from Canada for purposes of applying XXIX-A(3).
Position: Treaty benefits could be available, under the circumstances.
Reasons: Under the circumstances, where the other requirements of XXIX-A(3) are satisfied, the capital gain would constitute income derived from Canada for purposes of applying that provision.
IFA Roundtable, May 2014 Question 2
Question 2: Possible Application of Article XXIX-A(3) to the Gain on the Sale of a US Company
Assume that UK Parent owns US Parent, which owns US Holdco, which owns Can Sub. US Parent sells US Holdco. Assume further that US Holdco shares are "taxable Canadian property" within the meaning of subsection 248(1). If the Canada-US Tax Convention (the "Treaty") applies, Canada does not have the right to tax any gain on the disposition of US Holdco by US Parent. Does paragraph 3 of Article XXIX-A of the Treaty (i.e., the LOB) apply, assuming US Parent is carrying on a business that is upstream, downstream or parallel to the business carried on by Can Sub? The provision reads in part "the benefits of this [Treaty] shall apply to that resident person [US Parent] with respect to income derived from [Canada] in connection with or incidental to that trade or business (including any such income derived directly by that resident person through one or more other persons that are residents of [Canada]
" Would the CRA consider the gain to be derived from Canada where Canada taxes the gain under domestic law?
CRA Response
Where applicable, paragraph 3 of Article XXIX-A may extend benefits under the Treaty to a US resident that is not otherwise a qualifying person under paragraph 2. In particular, paragraph 3 provides that treaty benefits may be available to a US resident with respect to income derived from Canada, provided that the income is derived in connection with, or is incidental to, the active conduct of a trade or business (other than certain investment businesses) carried on in the US by the US resident, or a person related to the US resident, and provided that the US trade or business is substantial in relation to the activity carried on in Canada giving rise to the income.
In the situation described above, where the US Holdco shares are considered "taxable Canadian property", we would consider the gain realized in US Parent from the disposition of its US Holdco shares to be income derived from Canada for purposes of applying paragraph 3 of Article XXIX-A of the Treaty, since the value of the US Holdco shares would be principally derived from property that is "taxable Canadian property" as defined in subsection 248(1).
Kim Duval
2014-052671
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