6 September 2024 External T.I. 2019-0796831E5 - Part XIII Tax on Dividend Paid to a Partnership

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 a dividend paid by a Canadian corporation to a partnership with a 20% US resident corporate partner and an 80% German resident corporate partner would be eligible for the reduced 5% Part XIII withholding tax under the applicable tax treaties.

Position: Yes, The withholding tax rate would be 5% pursuant to both the Canada-US Tax Treaty and the Canada-Germany Tax Treaty.

Reasons: The conditions for the lower 5% withholding tax in Article X(2)(a) of the Canada-US Tax Treaty would be met as the US corporate partner would be considered to own 20% of the shares of the Canadian corporation. The conditions for the lower 5% withholding tax in Article 10(2)(a) of the Canada-Germany Tax Treaty would be met as the German corporate partner would be considered to control at least 10% of the voting power of the shares of the Canadian corporation.

XXXXXXXXXX									2019-079683
A. Kippen

September 6, 2024

Dear XXXXXXXXXX:

Re: Withholding Tax on Dividend Paid to a Partnership

We are writing in reply to your letter in which you requested our views on the rate of withholding tax applicable to a dividend paid by a Canadian corporation to a general partnership with U.S. and German corporate partners based on a hypothetical set of facts.

HYPOTHETICAL FACTS

1. A general partnership formed under the laws of the United States (“USP”) has two partners. Partner1 is a US corporation owned by US residents. Partner2 is a German corporation owned by German residents.

2. USP is regarded as a partnership and a fiscally transparent entity for Canadian, US and German tax purposes.

3. Partner1 owns a 20% interest in USP and Partner2 owns an 80% interest in USP.

4. USP owns 100% of the shares of a Canadian corporation (“Canco”).

5. The USP partnership agreement gives Partner2 control of USP as Partner2 has the power to exercise 80% of the votes that may be cast at a USP partnership meeting, including such votes of USP in its capacity as shareholder of Canco.

6. USP, Partner1, and Partner2 do not carry on business in Canada.

7. Canco will pay a dividend on its shares owned by USP.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”), the Canada-US Tax Treaty (footnote 1) and the Canada-Germany Tax Treaty (footnote 2) . It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

In the comments below, we have assumed that the hypothetical facts are those relevant for the analysis.

A partnership is generally not regarded as a person for purposes of the Act, although specific provisions of the Act may deem a partnership to be a person for certain purposes. One such provision is paragraph 212(13.1)(b) which deems a partnership that is not a "Canadian partnership", as defined in subsection 102(1), to be a non-resident person for purposes of Part XIII where a person resident in Canada pays or credits an amount to the partnership (footnote 3) . USP is not a Canadian partnership since not all of its partners are resident in Canada. Therefore USP would be deemed to be a non-resident person for Part XIII withholding tax purposes in respect of a dividend paid by Canco. Pursuant to subsection 212(2), a dividend paid by Canco to USP would be subject to a 25% withholding tax, subject to the eligibility for a lower rate of withholding tax pursuant to the terms of an applicable tax treaty between Canada and another country.

The long-standing position of Canada Revenue Agency (“CRA”) is that, for the purposes of applying a tax treaty, the dividends paid by a Canadian corporation on its shares held in partnership are considered to be paid or credited to the members of the partnership in order to determine if treaty benefits are applicable (see, for example, document 2004-0074241E5). Therefore, for purposes of Article X of the Canada-US Tax Treaty and Article 10 of the Canada-Germany Tax Treaty, Partner1 and Partner2 would be regarded as owners of their share of the Canco dividend.

Subparagraph 2(a) of Article X of the Canada-US Tax Treaty provides for a 5% withholding tax rate on dividends paid to the beneficial owner of such dividends “if the beneficial owner is a company which owns at least 10 percent of the voting stock of the company paying the dividends”. That provision also provides that “for this purpose, a company that is a resident of a Contracting State shall be considered to own the voting stock owned by an entity that is considered fiscally transparent under the laws of that State and that is not a resident of the Contracting State of which the company paying the dividends is a resident, in proportion to the company's ownership interest in that entity”.

In applying subparagraph 2(a) of Article X of the Canada-US Tax Treaty, since Partner1 is a corporation resident in the US and USP is a fiscally transparent entity under the laws of the US and is not a resident of Canada, Partner1 is considered to own the voting stock of Canco that is owned by USP in proportion to Partner1’s ownership interest in USP. Partner1 would therefore be considered to own 20% of the voting stock of Canco for purposes of that provision. As this percentage ownership is greater than the minimum 10% ownership threshold specified in subparagraph (2)(a) of Article X, Partner1 would be entitled to the reduced 5% rate of withholding tax on its share of the dividends paid by Canco.

With respect to the portion of the Canco dividend that is beneficially owned by Partner2, subparagraph 2(a) of Article 10 of the Canada-Germany Tax Treaty provides for a withholding tax rate of 5% “if the beneficial owner is a company that controls at least 10 per cent of the voting power in the company paying the dividends.” The word “controls” is not defined in the Canada-Germany Treaty. Therefore, pursuant to paragraph 2 of Article 3 in the Canada-Germany Tax Treaty and section 3 of the Income Tax Conventions Interpretations Act (Canada), the definition of “control” in the Act as well as the meaning of “control” that has been developed through case law and in interpretations of CRA determines how “controls at least 10 per cent of the voting power” is to be interpreted.

In the context of the Income Tax Act, the concept of control is related to the corporation itself. As Jackett P stated in the Exchequer Court decision in Buckerfield's Ltd et al v. Minister of National Revenue, 64 DTC 5301:

“I am of the view, however, that in Section 39 of the Income Tax Act , the word “controlled” contemplates the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors. See British American Tobacco Co. v. C.I.R., [1943] 1 All E.R. 13 , where Viscount Simon, L.C., at page 15, says:

“The owners of the majority of the voting power in a company are the persons who are in effective control of its affairs and fortunes.””

This principle of control meaning de jure control has been cited in numerous court decisions, including by the Exchequer Court in Vineland Quarries & Crushed Stone Ltd v. Minister of National Revenue, 66 DTC 5092 (“Vineland”) [aff’d 67 DTC 5283 (SCC)] and more recently in the Supreme Court of Canada (SCC) decision in Duha Printers (Western) Ltd. v. The Queen 98 DTC 6334.

When determining whether a particular corporation is controlled by a person or persons who are partners, the CRA has addressed whether a partner controls the votes of shares owned by the partnership. In a technical interpretation, 2013-0484031E5 dated December 12, 2013, the CRA stated:

“The partnership agreement of a partnership should be taken into account in determining who controls a corporation when a partnership owns shares in a corporation. The partnership agreement and the equity interest of the members must be examined to determine which member(s) of the partnership can exercise voting rights in respect of the shares of the corporation.”

This approach was cited in concluding, in document 2018-0787561I7 dated April 3, 2019, that a corporation may be controlled by another corporation where the latter corporation, together with its direct subsidiary, are the partners in a partnership which owns all the shares of a subsidiary.

In the hypothetical facts we are told:

“The USP partnership agreement gives Partner2 control of USP as Partner2 has the power to exercise 80% of the votes that may be cast at a USP partnership meeting, including such votes of USP in its capacity as shareholder of Canco.”

Because Partner2 is a German resident corporation, it is entitled to the reduced 5% withholding tax rate on its share of the Canco dividend, as it would meet the conditions set by paragraph 2(a) of Article 10 of the Canada-Germany Tax Treaty because it controls at least 10% of the voting shares of Canco.

We trust these comments will be of some assistance.

Yours truly,

Charles Taylor
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital, signed at Washington 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.

2 Agreement Between Canada and the Federal Republic of Germany for the Avoidance of Double Taxation With Respect to Taxes on Income and Certain Other Taxes, the Prevention of Fiscal Evasion and the Assistance in Tax Matters, as signed on April 19th, 2001.

3 The draft amendment to paragraph 212(13.1)(b), that has been introduced consequential on the proposed introduction of subsection 212(13.11) and proposed amendments to subsection 212(13.2), would have no application to the payment of a dividend by Canco to USP since Canco is neither a partnership nor a non-resident person that is deemed to be a Canadian resident person under proposed paragraphs 212(13.1)(a) or 212(13.2)(b).