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 should the Canadian payor of dividends and interest determine its withholding obligation where Article IV:6 of the Canada-US Treaty may apply in a triangular situation.
Position: In the situation described, where the ultimate owners of the entity, that is fiscally transparent for U.S. tax purposes, resident in a third country include both U.S. and non-U.S. residents, such entity would have a choice. It could claim treaty benefit under the Canada-US Treaty with respect to the portion of the dividends or interest that is deemed to be paid to the U.S. residents by article IV:6 of the Canada-US Treaty. Alternatively, it could claim the benefit under the treaty between Canada and that third country with respect to the full amount of the dividends or interest. The Canadian payor should determine its withholding obligation accordingly.
Reasons: A textual, contextual, and purposive analysis of paragraph 212(1)(b), subsection 212(2) and the relevant treaty provisions, taking into account Canada's general treaty policy with respect to fiscally transparent entities in a triangular situation.
2020 Canadian Tax Foundation
Question 5: Article IV:6 of the Canada-US Treaty
Where the conditions in Article IV:6 of the Canada-U.S. Income Tax Convention (“Canada-US Treaty”) are satisfied, Canadian-source income, profit or gain that is earned by a resident of the U.S. through an entity (other than an entity resident in Canada) that is treated as fiscally transparent for U.S. tax purposes is deemed to be derived by that U.S. resident for the purpose of the Canada-US Treaty. In the Technical Explanation to the 2007 Protocol to the Canada-US Treaty, an example is given of a U.S. resident that owns a French entity that earns Canadian-source dividends and the entity is considered fiscally transparent under U.S. tax law. The Technical Explanation indicates that the U.S. resident is considered to derive the Canadian-source dividends for purposes of the Canada-U.S. Treaty and thus, the dividends are considered as being “paid to” the U.S. resident.
In a slightly more complicated example, a French corporation that is fiscally transparent for U.S. tax purposes, is wholly-owned by a partnership that is fiscally transparent for U.S. tax purposes. All the partners of the partnership are non-residents of Canada: some are residents of the U.S., some are residents of countries with which Canada has an income tax convention, and some are residents in countries with which Canada does not have an income tax convention. The French corporation, which is a resident of France for purposes of the Canada-France Income Tax Convention (“Canada-France Treaty”), receives dividends and interest payments from a Canadian corporation. The French corporation is not fiscally transparent under Canadian or French tax laws.
Can the CRA confirm that the Canadian payor of the dividends and interest can determine its withholding tax obligations in accordance with the relevant articles under either the Canada-France Treaty or the Canada-US Treaty, as appropriate? Specifically, a positive response would involve that where the conditions for Article IV:6 of the Canada-US Treaty are met, such that a portion of the dividends or interest is considered to be derived by U.S. residents eligible to benefits under the Canada-US Treaty, the Canadian payor can apply the relevant rate under either the Canada-France Treaty or the Canada-US Treaty. A positive response would also involve that to the extent that the Canada-US Treaty does not apply to the dividends or interest, the Canadian payor can determine its withholding tax obligations by applying the relevant rates under the Canada-France Treaty.
Where a person found for purposes of the application of the Canada-US Treaty (the “Treaty”) to be resident in the U.S. makes an investment into a Canadian corporation through a Limited Liability Corporation (“LLC”) that is fiscally disregarded in the U.S., without the application of Article IV:6 of the Treaty (“Article IV:6”), Canada’s longstanding position is that the benefits provided under Articles X and XI of the Treaty are not available on the dividends and interest paid by the Canadian corporation to the LLC. That conclusion is based on the fact that from a Canadian perspective, the U.S. LLC is not considered for purposes of the application of the Treaty to be a “resident” of the U.S.
The Canadian tax implications of the investment structure described above changed as a result of the addition of Article IV:6 by the 2007 Protocol to the Treaty (the “2007 Protocol”). Where the conditions of Article IV:6 are satisfied in respect of the investment structure described above, provided that the U.S. resident members of the LLC are “qualifying persons” under the Treaty in accordance with Article XXIX-A(2) (“Qualifying Persons”), Canada is required to reduce the rate of tax under Part XIII of the Income Tax Act (“Part XIII”) imposed on dividends and interest paid to the LLC by the Canadian payor. However, the application of Article IV:6 does not alter Canada’s position that the LLC is not considered to be a resident of the U.S. for the purpose of the Treaty.
As mentioned in the question, where a French entity that is fiscally transparent under U.S. tax law but not under Canadian and French tax law is owned by a U.S. resident, the Technical Explanation to the 2007 Protocol provides that where all the conditions are met, Article IV:6 applies and the Canadian sourced income, profit or gain of the French entity is considered as being “paid to” the U.S. resident for the purposes of the Treaty. In such circumstances, from a Canadian perspective, the French entity remains the only taxpayer and the reduced withholding rate under the Treaty applies to the payments of dividends or interest.
The CRA is of the view that the French entity could alternatively claim the benefit of reduced withholding rates under the Canada-France Treaty. Assuming that the requisite conditions are met, the withholding tax rate under Part XIII would be limited by the lower rate of withholding on dividends or interest offered by either the Treaty or the Canada-France Treaty, if such lower rate is claimed. The result should be the same where there is a partnership between the French entity and the ultimate U.S. owner of the French entity. As previously mentioned by the CRA, the fact that there are multiple layers of fiscally transparent entities, on its own, should not preclude the application of Article IV:6.
In this case, there are multiple partners in the partnership which owns the French entity, and some of the partners are U.S. residents for the purpose of the Treaty while others are resident in other jurisdictions. It is our view that the benefit of reduced withholding rates under the Treaty can be claimed on a portion of a payment of dividends or interest that is deemed by Article IV:6 to be derived by U.S residents who are Qualifying Persons. In that context, where the reduced rate under the Treaty is applied to a portion of the payment, the other portion would be subject to the 25% tax rate imposed under Part XIII. Alternatively, the French entity could claim the reduced withholding benefit under the Canada-France Treaty with respect to the full amount of the payment of dividends or interest that it received from the Canadian payor. The CRA is of the view that the benefit of a reduced withholding rate under the Canada-France Treaty on the payment of dividends or interest received by the French entity cannot be claimed where such benefit is claimed under the Treaty. The Treaty and the Canada-France Treaty cannot both apply to a particular payment of dividends or interest that the French entity received from the Canadian payor.
The Canadian payor should determine its withholding obligation under Part XIII in accordance with the benefit that is applicable as described above. Before deciding to reduce the amount of Part XIII withholdings from a payment of this nature, any person responsible for deducting or withholding amounts on account of Part XIII tax is advised to obtain sufficient information to ascertain whether the particular amount will be considered to be derived by U.S. residents who are Qualifying Persons. The French entity could provide the Canadian payor with information that would support how the U.S. residents are considered to derive the income amount to be paid for the purposes of the Treaty. In this regard, the French entity could present the responsible person with the information asked for in Form NR301, Declaration of eligibility for benefits (reduced tax) under a tax treaty for a non-resident person, Form NR302 Declaration of eligibility for benefits (reduced tax) under a tax treaty for a partnership with non-resident partners and/or Form NR303, Declaration of eligibility for benefits (reduced tax) under a tax treaty for a hybrid entity, as applicable in the particular circumstances, and certify the correctness of that information. It should be noted that obtaining Forms NR301, NR302 and NR303 does not exempt the payor from being liable for any deficiency in tax withheld.
Finally, where a person resident in Canada pays or credits an amount of interest or dividends to a non-resident, the person is required to issue a Form NR4 Statement of Amounts Paid or Credited to Non-Residents of Canada to the non-resident payee on or before the last day of March following the calendar year in which the amount is paid or credited. This procedure applies even where a resident of the U.S. is considered, for the purposes of the Treaty, to have derived the amount (or a portion of the amount) of interest or dividends paid or credited to the non-resident payee by virtue of Article IV:6, with Form NR4 being issued to the non-resident payee. For more information concerning the completion of NR4 information slips, please consult Guide T4061, NR4 – Non-Resident Tax Withholding, Remitting and Reporting.
October 27, 2020
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