7 June 1994 External T.I. 9335535 - TECH INQUIRY CONCERNING EMPLOYEE PROFIT SHARING PLAN TRUST

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principales Questions:

technical interpretation on the application of section 2(a) and 3 of Article XXI of the Canada-United States Income Tax Convention (1980) ("Treaty") to trust funds established for Canadian Employee Profit Sharing Plans ("EPSP")

Position Adoptée:

no comments

Raisons POUR POSITION ADOPTÉE:

it would not be appropriate for Revenue Canada to provide interpretations on the provisions of the Treaty to exempt U.S. sourced income from taxation in the United States.

 		5-933553
XXXXXXXXXX	Carole Pronovost

Attention: XXXXXXXXXX

June 7,1994

Dear Sirs:

Re: Canada - United States Income Tax Convention (1980)
Technical Inquiry Concerning Employee Profit
Sharing Plan Trust Funds

We are writing in response to your request for a technical opinion on the application of the Canada - United States Income Tax Convention (1980) ("Treaty") to trust funds established for Canadian Employee Profit Sharing Plans ("EPSP"), such trust funds being described under the Income Tax Act of Canada ("ITA"). You outline the following situation.

Situation #1

Facts

The Canada Trust Company ("CT") acts as trustee for a trust fund established for an EPSP. At all times the EPSP trust would be a Canadian resident. The EPSP trust would receive dividends from a United States resident corporation as a result of the EPSP trust holding equities issued by a corporation resident in the United States.

Your interpretation

It is your view that the dividends received by the EPSP trust are exempt from U.S. withholding tax as the fact situation falls within the purview of section 2(a) of Article XXI of the Treaty. Your reasoning is as follows:

1.An EPSP is generally exempt from tax in a taxable year. Subsection 144(2) ITA and paragraph 149(1)(p) ITA confirm that an EPSP trust is exempt from Part I tax.

2.The EPSP trust would be a Canadian resident.

3.The EPSP trust is operated and constituted under a plan which has as its sole purpose the provision of employee benefits. You note that subsection 144(1) definition of an EPSP requires that payments be made by "an employer to a trustee in trust for the benefit of officers or employees of the employer".

Question

Would the dividends received by the EPSP trust be subject to any United States withholding tax, assuming that there is no related party issue under section 3 of Article XXI of the Treaty ?

Situation #2

Facts

CT acts as trustee for a trust fund established for an EPSP. The EPSP trust at all times would be considered as a Canadian resident. The settlor of the EPSP trust and the corporation offering the EPSP to its employees is a Canadian resident corporation. The EPSP trust holds equities issued by the U.S. parent of the Canadian resident corporation which is acting as settlor of the EPSP trust. The equities trade on an American stock exchange. The equities pay dividends which are to be received by the EPSP trust.

Your interpretation

It is your opinion that the conditions in #1 to 3 above are met enabling the EPSP trust to benefit from the exemption under section 2(a) of Article XXI of the Treaty. However, in your view section 3 of Article XXI of the Treaty could also be interpreted as categorizing the dividends from the equities issued by the U.S. parent as income from a "related person" removing the exemption from U.S. withholding tax?

Question

Are these dividends subject to U.S. withholding tax?

Our comments

The interpretation you seek relates to dividend income from a source in the United States. Accordingly, it involves the application of the provisions of the Treaty to exempt such income from taxation in the United States. In the circumstances we feel that it would not be appropriate for Revenue Canada to provide interpretations on the provisions of the Treaty to exempt U.S. sourced income from taxation in the United States. Generally, we agree that a trust resident in Canada and governed by an employee profit sharing plan is exempt from tax in Canada pursuant to subsection 144(2) and paragraph 149(1)p) of the Act. Moreover, a trust in circumstances described in paragraph 2 of Article XXI of the Convention may qualify for the exemption provided by that same paragraph, unless paragraph 3 of Article XXI of the Convention is applicable. Paragraph 78 of Information Circular 77-16R4 indicates the Department's general position concerning the application of Article XXI of that Convention. In the case you described to us, it appears that paragraph 3 of Article XXI of the Convention will be applicable if the trust is related to the payor. The determination as to whether such a person is related generally involves questions of fact which can only be resolved after a review of all of the relevant facts of that particular situation. Nevertheless, you may wish to communicate with the U.S. tax authorities for their views on this question. We regret that we cannot be of more assistance.

These opinions do not constitute advance income tax rulings and consequently are not binding on the Department.

We trust that the above comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch