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.
Principal Issues: Whether income derived in Canada by a U.S. master trust is exempt from tax under paragraph 1 of Article XXI of the Canada-U.S. Income Tax Convention.
Position: The Article XXI exemption would not apply to the U.S. master trust.
Reasons: The U.S. master trust is merely receiving income in trust on behalf of unknown recipients.
April 12, 1999
International Tax Directorate International Section
Special Projects Section G. Middleton
R. Power, A/Manager
XXXXXXXXXX Request for
Exemption From Part XIII Withholding Taxes
This is in reply to your memorandum in which you requested our views on a request from XXXXXXXXXX with respect to whether all or a portion of, the Canadian investment income derived in Canada by a U.S. Master Trust qualifies for the exemptions in subsection 212(14) of the Act or Article XXI of the Canada-U.S. Income Tax Convention (the “U.S. Convention”).
There was insufficient information given in XXXXXXXXXX letter to fully understand: the proposed structure; the residency of the investors; or the amounts and types of Canadian investment income derived in Canada; etc. However, we have briefly summarized our basic understanding of the facts in order to provide you with some general comments that may be relevant to your enquiries.
1. The U.S. Master Trust is organized as a trust under XXXXXXXXXX law. It qualifies as a U.S. partnership and will not be subject to tax in the U.S. The Trust will have XXXXXXXXXX separate investment portfolios.
2. There are XXXXXXXXXX U.S. feeder fund investment companies (USCOs) which may qualify as regulated investment companies for U.S. federal income tax purposes. There will be a USCO investing in each of the Master Trust’s XXXXXXXXXX investment portfolios (e.g., USCO #1 invests funds in the Master Trust’s portfolio #1; or USCO #2 invests funds in portfolio #2, etc.)
3. XXXXXXXXXX a limited liability company organized under the laws of the XXXXXXXXXX (i.e. an offshore investment fund), is comprised of XXXXXXXXXX feeder funds and these XXXXXXXXXX feeder funds make investments in the XXXXXXXXXX portfolios of the U.S. Master Trust in the same manner as the USCOs.
4. We have made the following assumptions.
a) The U.S. Master Trust makes investments in Canadian securities (e.g., stocks and bonds) with respect to each of its XXXXXXXXXX investment portfolios.
b) Canadian residents make various payments to the U.S. Master Trust in respect of the Canadian securities (e.g., dividends, interest, gains, etc.).
c) The main issue in this matter involves the rate of withholding tax on the Canadian investment income derived in Canada from the payments described in 4(b).
- In situations such as described above, it should be noted that, for the purpose of determining the persons who qualify for the exemptions or reduced rate of withholding tax (e.g., Article XXI of the U.S. Convention), it is necessary to determine the identity of the beneficiaries (or recipients or owners) of the income derived in Canada, not the trust or trust arrangement that merely receives the payments in trust on behalf of its beneficiaries or as an agent on behalf of its principals, respectively. Thus, it is our view that the U.S. Master Trust does not qualify as a trust, company, organization or other arrangement referred to under paragraph 1 or 2 of Article XXI of the U.S. Convention or under subsection 212(14) of the Act and, accordingly, it does not qualify for the exemptions under those provisions.
- The information is not clear as to whether the investment income derived in Canada and paid to the U.S. Master Trust can be traced (or allocated) to its ultimate beneficial owners (or beneficiaries) and it is not clear whether the identity or the residency status of the beneficial owners can be determined. Thus, we cannot determine whether any portion of such investment income qualifies for the exemptions in subsection 212(14) of the Act or Article XXI of the U.S. Convention, or the reduced withholding rate of tax accorded to amounts paid to residents of the U.S. under provisions in the U.S. Convention, such as Article X dealing with dividends or Article XI dealing with interest.
- Before the Department gives any consideration to allowing any exemptions or reductions in withholding tax in respect of investment income derived in Canada and paid to the U.S. Master Trust, XXXXXXXXXX should be required to provide documentation that would clearly explain: how the U.S. Master Trust acts in trust for, or as agent for or on behalf of, the ultimate beneficial owners; the identity and resident status for each beneficial owner; and the details on how each payment of Canadian investment income described in 4(b) is being received by or allocated to, or on behalf, of such beneficial owners.
If you have any further questions in this matter, please phone Greg Middleton at 957-2122.
Reorganizations and International Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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