2025 Ruling 2024-1035241R3 - IV(7)(b) & PUC increase

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: (1) Whether Article IV(7)(b) of the Canada-US Tax Treaty applies in respect of a deemed dividend payments by a Canadian-resident entity that is fiscally transparent for US income tax purposes to a US-resident corporate parent? (2) Whether subsection 245(2) applies to the proposed transactions?

Position: (1) No. (2) Not in these circumstances.

Reasons: (1) Article IV(7)(b) does not apply because the deemed dividend is subject to the same treatment under the taxation laws of the US as it would be if the dividend payer were not fiscally transparent. (2) The proposed transactions do not frustrate or defeat the underlying purpose/rationale of Article IV(7)(b).

XXXXXXXXXX									2024-103524

XXXXXXXXXX, 2025

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence and discussions in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:

i. in a previously filed tax return of the taxpayer or a related person and:

A. being considered by the CRA in connection with any such tax return;

B. under objection by the taxpayer or a related person; or

C. the subject of a current or completed court process involving the taxpayer or a related person; or

ii. the subject of a ruling request previously considered by the Income Tax Ruling Directorate in relation to the taxpayer or a related person.

Our understanding of the facts, proposed transactions, additional information and the purpose of the proposed transactions is as follows:

DEFINITIONS

Unless otherwise stated:

i. all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”);

ii. all terms and conditions used in this letter that are defined in the Act have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to, as follows:

“affiliated person” has the meaning assigned by section 251.1, read without reference to the definition of “controlled” in subsection 251.1(3);

XXXXXXXXXX;

“XXXXXXXXXX Common Share Capital Account” has the meaning ascribed thereto in Paragraph 9;

“Convention” means the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital signed 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;

“CRA” refers to the Canada Revenue Agency;

“Exchange” means the XXXXXXXXXX Exchange;

“Holdco” means XXXXXXXXXX;

XXXXXXXXXX;

“Opco” means XXXXXXXXXX, the principal business activity of which is the XXXXXXXXXX;

“Paragraph” refers to a numbered paragraph in this letter;

“Proposed Transactions” means the proposed transactions described under the Proposed Transactions header below;

“related persons” has the meaning assigned by subsection 251(2);

“safe income” in respect of a particular dividend received (as part of a transaction or event or a series of transactions or events) on a particular share means the income earned or realized (as determined for purposes of section 55) by any corporation after 1971 and before the safe-income determination time (as defined in subsection 55(1)) for the transaction, event or series of transactions that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the particular share;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1);

“Ultimate U.S. Parent” means XXXXXXXXXX the common shares of which are primarily and regularly traded on the Exchange under the symbol XXXXXXXXXX;

“U.S.” means the United States of America;

“U.S. Parent” means XXXXXXXXXX.; and

“U.S. Tax Law” means the U.S. Internal Revenue Code of 1986, as amended.

FACTS

1. Ultimate U.S. Parent is a corporation resident in the U.S. Ultimate U.S. Parent is, and will be at the time of the Proposed Transactions, a “qualifying person” within the meaning of subparagraph 2(c) of Article XXIX-A of the Convention.

2. U.S. Parent is a non-resident corporation resident in the U.S., and an indirect wholly owned subsidiary of Ultimate U.S. Parent. U.S. Parent is not fiscally transparent for U.S. tax purposes and is subject to tax in the U.S. on its worldwide income. U.S. Parent is, and will be at the time of the Proposed Transactions, a “qualifying person” within the meaning of subparagraph 2(d) of Article XXIX-A of the Convention.

3. Holdco is a taxable Canadian corporation formed under the XXXXXXXXXX and a wholly owned subsidiary of U.S. Parent. Holdco is fiscally transparent and disregarded as an entity separate from U.S. Parent for U.S. Tax Law purposes. Its registered address is XXXXXXXXXX.

4. The authorized share capital of Holdco consists of:

a) XXXXXXXXXX;

b) XXXXXXXXXX common shares, 100% of the issued and outstanding shares of which are owned by U.S. Parent;

c) XXXXXXXXXX; and

d) XXXXXXXXXX preferred shares, 100% of the issued and outstanding shares of which are owned by U.S. Parent.

5. Opco is a taxable Canadian corporation formed under the CBCA. U.S. Parent and Holdco collectively hold all the issued and outstanding shares of Opco. Opco is not fiscally transparent for U.S. tax purposes and is generally not subject to tax in the U.S. Its registered address is XXXXXXXXXX.

6. The issued and outstanding share capital of Opco consist of:

a) common shares, 100% of which are owned by Holdco, XXXXXXXXXX;

b) XXXXXXXXXX; and

c) XXXXXXXXXX preferred shares, 100% of which are owned by U.S. Parent XXXXXXXXXX.

PROPOSED TRANSACTIONS

The following transactions will be undertaken in the sequential order described below:

7. Opco will repurchase and immediately cancel all the XXXXXXXXXX preferred shares held by U.S. Parent. Opco will remit any Part XIII withholding tax on any deemed dividend arising on the repurchase of the XXXXXXXXXX preferred shares, on behalf of U.S. Parent.

8. Opco will declare and pay a dividend out of retained earnings on the Opco common shares held by Holdco. XXXXXXXXXX. The amount of the dividend paid by Opco to Holdco on the Opco common shares will not exceed the safe income that can reasonably be attributable to the Opco common shares owned by Holdco, determined immediately before the payment of that dividend.

9. XXXXXXXXXX. In accordance with the XXXXXXXXXX, Holdco will add to the balance in its XXXXXXXXXX Common Share Capital Account an amount between $XXXXXXXXXX previously credited to retained earnings.

10. Immediately after the completion of the transaction described in Paragraph 9, Holdco will reduce the balance in its XXXXXXXXXX Common Share Capital Account in accordance with the XXXXXXXXXX, without redeeming, acquiring or cancelling any shares, by an amount equal to the amount of the increase described in the above Paragraph 9. Holdco will distribute that amount in cash as a repayment of this reduction of capital to U.S. Parent, less the amount of Part XIII taxes it will remit on U.S. Parent's behalf on any deemed dividend arising on the addition to the XXXXXXXXXX Common Share Capital Account.

ADDITIONAL INFORMATION

11. Ultimate U.S. Parent, U.S. Parent, Holdco, and Opco will be, at all relevant times, related persons and affiliated persons for the purposes of the Act.

12. For U.S. Tax Law purposes the dividend paid by Opco to Holdco described in Paragraph 8 will be considered a dividend paid directly to U.S. Parent. Opco’s income is reported to U.S. tax authorities as earned.

13. The Proposed Transactions in Paragraph 9 will be disregarded for U.S. Tax Law purposes, and as such, will not result in any income inclusion or deduction in computing the taxable income of U.S. Parent for U.S. Tax Law purposes. Likewise, no amount of income, profit or gain would be recognized for U.S. Tax Law purposes as a result of that transaction if Holdco was not fiscally transparent under that tax law.

14. U.S Parent and Holdco are the beneficial owners of the Opco shares they respectively hold, and of all distributions made on those shares.

15. The increase of the XXXXXXXXXX Common Share Capital Account described in Paragraph 9 will not result in the increase of the value of Holdco’s assets less its liabilities and/or decrease Holdco’s liabilities less the value of its assets.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to distribute earnings from the business operations of Opco to U.S. Parent in a tax-efficient manner such that the distributions qualify for benefits under the Convention. U.S. Parent will use the funds received from Holdco in the ordinary course of its business.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions, additional information, and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, our Rulings are as follows:

A. Subsection 84(3) will apply to the repurchase and cancellation by Opco of the XXXXXXXXXX preferred shares from U.S. Parent, with the result that Opco will be deemed to have paid, and U.S. Parent deemed to have received, at the time of such repurchase, a dividend equal to the amount, if any, by which the consideration paid on the repurchase of the XXXXXXXXXX preferred shares exceeds the paid-up capital (as defined in subsection 89(1)), immediately before that repurchase, of the XXXXXXXXXX preferred shares so repurchased. As a result of the application of subsections 212(2) and 215(1), and paragraph 2 of Article X of the Convention, Opco will be required to remit to the Receiver General, tax at the rate of 5% as prescribed by subparagraph 2(a) of Article X of the Convention.

B. Subsection 84(1) will apply to the increase in the amount of the XXXXXXXXXX Common Share Capital of Holdco described in Paragraph 9, with the result that Holdco will be deemed to have paid, and U.S. Parent will be deemed to have received, at that time, a dividend equal to the amount of such increase and such dividend will be a taxable dividend as referred to in paragraph 212(2)(a).

C. For the purposes of applying Article X of the Convention, the amount of the dividend referred to in Ruling B will, in the absence of subparagraph 7(b) of Article IV of the Convention and subsection 245(2), be considered to be income, as described in the definition of “dividends” in paragraph 3 of Article X of the Convention, that is derived by U.S. Parent.

D. Subparagraph 7(b) of Article IV of the Convention will not apply to treat the dividend referred to in Ruling B as not having been paid to or derived by U.S. Parent.

E. To the extent that the amount distributed on the reduction of the XXXXXXXXXX Common Share Capital Account of Holdco described in Paragraph 10 does not exceed the increase in the amount of the XXXXXXXXXX Share Capital Account described in Paragraph 9, no amount will be deemed to have been paid and received as a dividend pursuant to subsection 84(4).

F. As a result of the application of subsections 212(2) and 215(1), and paragraph 2 of Article X of the Convention in respect of the dividend referred to in Ruling B, Holdco will be required to remit to the Receiver General, tax at the rate of 5% as prescribed by subparagraph 2(a) of Article X of the Convention.

G. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the Rulings above.

The above-noted Rulings are based on the Act, the U.S. Tax Law and the Convention in their present form and do not take into account any proposed amendments to the Act, the U.S. Tax Law or the Convention which, if enacted, could have an effect on the Rulings provided herein.

CAVEATS

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the facts, Proposed Transactions, and additional information, other than those specifically described in the Rulings given above and in particular, without limiting the generality of the foregoing, in respect of:

(a) whether U.S. Parent is a “qualifying person” within the meaning of subparagraph 2(d) of Article XXIX-A of the Convention;

(b) the determination of the paid-up capital or fair market value of any shares or other property referred to herein;

(c) the amount of any dividend that may be deemed to be paid by Opco or Holdco as a consequence of the Proposed Transactions, as well as the applicable withholding tax rate;

(d) the amount of Holdco’s retained earnings;

(e) the safe income attributable to any share of Opco;

(f) whether U.S. Parent, Holdco or Opco are fiscally transparent under U.S. Tax Law;

(g) whether any deemed dividend resulting from the transactions described in the proposed Transactions are disregarded or not under U.S. Tax Law or would be disregarded if the relevant payor were not fiscally transparent under U.S. Tax Law;

(h) U.S. Tax Law consequences described in Paragraphs 12 and 13; and

(i) any tax consequences relating to the facts, preliminary transactions and Proposed Transactions, other than those described in the Rulings given above, or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, including, whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R12 Advance Income Tax Rulings and Technical Interpretations, dated April 1, 2022 and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before XXXXXXXXXX.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Your truly,

XXXXXXXXXX
Section Manager
for Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch