5 November 2025 External T.I. 2020-0868261E5 - Article XXI Exemption

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 US resident non-profit organizations (the NPOs”) are exempt from Canadian withholding tax under the Canada-U.S. Income Tax Treaty (“the Treaty”) with respect to rental income and timber royalty derived through a chain of partnerships that are treated as transparent for Canadian and U.S. income tax for the purposes?

Position: Generally, yes.

Reasons: The income will be considered to be derived by the partners, the NPOs, when determining whether Article XXI of the Treaty is applicable in respect of this income. Provided that the income is exempt from tax in the United States, is not from carrying on a business and is not from a related person (other than related persons referred to in Articles XXI(1), (2) or (3)), the royalties and rent should not be subject to Canadian withholding tax.

XXXXXXXXXX								2020-086826
									Sylvain Grégoire

November 5, 2025

Dear XXXXXXXXXX:

Re: Treaty Benefits on Canadian source rent and timber royalty payments paid to a partnership

We are writing in response to your question regarding the application of the Treaty 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 Fifth Protocol signed on September 21, 2007 (the "Treaty"). More specifically, your question related to Canadian source rent and timber royalty payments paid by a Canadian-resident corporation to a partnership in the context of the following hypothetical situation:

1. Two non-profit organizations (respectively, “Tax Exempt Partner1” and “Tax Exempt Partner2”, or together, the “Tax Exempt Partners”) are residents of the United States for purposes of the Treaty. The Tax-Exempt Partners are both included in the list (revised in March 2024) of U.S. organizations that are tax exempt under paragraph 1 of Article XXI of the Treaty. The Tax-Exempt Partners are residents of the United States for the purposes of the Treaty and "qualifying persons" within the meaning of Article XXIX-A of the Treaty.

2. Tax Exempt Partner1 and Tax Exempt Partner2 respectively own a 99.8% and 0.02% interest in a limited partnership (“First Tier LP”).

3. First Tier LP and Tax Exempt Partner2 respectively own 99.8% and 0.02% interests in another limited partnership (“Second Tier LP”).

4. First Tier LP and Second Tier LP are partnerships for purposes of the Income Tax Act (the “Act”).

5. Second Tier LP owns a 99% interest in a limited partnership (“Third Tier LP” and together with the First Tier LP and the Second Tier LP, the “LPs”).

6. A third-party corporation incorporated in and resident of Canada (“Canco1”) owns the remaining interest in Third Tier LP.

7. Third Tier LP receives rent and timber royalty payments from a corporation incorporated in, and resident of, Canada (“Canco2”) pursuant to a lease agreement and timber cutting agreements with respect to real property located in Canada which is held as capital property by Third Tier LP (the “Rent and Royalty Payments”).

8. Canco1 and Canco2 are related for purposes of the Tax Act and the Treaty.

9. Canco1 and Canco2 are treated as corporations for U.S. income tax purposes.

10. Canco1 and Canco2 are not related to the Tax-Exempt Partners for purposes of the Tax Act and the Treaty.

11. The LPs have no employees and are not carrying on a trade or business in Canada.

12. The LPs are treated as partnerships for U.S. income tax purposes, for Canadian income tax purposes and for Treaty purposes.

Your question is whether the Tax-Exempt Partners are exempt from Canadian withholding tax under the Canada-U.S. Income Tax Treaty with respect to rental income and timber royalty derived through the LPs?

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). 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 particular transactions 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 IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 212(13.1)(b) provides that for the purposes of Part XIII of the Act (other than section 216), “where a person resident in Canada pays or credits an amount to a partnership (other than a Canadian partnership within the meaning assigned by section 102), the partnership shall be deemed, in respect of that payment, to be a non-resident person”.

Therefore, when Canco 2 pays or credits an amount of rental income and timber royalty, subject to tax under Part XIII pursuant to paragraph 212(1)(d)), to Third Tier LP, it is required under subsection 215(1) to deduct or withhold 25% from the amount paid or credited. Canco 2 is then required to remit the amount deducted or withheld forthwith to the Receiver General on behalf of Third Tier LP and to submit with the remittance a statement in prescribed form. However, the withholding tax on a payment to a non-resident person may be reduced or eliminated under the Treaty.

Article XXI (1) of the Treaty generally provides that “income derived by a religious, scientific, literary, educational, or charitable organization shall be exempt from tax in [Canada] if it is resident in the [United States], but only to the extent that such income is exempt from tax in the [United States]”. However, article XXI (4) of the Treaty denies the exemption if it is income “from carrying on a trade or business or from a related person other than a person referred to in 1, 2 or 3” (being another related non-profit organization or a related trust, company or other arrangement that is itself operated exclusively to earn income for the benefit of one or more non-profit organizations or trusts, companies or other arrangements described in Article XXI (2)).

Article IV (7)(a) might apply to deny Treaty benefits on an amount of income, profit or gain received by a resident of one of the Contracting States (e.g., the United States) through an entity that is a non-resident of the United States and that is treated as fiscally transparent in the source state (Canada) but not in the residence state (the United States).

That provision would apply if the LP treated as fiscally transparent in Canada were not viewed as fiscally transparent by the United States and the amount received by the United States resident did not receive the same treatment under the United States tax laws as it would had it been derived directly. If applicable, the amount of income, profit or gain would be considered not to be paid to, or derived by the person who is a resident of the United States. Based on the facts described above, Article IV(7)(a) does not apply since the LPs are treated as fiscally transparent in the United States.

Where a non-profit organization that is a resident of the United States and a qualifying person under article XXIX-A of the Treaty derives a Canadian-sourced income amount through one or more partnerships that are transparent in both Canada and the United States, as is the case in the facts described above, the non-profit organization will, subject to Article XXI (4), generally be considered to derive the amount for the purposes of applying Article XXI.

Therefore, based on the facts provided with your submission, the Rent and Royalty Payments that are derived by the Tax Exempt Partners are exempt from Canadian withholding tax under the Treaty.

We trust the above information will assist you.

Yours truly,

Yves Grondin
Section Manager
for Division Director
International Tax Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch