CRA finds that Canadian timber royalties derived by US NPOs through a stacked partnership structure were exempted from Pt. XIII tax under XXI(1) of the Canada-US treaty

A 99% interest in a limited partnership (“Third Tier LP”) was held by two U.S.-resident non-profit organizations (the “Tax Exempt Partners”), which were exempt under Art. XXI(1) of the Canada-US Treaty and were “qualifying persons”, through two intermediate partnerships. The remaining 1% interest in Third Tier LP was held by a Canadian-resident corporation (“Canco1”), which was unrelated to the Tax Exempt Partners.

Third Tier LP received timber royalties and rents (the “royalties”) from the exploitation of its Canadian real property by a corporation (“Canco2”) which was related to Canco1. None of the above partnerships carried on a trade or business in Canada, and they were treated as partnerships for US and Canadian income tax purposes.

CRA noted that:

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).

However, that was not the case here as the partnerships were fiscally transparent for US purposes. CRA concluded that royalties derived by the Tax Exempt Partners were exempt from Canadian withholding tax under the Treaty.

Neal Armstrong. Summary of 5 November 2025 External T.I. 2020-0868261E5 under Treaties – Income Tax Conventions – Art. 4.