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: For purposes of applying the Limitation of Benefits Provision of the Canada-US Income Tax Convention, as amended by the Fifth Protocol (the "Canada-US Treaty"), will Canada look through limited liability companies ("LLCs") and other entities that are fiscally transparent for US purposes, in applying paragraphs 2(d) and (e) of the definition of "qualifying person" of Article XXIX A?
Position: Yes
Reasons: Technical Explanation of the Canada-US Treaty
2008 IFA Conference
Question:
For purposes of applying the Limitation of Benefits Provision of the Canada-US Income Tax Convention, as amended by the Fifth Protocol (the "Canada-US Treaty"), will Canada look through limited liability companies ("LLCs") and other entities that are fiscally transparent for US purposes, in applying paragraphs 2(d) and (e) of the definition of "qualifying person" of Article XXIX A?
Response
The principles of new paragraph 6 of Article IV of the Treaty will be taken into account by the CRA when applying the ownership and base erosion provisions of Article XXIX A. Therefore, the CRA will "look through" an entity that is viewed as fiscally transparent under the domestic laws of the residence State (other than entities that are resident in the source State) when applying the ownership/base erosion test in paragraphs 2(d) and 2(e) of the definition of "qualifying person" of Article XXIX A. The CRA recommended that the TE reflect this interpretation.
For example, assume that USCo, a company incorporated in the United States, wishes to obtain treaty benefits in respect of Canadian source income it receives. USCo is owned by USLLC, an entity that is treated as fiscally transparent in the United States. USLLC is owned by a US resident individual. Since the United States (i.e the resident State vis-a vis the individual) views the USLLC as fiscally transparent, the US resident individual member of the USLLC shall be regarded as the owner of USCo for purposes of the ownership test. Accordingly, USCo would satisfy the ownership requirement of the ownership/base erosion test. Similarly, deductible payments made to USLLC will be treated as made to the US resident individual.
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