7 October 2010 External T.I. 2009-0344201E5 - Canada-US Tax Convention

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: Is a US charitable organization eligible for the exemption from Canadian withholding tax provided in Article XXI of the Convention in respect of an item of income received from a Canadian-resident ULC that is fiscally transparent under the laws of the US?

Position: No

Reasons: Article IV(7)(b) applies after 2009 to deem the item of income not to be derived by the charitable organization

XXXXXXXXXX 								2009-034420
									R. Kauffman
Attention:  XXXXXXXXXX  

October 7, 2010

Dear Sirs:

Re: Canada-United States Tax Convention

This is in reply to your correspondence of September 21, 2009. We apologize for the delay in our response.

You presented us with the following hypothetical fact situation.

1) US LP is a limited partnership established under the laws of the U.S. US LP is a partnership for both Canadian and U.S. tax purposes.

2) The 80% limited partner of US LP is a U.S. resident entity that qualifies for tax exempt status under section 501(c)(3) of the U.S. Internal Revenue Code (the "Limited Partner"). The 20% general partner (the "General Partner") is a U.S. resident corporation and a qualifying person under Article XXIX A(2)(e) of the Canada-U.S. Tax Convention (the "Treaty"). The income of the US LP is allocated to the Limited Partner and General Partner in proportion to their partnership interests.

3) US LP owns all of the issued and outstanding shares and debt of a Nova Scotia Unlimited Liability Company ("Canco"). Canco is a corporation for Canadian tax purposes but treated as a disregarded entity for U.S. tax purposes. For purposes of the Income Tax Act (Canada) (the "Act") and the Treaty, the Limited Partner is not related to Canco or US LP.

4) Canco earns passive rental income in Canada and does not carry on a trade or business for the purposes of the Act or the Treaty. For U.S. tax purposes this rental income is included in the income of US LP and allocated to its members. The Canadian source income of the Limited Partner is exempt from tax in the U.S.

5) Canco makes dividend and interest payments to US LP. For U.S. tax purposes, these payments are disregarded. These payments would, however, be recognized under the taxation laws of the U.S. if Canco were not fiscally transparent.

6) From Canada's perspective, the Limited Partner derives its share of the interest and dividends paid to US LP by Canco.

7) Canco is disregarded for U.S. tax purposes primarily to achieve income (and foreign tax credit) flow-through treatment for the General Partner.

You have asked us whether, in the circumstances described above, Article XXI of the Treaty will apply to exempt the dividends and interest derived by the Limited Partner from Canadian taxation. In your view, Article IV(7)(b) of the Treaty should not apply to the dividends and interest derived by the Limited Partner through US LP because Article XXI(1) is not predicated on the Limited Partner being a "resident of" a Contracting State but being "resident in" a Contracting State. Alternatively, you argue that since the Canadian-source income of the Limited Partner is exempt under U.S. tax law and would be exempt if Canco was not fiscally transparent, Article IV(7)(b) does not apply since the treatment of the amounts derived by the Limited Partner is the same from a U.S. tax perspective.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete (i.e., not of a proposed nature), the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website.

To be eligible for benefits under the Treaty in respect of taxes withheld on or after February 1, 2009 in respect of the dividends or interest paid by Canco to US LP, the Limited Partner must be a qualifying person or a person entitled to the benefits of the Treaty pursuant to Articles XXIX A(3), (4) or (6). In addition, for payments made after 2009, Treaty benefits are not available if the Limited Partner is considered not to have derived the dividends or interest by reason of Article IV(7)(b) of the Treaty.

The Limited Partner will be a qualifying person if it is a resident of the United States within the meaning of Article IV of the Treaty and it is described in paragraph 2 of Article XXIX A of the Treaty. Generally, a U.S. charitable organization would be a resident of the United States by virtue of clause 1(b)(ii) of Article IV of the Treaty or based on general principles governing the determination of residency. This type of organization would also be a qualifying person under subparagraph 2(g) of Article XXIX A of the Treaty if it meets the test in that subparagraph regarding its beneficiaries, members or participants. Whether a particular organization is described in this subparagraph is a question of fact and we express no opinion on whether the Limited Partner would be a qualifying person in the above scenario.

Article IV(7)(b) of the Treaty applies after 2009 to an item of income, profit or gain received by a resident of the U.S. from a Canadian ULC that is disregarded under the taxation laws of the U.S. if the treatment of the item under the taxation laws of the U.S. is not the same as it would be if the ULC were not disregarded under U.S. law. The determination of same treatment involves an analysis of the quantum, character and timing of the item of income, profit or gain under U.S. tax laws.

In our view, the treatment of the dividends and interest under U.S. law is not the same as its treatment would be if Canco were not treated as fiscally transparent. Therefore, assuming that the Limited Partner were a qualifying person, Article IV(7)(b) of the Treaty would apply to the dividends or interest paid or credited by Canco to the US LP after 2009 with the result that the dividends and interest would be considered not to be paid to or derived by the Limited Partner.

We hope these comments are of assistance.

Yours truly,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch