2009 Ruling 2009-0345901R3 - Canada-U.S. 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: Whether Article IV(7)(b) of the Treaty applies to fees paid by a Canadian unlimited liability corporation ("ULC") to a U.S. limited partnership

Position: No

Reasons: The treatment of the fees under the income tax laws of the U.S. is the same as it would be if the ULC were not fiscally transparent

XXXXXXXXXX 								2009-034590

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX (the "taxpayers")

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayers.

To the best of your knowledge and that of the taxpayers, none of the issues involved in this ruling request are:

(i) in an earlier return of the taxpayers or a person related to the taxpayers;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a person related to the taxpayers;

(iii) under objection by the taxpayers or a person related to the taxpayers;

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise stated, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supplement) (the "Act"), as amended to the date of this advance income tax ruling. All references in this letter to currency are to Canadian currency.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your request do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

(a) "Canco" means XXXXXXXXXX .;

(b) "Companies Act" means the XXXXXXXXXX ;

(c) "CRA" means the Canada Revenue Agency;

(d) "fiscal period" has the meaning assigned by subsection 249.1(1) of the Act;

(e) "Foreign Jurisdiction" means XXXXXXXXXX ;

(f) "Foreign Legislation" means the XXXXXXXXXX ;

(g) "Investors" means the individuals who are members of Partnership A;

(h) "Mr. X" means XXXXXXXXXX ;

(i) "Partnership A" means XXXXXXXXXX .;

(j) "Partnership B" means XXXXXXXXXX .;

(k) "Province" means XXXXXXXXXX ;

(l) "qualifying person" has the meaning assigned by Article XXIX-A of the Treaty;

(m) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(n) "S Corp" means XXXXXXXXXX .;

(o) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(p) "taxation year" has the meaning assigned by subsection 249(1) of the Act;

(q) "Treaty" means the Convention Between Canada and the United States of America With Respect to Taxes on Income and 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; and

(r) "United States" means the United States of America.

Facts

1. Mr. X is a citizen of the United States and a resident of the United States for the purposes of the Treaty.

2. S Corp was incorporated under the Foreign Legislation. Mr. X owns all of the issued and outstanding shares of S Corp. S Corp has elected to be an S Corporation under the income tax law of the United States and is a qualifying person for the purposes of the Treaty. XXXXXXXXXX

3. Each of the Investors is:

(a) an individual;
(b) a citizen of the United States; and
(c) a resident of the United States for purposes of the Treaty.

4. Partnership A is a limited partnership organized under the laws of the Foreign Jurisdiction. S Corp's interest in Partnership A entitles it to XXXXXXXXXX % of the income and distributable assets of Partnership A. The Investors own the remaining XXXXXXXXXX % interest in Partnership A. Partnership A is not treated as a corporation under the income tax law of the United States (i.e. Partnership A is fiscally transparent) and is not a resident of the United States for the purposes of the Treaty.

5. Partnership B is a limited partnership organized under the laws of the Foreign Jurisdiction. S Corp's interest in Partnership B entitles it to XXXXXXXXXX % of the income and distributable assets of Partnership B. Partnership A owns the remaining XXXXXXXXXX % interest in Partnership B. Partnership B does not carry on business in Canada. Partnership B is not treated as a corporation under the income tax law of the United States (i.e. Partnership B is fiscally transparent) and is not a resident of the United States for the purposes of the Treaty.

6. The members of Partnership A and Partnership B do not hold their respective interests in the partnership, or receive any income or distributions from the partnership, for or on behalf of any other person.

7. Canco is a taxable Canadian corporation formed under the Companies Act as an unlimited liability corporation. XXXXXXXXXX

8. Partnership A owns all of the issued and outstanding shares of Canco.

9. Canco files its tax returns with the XXXXXXXXXX Taxation Centre under Business Account Number XXXXXXXXXX and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. Canco is treated as a disregarded entity under the income tax law of the United States (i.e. Canco is fiscally transparent).

10. Partnership A, Partnership B, Canco, and S Corp each have a fiscal period that begins on XXXXXXXXXX and ends on XXXXXXXXXX .

11 On XXXXXXXXXX Canco entered into an XXXXXXXXXX (the "Agreement") with Partnership B. Pursuant to the terms of the Agreement, Partnership B provides Canco with XXXXXXXXXX services. All services under the Agreement are performed in the Foreign Country.

12. A separate agreement (the "Letter Agreement") establishes the amount that Canco is required to pay to Partnership B for the services it provides to Canco under the terms of the Agreement. In accordance with the terms of the Letter Agreement, Canco paid in excess of $XXXXXXXXXX dollars to Partnership B for the services it performed during the XXXXXXXXXX fiscal period. The amount paid in XXXXXXXXXX is representative of the amounts that will by paid by Canco during the XXXXXXXXXX year.

Proposed Transaction

13. Canco will, during its XXXXXXXXXX taxation year, make a payment (the "Management Fee") to Partnership B for the services provided to it pursuant to the terms of the Agreement and the Letter Agreement.

Additional Information

14. The Management Fee is recognized as an item of income to Partnership B under the income tax law of the United States in the same manner as it would be if Canco were not fiscally transparent. More specifically, the quantum and character of the Management Fee and the timing of its inclusion in the income of Partnership B (and its recognition in the hands of Mr. X and the Investors) is the same under the income tax law of the United States as it would be if Canco were not fiscally transparent under those laws.

Purpose of the Proposed Transaction

15. To continue to comply with the requirements of the Agreement and the Letter Agreement.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Article IV(7)(b) of the Treaty will not apply to the Management Fee paid by Canco to Partnership B, as described in paragraph 13 above.

B. Subsection 245(2) of the Act will not apply to re-determine the tax consequences described in the ruling given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transaction is completed before XXXXXXXXXX

Caveat

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, the CRA has not reviewed, confirmed or made a determination in respect of:

(a) whether Partnership A, Partnership B, S Corp and/or Canco are fiscally transparent under the income tax law of the United States; and

(b) the relative ownership interests of the members of Partnership A and Partnership B or the share of any particular partner in the income or distributions of Partnership A or Partnership B.

Yours truly,

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