Article 10


Canada v. Prévost Car Inc., 2009 DTC 5721, 2009 FCA 57

The taxpayer paid dividends to its shareholder, ("Prévost Holding"), a Netherlands holding company which, in turn, paid dividends in substantially the same amount to its two corporate shareholders, a Swedish and UK corporation. Prévost Holding was not party to a shareholders agreement that contemplated that dividends received by Prévost Holding would be paid to its shareholders and Prévost Holding was not otherwise obligated to pay those dividends to its shareholders.

The Court accepted (at para. 13) the finding of the Trial Judge that "the 'beneficial owner' of dividends is the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend he or she received" and (at para. 16) the finding of the Trial Judge that "the corporate veil should not be pierced because Prévost Holding is not 'a conduit for another person', cannot be said to have 'absolutely no discretion as to the use or application of funds put through it as a conduit' and has not 'agreed to act on someone else's behalf pursuant to that person's instructions without any right to do other than what that person instructs it ..."

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions 76

Hunter Douglas Ltd. v. The Queen, 79 DTC 5340, [1979] CTC 424 (FCTD)

A Canadian company shifted its central management and control to the Netherlands, thereby becoming a resident of the Netherlands for purposes of the 1957 Canada-Netherlands Convention, and then paid a stock dividend to its shareholders. Since paragraph IV(5) provided that where a Netherlands resident company derived income from within the other State (Canada) "that other State shall not impose any form of taxation on dividends paid by the company to persons not resident in that other State", it was held that shareholders of the company who were not resident in either Canada or the Netherlands, in addition to resident Netherlands shareholders, were entitled to the exemption. It was noted that the Crown's contention, that the exemption did not apply to third-country residents, would lead to double-taxation of such shareholders by Canada and the Netherlands and "such a result would be contrary to the purpose of all of Canada's 32 international treaties."

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions 49

See Also

RMM Canadian Enterprises Inc. v. The Queen, 97 DTC 302, [1998] 1 C.T.C. 2300 (TCC)

After finding that sale proceeds was deemed to be a dividend by s. 84(2), Bowman TCJ. went on to find that this deemed dividend was a dividend for purposes of Article X of the Canada-U.S. Income Tax Convention, rather than being exempted from tax by Article XIII. In reaching this conclusion, he noted that "the word 'alienation' in Article XIII connotes a genuine alienation, and not one that was made to an accommodation party as an integral part of a distribution of surplus", and also noted that neither Canada nor the United States reserved on Article X of the OACD Model Convention, which stated that payments regarded as dividends included "disguised distributions of profits".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 159 - Subsection 159(3) 167
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) 188
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 235
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) purchaser of cash-rich company without any signifcant separate role did not deal at arm's length 177
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) application of s. 84(2) to sale of cash-rich company to accommodation party who quickly paid cash proceeds therefor 222
Tax Topics - Treaties - Income Tax Conventions 96

Specialty Manufacturing Ltd. v. The Queen, 97 DTC 1511, [1998] 1 CTC 2095 (TCC)

Article IX of the 1980 Canada-U.S. Convention and Article IV of the 1942 Canada-U.S. Convention did not prevent the application of s. 18(4) of the Act to limit the deduction of interest by the taxpayer, not withstanding that the loans in question bore interest at an arm's length rate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(4) 54

Administrative Policy

27 October 2020 CTF Roundtable Q. 5, 2020-0864281C6 - Article IV:6 of the Canada-US Treaty

choice between application of France and US Convention to dividends paid by Canco at bottom of multi-tier structure

A partnership whose partners are resident in the U.S. and in other countries with which Canada does and does not have a treaty owns a French entity (that is fiscally transparent for U.S., but not Canadian or French purposes) that earns dividends and interest from a Canadian company. Can the Canadian payor of the dividends determine its withholding tax obligations in accordance with the relevant articles under either the Canada-France, or Canada-US, Treaty?

CRA noted that the first option is that, if IV(6) of the Canada-US Treaty applies, and some of the dividend paid by the Canadian company to the French company is deemed to be derived by the US partners, US Treaty benefits can be claimed to reduce the withholding rate on the portion of the dividend attributable to those partners, under Art. IV(6).

The second option is that, from a Canadian perspective, there is a single dividend payment from a Canadian entity to a French entity, so that the French Treaty is applicable to the entire amount of the dividend.

CRA indicated that the two options are mutually exclusive and exhaustive – either the French Treaty applies to the full amount of the dividend, or the US Treaty applies pro-rata to the US partners.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 4 where Canco is held by fiscally transparent Franceco, which is held by LP with only some US partners, there is a choice as to which Treaty to apply 374

18 April 2019 Internal T.I. 2018-0753621I7 - Subsection 247(12)

secondary adjustment benefit to a NR sister was a dividend for Treaty purposes

Parentco, a U.S.-resident, is the only member of Parentco LLC, which is the only member of Sisterco LLC, and also wholly-owns Canco. Canco resides in Canada for purposes of the Canada-US Income Tax Treaty (the “Treaty”).

CRA proposed an inclusion in Canco’s income under s. 247(2) of the difference between an arm’s length price for goods sold by Canco to Sisterco LLC and the consideration paid, and also proposed a secondary adjustment under s. 247(12) on the basis that a resulting benefit conferred on Sisterco LLC was deemed to be a dividend that was paid by Canco that was subject to a Pt. XIII remittance obligation.

The Directorate found that the s. 247(12) amount (which was a deemed dividend under ITA s. 2121(2)) was also a dividend for Treaty purposes, stating:

Although Sisterco LLC is not a shareholder of Canco, the transfer pricing income adjustment made under subsection 247(2) results from the fact that they are not dealing at arm’s length (or to paraphrase paragraph 29 of the OECD Commentary, that “the persons receiving such benefits are closely connected with a shareholder; this is the case, for example, where the recipient is a relative of the shareholder or is a company belonging to the same group as the company owning the shares”).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(12) transfer pricing income adjustment re sale to NR sister gave rise to taxable dividend 110
Tax Topics - Treaties - Income Tax Conventions - Article 4 a s. 247(12) secondary-adjustment deemed dividend paid by Canco to an LLC sister qualified under Art. IV(6) for the 5% Treaty-reduced rate on dividends to its U.S. parent 498

4 April 2019 Internal T.I. 2017-0736531I7 - Articles IV(6) and X(6) of the Canada-US Treaty

Art. IV(6) of the Canada-US Treaty works to reduce Canadian branch profits tax earned through multiple stacked LLCs

Two U.S. corporations that were “qualifying persons” for purposes of the Canada-U.S. Treaty (USCo1 and USCo2) held 58% and 42%, respectively, of LLC1 which held LLC2 which, in turn, held LLC3. LLC3 operated a Canadian branch business.

Headquarters stated:

[T]he fact that there may be more than one fiscally transparent entity in the corporate chain does not alter the fact that the condition of there being an entity that is fiscally transparent and through which a U.S. resident person derives income is already met.

Accordingly, if all the LLCs were fiscally transparent for U.S. income tax purposes (so that LLC1 was a partnership for U.S. purposes), USCo1 and USCo2 would be considered to be deriving income through LLC3 that met the same tax treatment condition in Art. IV(6) – and, similarly, LLC1 Itself would be considered to be deriving such income as a qualifying person if it had chosen to be treated as a corporation. Thus, in both scenarios, such income would be entitled to the branch profits rate reduction in Art. X(6).

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 4 Art. IV(6) of Cda-US Treaty can be satisfied where Canadian branch profits are earned at bottom of stacked LLCs held by qualifying persons 247

7 September 2016 External T.I. 2014-0563781E5 - Articles 10 and 11 of Canada-UK Treaty

limited partners generally do not have control over a company’s voting power/an over-10% limited partner is considered to “indirectly” own over 10% of an LP subsidiary

A UK corporation (“GP Co”) is the general partner (with a 1% interest) of a UK limited partnership which is fiscally transparent for UK purposes and a partnership for ITA purposes (“UK LP” – all of whose partners are non-residents), and the Limited Partners include LP1 and LP3, which provide benefits under a “recognized pension plan” (as defined in Art. 10, para. 4 of the Canada-UK Treaty) and own 7% and 11% partnership interests, and LP2, a UK corporation owning a 19% partnership interest. In addition to being unrelated, the partners factually deal with every other at arm’s length. UK LP wholly owns Holdco, which wholly owns Canco, also a taxable Canadian corporation. UK LP used the subscription proceeds from the issuance of its partnership interests to make a loan to Canco (the “UK LP Loan”), the interest on which is not a “participating debt interest.”

Issue 1

Would LP2 and LP3 be considered to have “indirect control” over the voting power of Holdco, the shares of which are held by UK LP, for purposes of Art. 10, subpara. 2(a)?

Issue 2

Would LP1 and LP3 be considered to own indirectly shares of Holdco for purposes of Art. 10, para. 3?

CRA responded:

Issue 1…

The 5% withholding rate under subparagraph (2)(a) of Article 10 of the Treaty applies if the beneficial owner of the dividend “is a company which controls, directly or indirectly, at least 10 per cent of the voting power in the company paying the dividends.” …

[O]nly GP Co would be considered to control directly or indirectly at least 10% of the voting power in Holdco unless the partnership agreement specifically provided the limited partners with the ability to vote on the shares of Holdco. Therefore, LP2 and LP3 would not qualify for the 5% withholding rate under subparagraph 2(a) of Article 10. In addition, it is unclear…that LP3 would meet the definition of a “company” in Article 3….

Issue 2...

Paragraph 3 of Article 10… provides an exemption from withholding tax on dividends beneficially owned by a “recognized pension plan” if, among other conditions, such an organisation “does not own directly or indirectly” more than 10% of the capital or 10% of the voting power of the company paying the dividends.

…LP1 and LP3 will be considered to own indirectly the shares of Holdco and accordingly Holdco’s capital in proportion to their partnership interests in UK LP. While…fractional ownership under the partnership law would generally prevent partners from owning a particular percentage of the partnership’s property…the words “directly or indirectly” enable to attribute a particular percentage of ownership of partnership property to a partner….

Consequently, the requirements of subparagraph 3(b) would be satisfied in respect of LP1 but not in respect of LP3.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 11 limited partners of an LP can deal at arm’s length with a Canadian subsidiary of the LP 452
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) limited partners of an LP could deal at arm’s length with a Canadian sub of the LP 222

28 May 2015 IFA Roundtable Q. 12, 2015-0581521C6 - IFA 2015 Q.12: Canada-Switzerland Treaty

resolution of conflicting French and English Treaty versions of Swiss Treaty in taxpayer's favour

A corporation resident in Switzerland ("Swissco") wholly-owns "Holdco," which wholly-owns "Canco"). S. 214(3)(a) deems Canco to pay a dividend to Swissco. The rate of withholding tax would be 15% under the English version of the Swiss Treaty but 5% under the French version. How would Art. 10(2)(a) of the Swiss Treaty apply? CRA responded:

[T]axpayers should, in these circumstances, apply the version of the Swiss Treaty that gives them the most favourable result. We would normally expect that this would be the French version… .

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions resolution of conflicting French and English Treaty versions of Swiss Treaty in taxpayer's favour 89

28 May 2015 IFA Roundtable Q. 2, 2015-0581551C6 - IFA 2015 Q.2: GAAR and treaty shopping

What is CRA's position on the application of the GAAR to treaty shopping arrangements? CRA stated:

The…comments on treaty shopping… made in the February 2014 Budget as well as in the August 2014 Finance news release [do not] preclude[e] the application of the GAAR to treaty shopping arrangements.

The CRA continues to contemplate the application of the GAAR to transactions undertaken primarily to secure a tax benefit afforded by a tax treaty and, in fact, the GAAR Committee has recently approved the application of the GAAR to certain treaty shopping arrangements.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) treaty shopping 99

11 July 2014 External T.I. 2013-0497381E5 - REIT investment in a US IRA.

SIFT distributions respected as dividends

An IRA account of Mr. X (who is a citizen and a resident of the US) receives a distribution on units held in a REIT as defined in s. 122.1(1). Before concluding that the REIT distributions would not be eligible for 0% withholding under Art. XXI, para. 2 of the Canada-U.S. Treaty as the REIT was not a SIFT trust, CRA stated:

[A] distribution of income from a SIFT Trust is deemed to be a dividend pursuant to subsection 104(16)… and is similarly treated as a dividend for the purposes of the Treaty pursuant to the 2007 Protocol Annex B in regards to paragraph 3 of article X.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 22 REIT income distributions to IRA at 15% 222

31 May 2013 External T.I. 2013-0486011E5 - Loan to non-resident - Part XIII tax

partnership fiscally transparent for Treaty withholding purposes re s. 15(2) loan made by it

A Canadian-resident corporation (CanCo1) and its wholly-owned Canadian-resident subsidiary (CanCo2) are the 99% limited partner and 1% general partner, respectively, of CanLP. CanLP lends $1 million to the immediate Netherlands-resident parent of CanCo1 (Foreign Parent) or, alternatively ("situation 2"), lends $1 million to the Netherlands parent of Foreign Parent (Foreign Grandparent). In either situation, the loan is not repaid on a timely basis, so that in the absence of Treaty relief, Foreign Parent or Foreign Grandparent is deemed under s. 214(3)(a) to receive a dividend which is subject to Part XIII withholding tax of 25%. Subpara. 2(a) of Art. 10 of the Canada-Netherlands Treaty provides that if the recipient of the dividend (i.e., Foreign Parent or Foreign Grandparent, as applicable) owns at least 25 per cent of the capital of, or controls directly or indirectly at least 10 per cent of the voting power in, the company paying the dividend, a 5 per cent withholding tax rate would apply.

In finding that the 5% Treaty-reduced rate applied to either deemed dividend, CRA stated:

In the context of applying the provisions of Article 10 of the Treaty, subsection 96(1) of the Act does not apply and CanLP is not considered a separate person. As CanLP is not a separate person, each of the partners thereof would be viewed as having made their pro rata share of the loan described in hypothetical situations 1 and 2 above. It follows, in our view, that each of CanCo1 and CanCo2 would be considered, for the purposes of Article 10 of the Treaty, to have paid their pro rata share of the dividend deemed to have been paid pursuant to paragraph 214(3)(a)….

Furthermore, the above structure would satisfy the indirect voting control test in para. 2(a) so that, for example, it would be considered that Foreign Grandparent "satisfies the controlling threshold of controlling directly or indirectly at least 10 per cent of the voting power in each of CanCo1 and CanCo2."

23 October 2012 External T.I. 2012-0440101E5 - Article X(6) Canada-US Treaty

A US LLC, which has two US-resident members (either two corporations or an individual and a corporation) who qualify for Treaty benefits, carries on business in Canada through a permanent establishment. CRA indicated:

To facilitate the computation of the relevant Article X(6) earnings that may be eligible for a reduced 5% branch tax, the earnings are computed by the LLC as if it were the company referred to in Article X(6). Once the LLC has computed its earnings attributable to permanent establishments in Canada, they are then allocated to the LLC's members by applying Article IV(6). Accordingly, the LLC can generally pay the reduced rate of branch tax in Article X(6) in respect of the share of branch profits that are considered to be derived by its corporate members.

After indicating that the LLC may not claim the reduction under Art. X(6) in respect of the portion of its "branch profits that are considered, by virtue of Article IV(6), to be derived by individual members," CRA stated:

It is the CRA's view that a LLC has only one $500,000 cumulative exemption. It must be shared by associated companies with respect to the same or similar business and reduced by any portion which has previously been deducted.

17 May 2012 IFA Roundtable, 2012-0444151C6 - Hybrid Partnerships and Branch Tax Liability

The two partners of a partnership which has elected to be a domestic corporation for Code purposes are: a corporation which is resident in the U.S. for purposes of the Canada- U.S. Income Tax Convention; and a corporation resident in a non-Treaty country.

CRA indicated that a member of the partnership can access benefits under Article X(6) of the US Treaty ("partnership-level benefits") to the extent that the partnership could have claimed such benefits had the partnership been the entity subject to Canadian branch tax. Although the partnership would not so qualify as a "qualifying person" as defined in Art. XXIX A(2) of the US Treaty due to the absence of share capital for the partnership, "partnership-level benefits" under Art. X(6) may apply to business profits earned by a US-resident partnership through a Canadian permanent establishment in accordance with the "active trade or business" test under Art. XXIX A(3), or, if treaty benefits are granted by the Canadian competent authority, under Article XXIX A(6).

Additionally, a member of the partnership that is itself eligible to claim treaty benefits under Article X(6) may still apply the reduced branch tax rate to its share of the partnership's profits earned through a Canadian permanent establishment.

In the first "partnership-level benefits" situation, partnership profits will not be reduced by partner-level expenses or Canadian income tax liabilities. "Consequently, the member of the partnership may find that its share of the partnership's Article X(6) earnings amount exceeds the amount upon which Part XIV tax is otherwise payable under subsection 219(1)."

2012 Ruling 2012-0435211R3 - Article XXIX-A(3) of the Canada-US Tax Convention

Holdco, which had been a listed U.S. company, was taken private by L5, which was a fund whose members are not known. Holdco and its subsidiary, USCo (neither of which carry on a business of making or managing investments) filed a Chapter 11 Plan (following their filing of a petition in bankruptcy), and a Plan Administrator was appointed. Although a Canadian subsidiary of Holdco (Canco) ceased to sell assets to securitization trusts when the group financial difficulties became severe, it continues to earn income from obligations to it of those trusts, including the receipt of deferred purchase price. Canco will pay three cash dividends to Holdco, its sole shareholder. "Through the Plan Administrator under the Plan of Liquidation, Holdco will have full discretion and control over the Dividends throughout the period during which the Dividends are paid."

Ruling that the rate of withholding under Art. X will be 5%.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 29A US Holdco in Chap. 11 receives dividend 235

2012 Ruling 2011-0424211R3 - Article X(2) and 84(3) deemed dividends

Treaty-reduced rate applicable to redemption all of the common shares of a Canadian grandchild held by US beneficial grandparent

All of the Class A shares of two taxable Canadian corporations ("OpCo2" and "Salesco") are owned by a corporation ("USSalesco1") which is not fiscally transparent and is resident in the U.S. for purposes of the Canada- U.S. Treaty, and all their commons shares (with essentially identical attributes to the Class A shares) are owned by a taxable Canadian corporation ("OpCo1") which is a direct wholly-owned subsidiary of USSalesco1. OpCo2 and Salesco are not fiscally transparent for U.S. purposes.

Salesco and OpCo2 purchase for cancellation all the issued and outstanding Class A shares (held by USSalesco1) for cash or promissory note consideration equal to the shares' fair market value.

Rulings that provided that USSalesco1 is the beneficial owner of dividends paid on the Opco2 and Salesco Class A shares pursuant to Article XXIX-A(3) and Article X(2)(a) of the Treaty, the benefits of the Treaty will apply to USSalesco1 with respect to the s. 84(3) deemed dividend resulting from the redemptions.

Ruling that provided that USSalesco1 is the beneficial owner of dividends paid on the Opco2 and Salesco Class A shares, pursuant to Article XXIX-A(3) and Article X(2)(a) of the Treaty, the benefits of the Treaty will apply to USSalesco1 with respect to the subsection 84(3) deemed dividend resulting from the redemptions.

Income Tax Technical News No. 44 13 April 2011 [archived]

use of s.à r.l.

After commenting on a transaction in which a ULC held by a US C corporation (USco) increases its paid-up capital (giving rise to a deemed dividend) and then distributes that PUC to USco, CRA then was asked to consider a Luxembourg s.à r.l. (which is resident in Luxembourg but disregarded for U.S. purposes) inserted between USco and ULC. Would the 5 percent withholding tax rate under the Canada-Luxembourg treaty generally apply to dividends paid by ULC to Luxco? CRA stated:

The 5 percent withholding rate will normally apply if Luxco is the beneficial owner of the dividends. Our recent views on the meaning of "beneficial owner" in the light of Canada v. Prévost Car Inc. are set out in document no. 2009‑0321451C6

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) inter-provincial loss shifting 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) exchangeable debenture appreciation not recognized 90
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(f) exchangeable debenture appreciation not recognized 106
Tax Topics - Income Tax Act - Section 49 - Subsection 49(1) exchangeable debenture exercise 84
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) FMV basis in contributed property 72

30 November 2010 Annual CTF Roundtable, 2010-0386391C6 - Branch Tax

In response to a query as to whether the branch tax reduction in Art. X(6) of the Canada-US Tax Convention is available to a fiscally transparent LLC that is wholly-owned by US-resident individuals, CRA stated that such Treaty benefits may be claimed by an LLC on behalf of its members with respect to an amount of profit attributable to a Canadian branch only if the amount is considered to be derived, pursuant to Art. IV(6), by a US-resident company that is a "qualifying person" (or entitled, with respect to the amount, under Art. XXIX A(3)) – so that no such benefits would be available here as the earnings of the LLC are derived by individuals.

13 July 2009 External T.I. 2009-0318701E5 - Article X(2) and Tiered Partnerships

Where a US corporation that is a qualifying person is a 99.99% limited partner of a Delaware limited partnership which, in turn, is a 99.99% limited partner of a second Delaware limited partnership which owns all the shares of Canco, the US corporation will be considered to have an "ownership interest" in Canco, so that it will be entitled to the 5% rate on dividends paid by Canco.

21 May 2009 IFA Roundtable Q. 1, 2009-0321451C6 - Meaning of beneficial owner in Article 10, 11 & 12

In the Prévost Car case, "the Court implied that where an intermediary acts as a mere conduit or funnel in respect of an item of income, the intermediary would not have sufficient economic entitlement to the income to be considered the 'beneficial owner'. The CRA will examine future back-to-back dividend, interest and royalty cases that have encounters with a view to whether an intermediary could, on the facts, be considered a mere conduit or funnel".

2007 Ruling 2007-0248021R3 - Cdn Japan Convention: withholding rate deemed div.

a dividend deemed to be received by significant Japanese corporate shareholder of a Canadian corporation under s. 84(3) on the purchase for cancellation y the Canadian corporation of shares held by the shareholder was eligible for the treaty-reduced rate of 5% under the Canada-Japan Convention.

2004 IFA Roundtable Q. 3, 2004-007223

Although a partner is not considered to own a specified percentage of the shares of a corporation held by a partnership, a favourable ruling was granted where a corporation issued sufficient voting preferred shares directly to each partner in order to comply with the formal requirements, of the Canada-U.S. Convention, Article X, para. 2(a), that the beneficial owner of the dividend must own at least 10% of the voting stock of the corporation paying the dividend.

17 December 2002 External T.I. 2002-0155005 - FTC for U.K. Dividends

Following the repeal of U.K. ACT in 1999, paragraph 3 of the Canada-U.K. Convention continues to apply since individuals in the United Kingdom are still entitled to a tax credit in respect of dividends paid by a U.K. company. However, the U.K. Competent Authority has informed CCRA that non-resident individuals should no longer be eligible for any net refund from the U.K. because the tax credit available under paragraph 3(b) is now less than the tax allowed by paragraph 3(a)(ii).

30 January 2002 External T.I. 2001-0106695 - Subs. 219(5.3);Article X of Canada-US Treaty

A deemed dividend under s. 219(5.3) of the Act will be treated as a dividend governed by Article X, paragraph 2 of the Canada-U.S. Convention, rather than paragraph 6, notwithstanding that such deemed dividend could be attributed to the decision not to pay branch tax pursuant to s. 219(5.1) at the time the non-resident insurance company incorporates the Canadian branch.


Because the purpose of the "source country deemed dividend rule" in the definition of "dividend" in paragraph 3 of Article X of the Canada-U.S. Convention is only "to ensure that the source country's right to tax an amount that would not otherwise meet the definition of a 'dividend', but is treated as such in the source country, will be governed by paragraph 2 of Article X", that rule does not trammel the ability of Canada to tax as a dividend a distribution received by Canadian-resident shareholders of a Delaware corporation that might not be treated like a dividend under the U.S. Internal Revenue Code.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(1) all distributions from Delaware corps are dividends 92
Tax Topics - Income Tax Act - Section 90 - Subsection 90(3) all distributions from Delaware corps are dividends 92
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Dividend 92

4 March 1993 Memorandum (Tax Window, No. 30, p. 18, ¶2472)

A Canadian resident will not be entitled to a foreign tax credit or to a refund of ACT from the U.K. authorities with respect to a stock dividend received from a U.K. corporation.

October 1992 T.I. 921009 "Loans to Non-Residents"

Where a Canadian subsidiary issues a demand note to its U.S. parent, the deemed dividend arising under s. 214(3)(a) will be eligible for the reduced rate of withholding tax under Article X, paragraph 2(a) of the Canada-U.S. Convention.

3 September 1992 T.I. 920333 "Interest-Free Loans - Reason for Withholding"

The word dividend in the Canada U.S.-Convention includes deemed dividends arising under s. 214(3)(a) of the Act.

8 April 1992 T.I. (913412 (March 1993 Access Letter, p. 83, ¶C180-135; Tax Window, No. 18, p. 10, ¶1847)

Where s. 214(3)(a) imputes a shareholder benefit to U.S. resident shareholders of a U.S. corporation which allows them to use a Canadian vacation property free of rent, Article X(5) of the Canada-U.S. Convention will not grant relief to them because s. 214(3)(a) deems the dividend to have been paid by a corporation resident in Canada rather than by a U.S. corporation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 28

91 C.R. - Q.1

A U.S. corporation holding shares through a U.S. partnership will not be eligible for the 10% rate.


Peter Lee, Paul Stepak, "PE Investments in Canadian Companies", draft 2017 CTF Annual Conference paper

Application of 10%-of-voting power test where sister companies held through holding “Aggregator” LP (pp. 5, 9)

[A] PE fund limited partnership agreement ("LPA") (or side-letters relating thereto) will often require (or effectively require) the use of a blocker where an investment would otherwise expose investors to a tax return filing obligation. …

Where a blocker is in place, the applicable treaty should be reviewed to confirm the Aggregator LP does not interfere with any desired treaty benefits. In particular, many treaties provide a 5% reduced rate of withholding on dividends if the recipient controls, directly or indirectly, at least 10% of the voting shares of the payor. In that regard, in one Technical Interpretation [fn 33: … 2014-0563781E5 …] the CRA considered a situation in which a general partner of a limited partnership held a general partnership interest representing 1% of the interests in the limited partnership and, under the terms of the partnership agreement, the general partner had sole authority to manage and control the management activities and affairs of the partnership. Implicit in that authority was the ability to vote any shares of corporations wholly-owned by the partnership. The CRA stated that the general partner in this situation would be considered to control, directly or indirectly, at least 10% of the voting power of a corporation held by the partnership (this technical dealt with the Canada-UK Tax Treaty).

Elio Andrea Palmitessa, "Italian Supreme Court Applies the Beneficial Ownership Clause to Pure Holding Companies", Tax Notes International, April 17, 2017, p. 259

Dividend withholding avoidance (p. 259)

[A] U.S. corporation owned a holding company in France, which in turn owned an Italian subsidiary. In 2002 the Italian subsidiary distributed dividends to its French parent company, withholding a 5 percent tax under article 10, paragraph 2(a) of the France-Italy tax treaty. The French holding company applied for a tax credit from the Italian tax authorities (less the 5 percent withholding tax levied at the source) under article 10, paragraph 4(b) of the same treaty.

Beneficial ownership by holdco does not require business activity (p. 261)

[T]he [Italian] Supreme Court's analysis [in Decision No. 27113/2016] considers the nature and the peculiarities of a pure holding company as well as the activities undertaken by the entity in this instance, characterized by having no significant business activities or investments, no assets, no business premises, and no personnel, and owning no shares beyond participation in the controlled subsidiary. Therefore, the mere fact that a pure holding company is not engaged in actual business activities would not be sufficient to limit its ability to carry out holding activities consistent with the EU principle of freedom of establishment. To hold otherwise would, in essence, suggest that a pure holding company can never have a valid existence, at least from a beneficiary standpoint….

Focus instead on autonomy of decision-making (p. 261)

Ultimately, the Supreme Court held that beneficial ownership — which can be a key issue in the context of the domestic antiavoidance rules as well as the antiabuse principle of article 31 of the Vienna Convention on the Law of Treaties — should be tested, considering the nature and the functions of the direct recipient of income concerning its ability to make autonomous decisions regarding and exercise power over the funds. Therefore, in this case, understanding beneficial ownership requires considering the significant lack of operations as part of the nature of a pure holding company rather than a detrimental indicator, as it would be in the context of an operating company. …

[T]he Supreme Court held that the right to claim tax treaty relief should not be limited simply because a pure holding company is wholly owned by a sole shareholder based in another country….

Finding that effective place of management was in France (p. 262)

[T]he Supreme Court found that the French holding company had provided evidence supporting the conclusion that its place of effective management was France, given that:

  • the headquarters had been in France since 1946 (while the tax treaty at issue was signed in 1989 and ratified in 1992);
  • the main management and administrative decisions occurred in France;
  • the French tax authorities issued a certificate showing that the holding company was resident for tax purposes in France; and
  • all members of the holding company's board of directors were tax residents in France.

Timothy Hughes, Matias Milet, Marc Richardson-Arnould, "Private Equity Funds – Selected Canadian Tax Issues", Tax Management International Journal, 2016, p.84

Advantages of separate fund for Canadian investors (p. 87)

A non-Canadian private equity fund that expects to have significant investor capital sourced in Canada and to invest in Canadian portfolio companies should consider forming a separate fund restricted to Canadian investors that would invest in parallel with the main fund….In addition to permitting certain tax-deferred entry and exit transactions for Canadian investors, a parallel fund avoids two significant indirect tax inefficiencies associated with investing in a partnership that has one or more non-Canadian members (a "Non-Canadian Fund"):…

Avoidance of s. 116 withholding (p. 88)

[I]f the Non-Canadian Fund Sells property (e.g. shares in the capital stock of a Canadian portfolio company) that are TCP, this can result in the TCP rules being indirectly visited upon Canadian investors.

Avoidance of s. 212(13.1)(b) withholding (p. 88)

[T]he ITA provides that if a payment subject to Canadian withholding tax (e.g., interest, dividends, royalties, etc.) is made by a Canadian portfolio company to a Non-Canadian Fund, the entire payment is treated as paid to a non-resident of Canada…Recently, the CRA has adopted an alleviating administrative policy whereby no amount in respect of the portion of such payments allocable to a Canadian resident partner of a Non-Canadian Fund would be required to be withheld by a Canadian portfolio company. However, this policy, for which there is no legislative basis, does not expressly supersede past contrasting published positions. Some Canadian investors have expressed uneasiness with this uncertainty and are not receptive to investing jointly with non-Canadians in a fund that is subject to Canadian withholding tax. While a concern over withholding taxes is often downplayed where portfolio companies are not expected to pay material amounts of dividends, it should be noted that common exit transactions can nonetheless result in withholding tax arising on net proceeds distributed to a Non-Canadian Fund by way of a dividend or share redemption proceeds.

As a result of these concerns, many Canadian investors insist on the use of a parallel fund. This is typically easier for Canadian private equity fund sponsors to accommodate than for non-Canadian sponsors, who would otherwise not consider forming a Canadian partnership having a Canadian resident general partner.

Jack Bernstein, "Canada-US Tax Traps for LLCs", Canadian Tax Highlights, Volume 22, Number 2, February 2014, p. 11

High US branch tax if use LLC (p.11)

Assume that a Canco expands into the United States and forms an LLC to be the US opco. For Canadian tax purposes, the LLC is regarded as a controlled FA. For US tax purposes, the LLC is disregarded, and the Canco is subject to US corporate tax and to a 30 percent US branch tax. The branch tax reduction in treaty article X does not apply, both because of US domestic law and because of article IV(7)(a). Alternatively, if the Canco carried on business directly in the United States, the US branch tax will be reduced to 5 percent and may apply after a $500,000 threshold is exceeded.