Article 22

Does 2013-0504641E5 - indicating that a reduced (to 15%) rate of withholding on amounts distributed by RESPs constituted as trusts can apply pursuant to Art. XXII of the Canada-U.S. convention - also apply to RDSPs and TFSAs that are trusts? After noting that the Part XIII withholding rules could apply to distributions from a TFSA described in s. 12(1)(z.5), 146.2(9) or 207.061, CRA stated:

Since payments from TFSAs and RDSPs to US residents are not dealt with in any other Article of the Convention, they qualify as "other income" for the purposes of Article XXII:1 of the Convention. …

Consequently, the reduced rate of 15% provided for in Article XXII:2 of the Convention may be applied to amounts distributed from TFSAs and RDSPs to a U.S. resident where such TFSAs and RDSPs are constituted as trusts and are described in paragraph 212(1)(r.1) or 212(1)(p), as the case may be.

An entity (the “Tax Exempt Entity”) that is a resident of Norway per Art. 4(1) of the Treaty and that is exempt from income tax liability under Norway income tax law, maintains an investment fund (the “Fund”) whose assets are held by it directly but segregated from its other assets. Through the Fund, it invests in a trust (the “REIT”) that is a REIT under ITA s. 122.1(1). Art. 22(2) of the Treaty provided:

“Where such income is income from a trust, other than a trust to which contributions were deductible, the tax so charged shall, provided that the income is taxable in the Contracting State in which the beneficial owner is a resident, not exceed 15 per cent of the gross amount of the income.”

Is the 25% withholding under s. 212(1)(c) on the taxable REIT distributions made to the Fund reduced to 15% under Art. 22(2)? CRA stated:

if a distribution from a Canadian-resident trust would otherwise be included in the Norwegian resident’s taxable income, but the recipient itself is, under Norwegian tax law, exempt from the imposition of income taxation, we would consider that the “income is taxable” for the purpose of paragraph 2 of Article 22. In contrast, if the distribution were made to a Norwegian resident that was otherwise taxable under Norwegian tax law but entitled under Norwegian tax law to exclude the distribution from income, the requirements of paragraph 2 would not be met.

Based on our understanding of the facts, the Taxable Distributions are recognized under Norwegian income tax law and generally included in a resident’s income for tax purposes.

The reason no Norwegian income tax is imposed on Tax Exempt Entity in respect of the Taxable Distributions is because Tax Exempt Entity is exempt from the imposition of income tax under Norwegian tax law, and not the result of a specific exclusion from income. As a result, paragraph 2 of Article 22 of the Treaty would apply to lower the withholding rate on the Taxable Distributions to 15%.

An income distribution by a Canadian REIT to a Swedish resident was subject to a reduced rate of Part XIII witholding of 15% pursuant to Art. 21, para. 2 of the Canada-Sweden Treaty. As Part XIII tax in fact was withheld at 25%, the Swedish resident could apply on Form NR7-R, within two years after the end of the calendar year in which the amount was withheld, for a refund.

A lump sum payment in compensation for a loss of employment at a French subsidiary is made by Canco to a non-resident of Canada who had been seconded to the subsidiary. CRA found that although s. 212(1)(j.1) would apply to this payment, it would be exempt under Art. 15 of Canada-France Convention, as not being in respect of employment exercised in Canada, or Art. 21 as not being derived from sources in Canada.

Shares of SubCo held by LuxCo (as a capital investment) and CanCo were sold to a third party. Pursuant to a "Letter Agreement" between CanCo and LuxCo, CanCo paid LuxCo an amount dependent on "post-closing cash savings" and withheld 25% of the payment on the premise that it was for a "restrictive covenant" under s. 56.4(1). LuxCo did not have a permanent establishment in Canada and requested a refund based on Art. 7 or 21 of the Canada-Luxembourg Treaty.

Respecting Art. 7, CRA noted that although it used the term "profits" rather than "business profits," under Art. 3, para. 1(c) of the OECD Model, the term "enterprise" applies to the "carrying on of any business," so that the reference to "profits of an enterprise" means profits from carrying on a business. Given that the shares of SubCo were held by LuxCo on account of capital, there was no reason to believe the payment constituted income from a business, so that Art. 7 did not apply.

Respecting Art. 21, CRA found that the restrictive covenant payment was derived from sources within Canada for the purpose of Art. 21. so that it was subject to Part XIII tax at a rate of 25% without relief under the Treaty, stating:

Firstly, the person who made the payment to Luxco under the Letter Agreement (i.e. CanCo) is a resident of Canada. Secondly, the Letter Agreement is in respect of a sale of shares of a Subco which is a corporation resident in Canada. Thirdly, the Letter Agreement and share purchase agreement] are both governed by the laws of XX.

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). "[T]he IRA is considered a qualifying person for purposes of the [Canada-U.S.] Treaty by virtue of paragraph (4) [sic, 2(h)] of article XXIX-A… ." CRA stated:

[D]istributions of income from a Canadian resident trust to a US resident that is a qualifying person under the Treaty would generally fall under article XXII…such that the Part XIII tax charged by Canada shall be limited to 15%. …

[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.

However, owing to the fact that a REIT is, by definition, precluded from being considered a SIFT Trust…the treatment of distributions from income trusts and royalty trusts provided under paragraph 3 of article X would not be applicable… . [Accordingly] tax withholdings of 15% would be required on the distributions from the Canadian-resident REIT to the US IRA account of Mr. X pursuant to paragraph 212(1)(c) of the Act and subject to paragraph 2 of article XXII... .

The Fund is a listed mutual fund trust which is not fiscally transparent for U.S. tax purposes. It is not subject to SIFT tax as essentially its only assets are shares of "Can Holdco" and interest-bearing debt ("US Opco Notes") of the wholly-owned U.S. subsidiary of Can Holdco ("US Opco"). US Opco uses the periodic proceeds of issuances by it of US Opco Notes and shares to acquire properties in the U.S.

Distributions by the Fund to its unitholders are funded out of interest received by it on the US Opco Notes and by return-of capital distributions received by it on its shares of Can Holdco (which in turn would be funded by return-of capital distributions received by Can Holdco on its shares of US Opco.) The Fund deducts under s. 104(6)(b) to the extent of its income. The units held by unitholders will include units to be issued on conversion of convertible debentures of the Fund.

Rulings that:

• To the extent that a portion of a distribution from the Fund to a non-resident unitholder is in excess of the amount that is included in the unitholder's income of such unit holder under s. 104(13), s. 212(1)(c) will not apply so that the Fund is not required to withhold.
• If the distribution is made to a unit holder who qualifies for the benefits of the Canada-U.S. Tax Treaty, the portion of the distribution made out of income earned outside of Canada is not subject to Part XIII tax as it satisfies the exemption in Art. XXII of the Canada-U.S. Tax Treaty.

where Canco receives a guarantee (in respect of a loan made to Canco by a third party or Canco's indirect Canadian parent) for no consideration from a US sister company, the resulting interest payment imputed to be made by Canco under ss. 247(2) and 214(15)(a) will be exempted under Art. XXII(4) rather than Art. XI(1) of the Canada-US Income Tax Convention given that the former "was intended to deal with guarantee fees over the other Articles in the Treaty."

Regarding a Canadian resident holding a French life insurance policy, CCRA indicated that income under the policy came within the other income article of the Canada-France Convention (Art. XXI) and that any gain realized on disposition would come within Art. XIII, so that the Convention did not alter the consequences under the ITA of holding and disposing of the policy.

Article 20 of the Canada-New Zealand Convention provides that items of income of a resident of New Zealand which are not dealt with in other Articles and which are derived by the resident from sources in Canada, such income may be taxed in Canada according to the laws of Canada. A gain of a resident of New Zealand from a disposition of shares of a private Canadian corporation that were taxable Canadian property was subject to Canadian capital gains tax given that it had been the intention of the Canadian negotiators of Canadian Income Tax Convention that the source of income on the disposition of taxable Canadian property is from Canada and this intention was confirmed, for greater certainty, by s. 6.3 of the Income Tax Convention Act.

Where a Canadian-resident trust whose sole beneficiary is a resident of the United States distributes assets, consisting mainly of U.S. securities, to the beneficiary, the capital gains arising from that disposition would generally be considered to be income arising in Canada. Accordingly, Canada would be permitted to withhold at 15% pursuant to para. 2 of Article XXII of the U.S. Convention.

Income resulting from the application of s. 107(5) is considered to arise in Canada and, therefore, is not exempt to a U.S. resident recipient under Article XXII of the U.S. Convention.

The distribution to a U.S.-resident beneficiary by a Canadian testamentary trust of the net capital gains realized by the trust on the sale of shares of U.S. public corporations that had been held through accounts with a Canadian investment dealer will be exempt from Part XIII tax pursuant to paragraph 2 of Article XXII of the Canada-U.S. Convention, including any portion of the gain attributable to exchange rate fluctuations.

The Canada-Germany Convention does not reduce the 25% withholding tax applicable to distributions by a Canadian mutual fund trust to a resident of Germany.

Where a corporation which is resident in Australia realizes a gain on the disposition of shares of a corporation resident in Canada, the phrase "items of income" in paragraph 1 of Article XXI of the Canada-Australia Convention will include such gain even if it is realized on capital account rather than income account. In determining whether the gain is derived from sources in Canada for purposes of that paragraph, RC would not generally look to the situs of the underlying assets of the corporation but, rather, to the location of the sale of the shares. "One of the principal factors to consider would be where the contract was made between the parties to the sale."

Discussion of annual distributions of income by a Canadian - resident trust to a U.S. partnership.

Where a Canadian employee of a U.S. company was a deemed resident of Canada under s. 250(1)(a) but was a U.S. resident under the tie-breaker rule in paragraph 2 of Article IV of the Canada-U.S. Convention, interest or dividends received from a U.S. resident or from a third country would be taxed only in the U.S. by virtue of paragraph 1 of Article XXII. Such interest and dividends would be included in income for purposes of the Act, but would be deductible in computing taxable income under s. 110(1)(f)(i).