Article 29 - Miscellaneous Rules

Art. XXX(3) of the Canada-Barbados Treaty provides that the provisions of Arts. VI to XXIV of that Treaty do not apply to any person or other entity entitled to any “special tax benefit” in Barbados under indicated statutes including the Insurance Act (Barbados). The Barbados general corporate income tax rates range from 5.5% on the first BBD 1 million down to 1% on amounts in excess of BBD 30 million; whereas under the Insurance Act, the corporate tax rate on all insurance companies with a Class 2 licence (which permits the company to insure third-party risks wherever situated) is 2%.

Does the 2% rate constitute a "special tax benefit" within the meaning of Art. XXX(3)?

CRA indicated that the preamble to Art. XXX is broadly worded, making reference to “any special benefit” received by any person or other entity under the Insurance Act or any “substantially similar law.” Given that there is a tax regime in Barbados that is specific to insurance companies, a Class 2 licensee is considered to receive a special tax benefit for the purposes of Art. XXX(3), so that it would not be entitled to the benefits provided under Arts. VI to XXIV.

Where dividends paid by a resident corporation resident to a resident personal discretionary trust are deemed pursuant to s. 104(19) to be received by a beneficiary that is resident, but not domiciled in Barbados (“NR-Beneficiary”), would those dividends be subject to a reduced rate of withholding at 15% pursuant to Arts. XXIII(3) and XXX(5) of the Canada-Barbados Treaty?

After noting that NR-Beneficiary was subject to taxation under the Barbados Income Tax Act, 1968 on its “income from sources outside Barbados … only to the extent a benefit is obtained in Barbados from that income in the form, among others, of a remittance of money or an importation of property,” i.e., on a “remittance basis,” the Directorate further noted that although the dividend withholding rate otherwise was reduced to 15% pursuant to Art. XXIII(3) of the Treaty, “Article XXX(5) generally restricts the application of the provisions of the Treaty to income that is taxed in the hands of a person subject to tax on a remittance basis in Barbados.” The Directorate then stated:

If a person who is subject to remittance basis taxation in Barbados files a return of income in Barbados contrary to the application of the law in force in Barbados, it is our view that the income reported on that return … would not be considered “taxed” in Barbados for the purposes of Article XXX(5) such that the benefits of the Treaty would not apply to the Income.

Accordingly, to receive the Treaty-rate reduction on the dividend income, NR-Beneficiary would be required to establish that such income “is taxed in Barbados in conformity with the law in force in that country.”

In response to a query as to whether contributions made by an employer to certain French social security plans are considered taxable benefits to employees who are residents of Canada for a period not exceeding 5 years and an expressed view that such plans are employee benefit plans ("EBP") so that no amount is to be included in the employee's income as a benefit under s. 6(1)(a)(ii), CRA stated:

[W]here a pension plan is recognized for the purposes of paragraph 5 of Article 29 of the [Canada-France] Convention, it is our view that it is not an EBP. Further, in general, there would be no taxable benefit in such a case pursuant to paragraph 6(1)(a).

The CRA summary further noted:

The Tax Convention takes precedence over the application of the Act.

A Canadian resident (and US citizen) had an agreement with the Canadian Competent Authority under Art. XXIX(5) of the Canada-US Treaty, by virtue of which he included his share of the S Corporation’s income as FAPI, claimed a s. 126 credit for the US taxes on that income, and added such FAPI to the ACB of his shares. However, before he received any dividend, he revoked the S Corp’s status as a fiscally transparent entity for US purposes, so that the Agreement thereupon terminated.

The S Corp then paid a dividend to him of income that previously had been included in his income as FAPI (and now was included in his income under s. 90(1).)

The Directorate indicated that where the S Corp was a CFA of the individual, he could take a s. 91(5) deduction of the dividend paid after the Agreement invalidation, with a corresponding reduction to the ACB of his shares.

However, where the S Corp was not a FA at the time of the dividend, no s. 91(5) deduction would be available (but with no corresponding ACB reduction) because in such absence of FA status, Reg. 5900(3) would not deem the dividend to come out of taxable surplus.

A Canadian author (X) who became resident but not domiciled in the UK thereafter received royalties from a Canadian publisher, that were not subject to U.K. tax because they not remitted to the UK. Are the Royalties subject to 25% withholding under s. 212(1)(d) having regard to Art. 27(2) of the Canada-U.K. Treaty? Art. 27(2) provides:

Where under any provision of this Convention any income is relieved from tax in a Contracting State and, under the law in force in the other Contracting State a person, in respect of that income, is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the relief to be allowed under this Convention in the first-mentioned Contracting State shall apply only to so much of the income as is taxed in the other Contracting State.

In finding that the Royalties were subject to the non-Treaty reduced rate of 25%, CRA stated:

[I]ncome that is “relieved from tax” in Article 27(2) of the Treaty refers to income that is either partly or wholly relieved from Canadian income tax, pursuant to a provision in the Treaty. Given that Article 12(2) of the Treaty grants X a reduced 10% rate of withholding tax, such income would be considered to be “relieved from tax” in Canada under that Article for the purposes of Article 27(2). … Since … the Royalty payments will not be remitted to or received in the UK and accordingly are not taxable in the UK, X will not be entitled to the benefits of Article 12(2) … .

The new rules on tax on “global low-taxed intangible income” or “GILTI” in s. 951A of the Code may result in a U.S. corporation being subject to tax on a current basis on active business income earned by a controlled Canadian subsidiary, even if that subsidiary does not have a permanent establishment in the U.S. Under Article VII of the Canada-U.S. Tax Convention (“Convention”), business profits of a corporation resident in Canada that does not have a permanent establishment in the U.S. shall be taxable only in Canada. Will CRA agree to accept requests for competent authority relief under Article XXVI of the Convention on the basis that the taxes imposed under the GILTI rules may be in violation of Article VII?

CRA responded that under Para. XXIX(2) the Convention cannot affect the taxation by the US of its own residents, except to the extent provided in Para. XXIX(3) none of whose exceptions apply in this case, meaning that the Convention does not provide mechanisms to resolve the double-tax situation involving double-taxation arising from the new GILTI rules.

Where a U.S. S Corp. holds the shares of a qualified subchapter S Corp. subsidiary (“QSSS”), is the Canadian-resident shareholder of the S Corp. required to enter into two separate S Corporation Agreements with the Canadian competent authority respecting both corporations in order to have Art. XXIX(5) apply to the income of both?

CRA indicated that the template S-Corp. agreements provides that the income of the S-Corporation that is deemed to be foreign accrual property income is to be determined under the Code, which will include the income of the QSSS – so that there is no need for the Canadian shareholder to enter into a separate S-Corp. agreement with respect to the QSSS.

A single-member disregarded U.S. limited liability company (“SMLLC”), whose member is a resident of Canada, is factually resident in Canada and, thus subject to Part I tax, whereas U.S. source income (e.g., business income form a U.S. permanent establishment) would also be subject to U.S. income tax in the hands of the member, without the SMLLC being entitled to claim any foreign tax credit for such U.S. tax paid by its member. Is there Convention relief from double taxation?

CRA noted that if the member was a dual resident or U.S. citizen, and the LLC elected to be taxed as an S-Corp after electing to be taxable as a C-Corp, it would be subject to pass-through taxation for U.S. income tax purposes like a typical disregarded US LLC. However, the member might be able to request competent authority assistance pursuant to Art. 29(5).

A taxpayer who has renounced his US citizenship elects under Code s. 877A to irrevocably waive any right to claim any reduction in withholding on future pension payments under any US treaty and pay a flat 30% US tax on the taxable portion of all future pension payments. CRA stated:

[T]he interaction between section 126… and the provisions of the Canada-US Treaty will not limit the amount claimed by the taxpayer for non-business-income tax paid to the US in respect of the US-sourced periodic pension payments to 15% during the 10-year period described in Article XXIX(2)(b)… . [F]ollowing the taxpayer's US expatriation and during this subsequent 10-year period, the full amount of US withholding tax on the future taxable distributions from the US pension will be considered non-business-income tax paid by the taxpayer to a government other than Canada for purposes of a foreign tax credit claim pursuant to subsection 126(1)… .

Re application of paragraph 4 of Article 27 of the Canada-U.K. Convention where a share of a U.K. corporation held by a resident of Canada is purchased for cancellation. RC states that "both the amount of $101 representing the purchase price for cancellation and the U.K. tax credit of $25 would be considered to be proceeds of disposition of the share giving rise to a capital gain treatment. The Canadian resident would be allowed a foreign tax credit for the aggregate U.K. withholding tax of $18.75 levied on the purchase price of the share and the U.K. tax credit."

A non-resident of Canada who was resident in England but not domiciled there for tax purposes, and who on her death in England is subject to English estate duty to a deemed disposition under s. 70(5) on shares of a private Canadian corporation and would not be considered to be taxed in the U.K. by reference to an amount that was remitted to or received in the U.K. as a result of such deemed disposition. Accordingly, paragraph 2 of Article 27 of the Canada-U.K. Convention would not apply.

Paragraph 2 of Article XXVII of the Canada-U.K. Convention not only restricts the right of taxpayers to claim total exemptions under the Convention, but also restricts the right to claim partial or rate relief.