Article 4

Regarding a corporation (the “Inverted Payer Corporation”) incorporated under the laws of Canada that is subject to the “anti-inversion rules” in IRC §7874(b) (so that it is resident in the U.S. for IRC purposes), the Directorate indicated that under the “tie-breaker” rule in Art. IV(3) of the Canada-U.S. Convention (the “Convention”), the Inverted Payer Corporation is resident for Convention purposes in Canada because it had been incorporated there, so that s. 250(5) would not apply to deem it to be a non-resident. Accordingly:

• Dividend payments made by the Inverted Payer Corporation to a U.S. resident would be subject to Part XIII tax and to potential treaty-rate reductions in accordance with the normal rules (and dividend payments made to other non-residents also would be subject to Part XIII tax subject to potential reductions under any applicable treaty).
• No Part XIII tax would apply to dividends paid by it to Canadian residents (including to any other such Inverted Payer Corporation).
• Dividends paid by it to a Canadian resident would be Canadian-source income, so that the resident would not be entitled any foreign tax credit for the U.S. withholding tax on such dividends if it does not have other sources of U.S. non-business income.
• Although Art. X(5) of the Convention bars the U.S. from taxing such dividends, IRC §7874(f) provides that the anti-inversion rules apply despite U.S. treaty obligations, and a U.S. court would respect this treaty override (see Jamieson v. C.I.R., 584 F.3d 1074 (D.C. Cir. 2009)).
• U.S. dividend withholding tax might generate a deduction to the Canadian recipient under ITA s. 20(12).

Base Case

A US corporate REIT that is a qualifying person under the Canada-US Treaty owns US LLC 1, which owns US LLC 2 which, like US LLC 1, is disregarded for US purposes, and is a s. 216 taxpayer. Interest on an unsecured loan from LLC 1 to LLC 2 is now subject to Part XIII tax as a result of the introduction of s. 212(13.2)(b).

CRA confirmed that no Treaty relief would be available under Art. XI given that LLC 1 is a disregarded entity (and thus would not itself be a US resident for Treaty purposes) and given that Art. IV(6) could not apply because the interest is disregarded for US purposes.

CRA further agreed that two alternative modifications to this structure would generate an exemption for the interest under Art. XI of the Treaty.

Scenario 1

The REIT forms a taxable REIT subsidiary (TRS) that is a US resident and a qualifying person for Treaty purposes, and TRS and LLC 1 form US LP in which they have respective interests of 0.1% and 99.9%, respectively, and the loan to LLC 2 is made by US LP rather than LLC 1.

CRA indicated that TRS would be entitled to the Treaty benefit respecting its share of the interest income received by US LP and that the REIT would get the benefit of Art. IV(6) respecting its share of such interest income given inter alia that the U.S. income tax treatment of the interest received by US LP and indirectly allocated to REIT is the same as the U.S. income tax treatment had the REIT derived the amount directly from US LP.

Scenario 2

This is similar to Scenario 1 except that TRS, which is held by LLC 1, subscribes for a 0.1% membership interest in LLC 2 so that for US purposes, LLC 2 is a partnership between it and the REIT and, as in the base case, the loan is made by LLC 1 to LLC 2. CRA indicated that, again, Art. IV(6) would apply given inter alia that the U.S. income tax treatment of interest income to REIT is the same as the U.S. income tax treatment would be had REIT received the interest income directly from US LLC 2.

Where dividends paid by a resident corporation 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,” CRA indicated that NR-Beneficiary qualified as a resident of Barbados, i.e., as “a person must be subject to the most comprehensive form of taxation as exists in the relevant contracting state”:

That is because, even if, under the law in force in Barbados, the taxation of the Trust Income may be deferred until a benefit is obtained in the form of a remittance of money or an importation of property in Barbados, it is our understanding that the NR-Beneficiary remains, nonetheless, “liable to tax” in Barbados in respect of its worldwide income.

Canada’s treaties typically contain tie-breaker rules for individuals. Typically, if the test of the place of the individual’s permanent home or centre of vital interest does not determine the individual’s residence, resort is next had to the test of the location of the individual’s “habitual abode.” What are CRA’s views of what is an habitual abode of an individual and what factors are considered?

CRA indicated that length of stays, and the nature of the activities, of the individual in each jurisdiction would have to be considered, to determine whether the individual usually lives in one state as compared to the other, and that the relevance of particular lengths of time would need to be considered in the circumstances: no set periods of time were applied as tests.

Generally, a person must be “liable to tax” in a contracting state to be a resident there for treaty purposes. Per CRA, a person must be subject to the most comprehensive form of taxation as exists in that contracting state to be liable to tax therein. 9822230 stated: “In order to qualify as a resident [of a] contracting state which has territorial tax system, a taxpayer will generally have to be subject to as comprehensive a tax liability as is imposed by the particular state.” Can CRA provide additional guidance in this regard?

CRA noted that the residence Article of the applicable treaty generally provides that, in order to be resident of the other contracting state, the person must be “liable to tax” therein according to certain criteria, such as residence, place of management, domicile or other criteria of a similar nature. Where the treaty country has a territorial tax system, the liability of a person to tax in that state might turn on either the existence of a source of income, or the receipt of income, in that state.

CRA was asked to comment on whether a corporation that was incorporated in Singapore would be viewed as a Treaty resident of Singapore, which typically taxes income that is sourced in Singapore, or remitted to Singapore.

CRA’s conclusion was that such corporation was a resident of Singapore that could therefore benefit from the Singapore-Canada Treaty, provided that its central management and control was in Singapore at all relevant times.

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

Respecting the first, single US resident, scenario, CRA noted that when the Canadian company pays a dividend to the French company, the Technical Explanation released with the Protocol regarding the introduction of IV(6) of the Canada-US Treaty concluded that, if the conditions of IV(6) are met, that payment could benefit from the application of the US Treaty, on the basis that the French entity is looked through for US tax purposes.

Alternatively, CRA would also grant the application of the benefits under the French Treaty because, from a Canadian perspective, the French company is a legal entity, to which a dividend is paid. Thus, either treaty is applicable for determining the withholding obligations of the Canadian payor. CRA further noted that the answer would not change if a fiscally transparent partnership was inserted between the US resident and the French company.

Regarding the multi-resident partner scenario, CRA noted that the first option is that, if IV(6) applies, and some of the dividend paid by the Canadian company to the French company are 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.

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.

Parentco, a corporation resident in the U.S. for Treaty purposes, 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”). Parentco LLC and Sisterco LLC have their central management and control in the U.S., and are disregarded entities for U.S. purposes - so that all income earned by the two LLCs is derived by Parentco for U.S. tax purposes.

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 and that was subject to a Pt. XIII remittance obligation.

In finding that the deemed dividend arising under s. 247(12) would be eligible for a Treaty-reduced rate in accordance with Art. IV(6) of the Canada - U.S. Treaty having regard to the requirement thereunder that the deemed dividend amount be considered under U.S. tax law to have derived been derived through Sisterco LLC and Parentco LLC and that by reason of those LLCs being fiscally transparent, the U.S. treatment of such amount was the same as its treatment would be had it been derived directly by Parentco, the Directorate first referred to it position in 2009-0345351C6 (subsequently confirmed in 2017) that “any Canadian-source deemed dividend which arises on the redemption of the shares [is] derived by the US-resident member of the LLC even though the amount paid by the corporation to redeem the shares may be treated, under the taxation laws of the US, as proceeds of disposition or a return of capital,” and then stated:

If a corresponding adjustment is made in the U.S. to consider that Canco has paid a dividend that is derived by Parentco through Parentco LLC, the conditions of paragraph IV(6) should be met since Parentco would be considered to have derived a dividend through Parentco LLC.

Before [any] corresponding adjustment is made … the conditions of paragraph IV(6) should still be met since Parentco is considered to have derived an amount (that is not disregarded) through US Sisterco LLC. More specifically … from a US tax perspective, Parentco, will have a reduced cost of inventory that is derived through the purchases of Sisterco LLC from Canco. The application of paragraph IV(6) would result in the amount deemed to be a dividend under subsection 247(12) to be derived by Parentco for purposes of paragraphs X(1) and (2) and the presumption of ownership of the shares of Canco by Parentco in subparagraph X(2)(a) would apply to determine the applicable rate of withholding.

Either way … that amount [is not] “disregarded” for US tax purposes … .

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, for U.S. purposes, in Scenario 1 chose not to be fiscally transparent, or choose to be treated as a partnership), which held LLC2 which in turn, held LLC3. LLC3 (which, like LLC2, was fiscally transparent) operated a Canadian branch business.

In finding that Art. X(6) of the Treaty would apply to grant treaty benefits to LLC3 in respect of its Canadian branch earnings by virtue of the application of Art. IV(6), 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. …

[F]or U.S. income tax purposes, the Canadian Branch profits of LLC3 are considered to be derived by the first entity in the corporate chain which is not treated as a fiscally transparent entity for U.S. income tax purposes. In Scenario 1, this entity would be LLC1 and in Scenario 2, it would be USCo1 and USCo2. ...

Therefore, as LLC1 (in Scenario 1) and USCo1 and USCo2 (in Scenario 2) are deriving income through LLC3, an entity that is fiscally transparent, and the same tax treatment condition is met, Article IV(6) would apply.

A Canadian-resident unlimited liability company (ULC) pays dividends to its two shareholders, which are each disregarded U.S.-resident Delaware limited liability companies (LLC1 and LLC2) which, in turn, are held by USCo1 and USCo2, who are qualifying persons for the purposes of Art. XXIX-A of the Canada-U.S. Treaty and are regarded entities. Are the dividends (which are treated as partnership distributions for U.S. purposes) eligible for Treaty benefits? CRA stated:

[Under] Article IV(6) ... dividends paid by the ULC ... would be considered as being paid to USCo1 and USCo2.

Nevertheless, since the ULC is treated as fiscally transparent under the laws of the U.S., pursuant to Article IV(7)(b) of the Treaty, amounts of dividends paid by the ULC shall be considered not to be paid to or derived by a person who is a resident of the U.S. because, by reason of the ULC being treated as fiscally transparent under the laws of the U.S., the treatment of the amount under the taxation law of the U.S. (i.e. as a partnership distribution) is not the same as its treatment would be if the ULC were not treated as fiscally transparent under the laws of the U.S (i.e. as a dividend).

Therefore, pursuant to the application of Article IV(7)(b) of the Treaty, dividends paid by the ULC to LLC1 and LLC2 would be considered not to be paid to or derived by a U.S. resident. Therefore, the reduced treaty rate for dividends would not apply... .

The estate of a deceased U.S. citizen may be considered a U.S. estate under U.S. domestic law, and also a Canadian resident estate under the ITA central management and control test or s. 94. How is Art. IV(4) of the Treaty applied?

CRA indicated that in addition to the factors of residence listed in S6-F1-C1, the competent authority will consider:

• the residence of the settlor;
• the residence of the beneficiaries;
• the type and location of the trust property; and
• the reason that the trust was established in a particular jurisdiction.

It is generally the Canadian competent authority’s position that it would not be appropriate to cede on the Canadian residency of a trust, on the basis that the tests of residency under s. 94 are neither inferior nor subordinate to any other tests of residency, and given that s. 94 anticipates providing full relief for any foreign taxes paid by the trust. Thus, it is the Canadian competent authority’s expectation that the negotiation of treaty residence in such cases will generally not be possible or advisable.

However, the Treaty should be applied to a deemed resident trust to avoid any unexpected double-tax. Once income tax returns have been filed in Canada, the Canadian competent authority will accept requests from trusts that are deemed resident in Canada seeking relief from double tax. That relief could be provided unilaterally or the Canadian competent authority may enter into negotiations with the other contracting state to avoid any double tax that remains after the application of section 94.

Are Florida and Delaware LLPs and LLLPs that are treated by CRA as corporations considered to come within para. IV(6) of the Canada-US Treaty? CRA: yes.

US Parent, which has elected to be treated as an “S-corporation,” so that it is fiscally transparent for Code purposes and its shareholders are taxable in respect of its income, owns all the shares of US Sub, which has elected to be treated as a “Qualified Subchapter S Subsidiary” and also is fiscally transparent for Code purposes. US Sub owns all the shares of Can ULC, a Nova Scotia unlimited liability company, which is a disregarded entity for Code purposes.

In confirming that Art. IV, 7(b) of the Canada-U.S. Treaty would deny Treaty benefits to US Parent on the interest paid by Can ULC, CRA stated:

[A]n S corporation can own a 100 percent ownership interest in a Qualified Subchapter S Subsidiary (“QSSS”) and upon election of the parent S corporation under 1361(1)(b)(3) of the...Code, the QSSS would not be treated as a separate corporation and all the assets, liabilities, and items of income, deduction, and credit of a qualified subchapter S subsidiary would be treated as that of the parent S corporation.

[Accordngly]...the loan owing by Can ULC to US Parent should also be disregarded for U.S. tax purposes. As a result, the interest income would not receive the “same treatment” for U.S. tax purposes as it would have received if Can ULC were treated as being a regarded entity for U.S. tax purposes. That is, the interest payment made by Can ULC to US Parent is disregarded for U.S. tax purposes, whereas, if U.S. tax law regarded Can ULC as a corporation, the payment would be treated as interest.

Existing structure

U.S. Parent, which is a qualifying person for purposes of the Canada-U.S. Treaty and whose common shares trade on a recognized exchange, holds all the outstanding shares of ULC (which is disregarded for Code purposes). ULC holds all the common shares of Holdco, which holds Opco. Exchangeable shareholders of Holdco also hold special voting shares of U.S. Parent.

Proposed transactions

1. Opco will declare and pay a dividend to Holdco.
2. Holdco will declare and pay a dividend to ULC (which for Code purposes will be considered a dividend paid directly to U.S. Parent out of its E&P).
3. ULC (which will not have any E&P pool) will increase the stated capital of its shares.
4. ULC will distribute that amount as a return of paid-up capital to U.S. Parent less Part XIII taxes remitted by it on U.S. Parent's behalf.
5. U.S. Parent will use those funds to fund a stock buy-back.

Additional information

The stated capital increase in 3 will not result in income etc. for Code purpose, and no such income would have been recognized if ULC instead had not been fiscally transparent. The proposed transactions "will not affect the U.S. tax treatment of any subsequent distributions on the ULC shares."

Ruling

Art. IV, 7(b) of the Treaty will not treat the deemed dividend arising in 3 as not having been derived by U.S. Parent, so that a withholding rate of 5% will apply.

Structure

U.S. Parent (an S Corp. with only U.S.-resident shareholders and a qualifying person by reason of Art. XXIX(2)(a) or (e) of the Canada-U.S. Treaty) holds the U.S. Note owing by ULC, its wholly-owned (disregarded) Canadian subsidiary, with the interest thereon subject to 25% Part XIII tax by virtue of the application of Art. IV(7)(b) of the Treaty.

Proposed transactions

In order "to permit future interest payments on the U.S. Note to qualify for benefits under the U.S. Treaty":

1. U.S. Parent (as the x% general partner) and one of its shareholders (as the (100-x)% Limited Partner form LP.
2. U.S. Parent contributes the U.S. Note, and the Limited Partner contributes some cash, to LP.
3. ULC Inc. increases the capital account for its common shares by an amount previously credited to its retained earnings (thereby giving rise to a s. 84(1) deemed dividend) and then makes a cash distribution as a return of capital to U.S. Parent.
4. LP makes regular distributions equal to its income (net of expenses, if any) to its partners.

Additional information

"For U.S. federal income tax purposes, interest on the U.S. Note will be reported as income of LP, and will be allocated as an item of income to the Limited Partner, and to the General Partner, in the same manner as the interest would be if ULC was not fiscally transparent under those laws."

Rulings

Art. IV(7)(b) of the Treaty will not apply to treat the dividend in 3 or the payment of interest on the U.S. Note as not having been paid to or derived by U.S. Parent.

If the "mind and management" of a BC venture capital corporation (which was incorporated in Canada) resided in Israel, resort would be necessary to the tie-breaker rule in Art. IV, para. 3 of the Canada-Israel Treaty, which deems a dual-resident corporation to be resident in the state in which it is a national. A legal person deriving its status as such from the laws in force of Canada or Israel is a "national" of the respective jurisdiction. The place of incorporation (Canada) is therefore determinative of the corporation's "nationality."

Trust is resident in Canada, is not subject to s.75(2), has one individual beneficiary (the "Non-resident Beneficiary") who is a a qualifying person for the purposes of the Canada-U.S.Treaty, and is the sole-shareholder of a Canadian-resident unlimited liability company. Trust and ULC are fiscally transparent for U.S. tax purposes. ULC will pay a dividend to the Trust, which Trust will distribute to the Non-resident Beneficiary.

In finding that the Trust distribution was not eligible for the Treaty-reduced rate of 15%, CRA stated:

In determining whether the U.S. treatment of the Trust distribution to the Non-resident Beneficiary is the same…if the Trust is not fiscally transparent for U.S. tax purposes, we will refer to:

(i) the timing of the recognition/inclusion of the amount,

(ii) the character of the amount, and

(iii) the quantum of the amount.

For U.S. tax purposes…if the Trust is not viewed as fiscally transparent, then the Non-resident Beneficiary would be seen to receive a trust distribution from the Trust which the Non-resident Beneficiary would be required to include in income. In sum, on the one hand when the Trust is treated as fiscally transparent, the distribution to the Non-resident Beneficiary would be completely ignored for U.S. tax purposes and when the Trust is not fiscally transparent, the Trust distribution would be recognized for U.S. tax purposes and included in the computation of the income of the Non-resident Beneficiary. The treatment of the amount is different in all respects.

In going on to find that the answer does not change if a deemed dividend under s. 84(1) arises by increasing the PUC of the ULC shares, followed by a cash distribution in the same amount as a return of capital, CRA stated:

The analysis of the U.S. tax treatment does not focus on the amount moving between the ULC and the Trust regardless of whether the Trust is fiscally transparent. Thus, any deemed dividend created by the ULC cannot affect the analysis.

How would the Canada-U.S. Tax Convention (the "Convention") tie-breaker rules apply in a double residency case under the Convention and how could any double taxation be addressed? CRA responded:

In addition to the factors set out in … IT-447 … the Canadian competent authority may consider some of the following factors: the settlor's residency; the residency of the beneficiaries; the location of the property of the trust; the reason the trust was established in a particular jurisdiction, etc.

… In situations where the two countries cannot find common ground, it is possible that the negotiations result in the double residency of the trust.

After noting that CRA considers Sharlow JA's remarks on s. 94 in St Michael Trust Corp., to the effect that s. 94 "falls short of displacing the treaty definition of residence" (St Michael at para. 87), to be obiter dicta, CRA stated:

[T]he CRA remains of the view that trusts deemed resident pursuant to section 94 are residents of Canada for the purposes of the Convention and will not generally be prepared to relinquish their residency to the other Contracting State.

In addition, the legislative amendments … [under] the Income Tax Conventions Interpretation Act … a trust deemed to be resident in Canada pursuant to subsection 94(3) is deemed to be resident in Canada … for the purposes of the Convention. … [T]he effect of this new provision is to make it impossible to break the tie because it deems such an equality to be non-existent.

In the unlikely event that there is evidence of taxation imposed contrary to the Convention and double taxation, the Canadian competent authority has confirmed to us that it would be prepared to consider the matter and facts specific to the situation leading to double taxation in order to determine whether a unilateral solution is possible or if negotiations with the other Contracting State are required … .

USCo and USCo2 are each S Corporations whose shares are owned in the same proportions by U.S.-resident and qualifying-person individuals, who are required under the Code to include a proportionate share of each separately stated item of income, deduction, loss or credit of the corporation. USCo and USCo2 are the shareholders of an unlimited liability company governed by the Companies Act of a province (Canco), and Canco also previously borrowed under an interest-bearing loan (the Canco Debt) from USCo.

Canco will:

(a) increase, in accordance with the provisions of the Companies Act, the paid-up capital in respect of its shares held by USCo and USCo2 by an amount equal to the amount of cash that it wishes to distribute; and

(b) reduce the paid-up capital in respect of such shares by an amount equal to such increase and distribute an amount in cash, as a return of paid-up capital on its shares held by USCo and USCo2, equal to such reduction.

The transaction in (a) will not affect the tax treatment in the U.S. of any subsequent distribution on the Canco shares including the PUC distribution in (b).

The payment of interest by Canco to USCo will be treated for Code purposes as a payment of interest by a partnership (Canco) to one of its partners (USCo), with such interest being included in the income of the U.S. individuals in proportion to their interests in USCo. If Canco were not a fiscally transparent, such interest would be included in their income in the same manner. Such interest also will be deductible by USCo and USCo2 in the computation of their income in proportion to their respective interests in Canco. As they are "S" Corps, such interest will be deductible by the individuals in the computation of their income under the Code, in proportion to their respective interests in USCo and USCo2.

Rulings inter alia that:

1. the s. 84(1) dividends resulting under (a) to USCo and USCo2 will be subject to Part XIII tax at 5%
2. Art. IV, subpara. 7(b) of the Treaty will not apply to such dividends
3. Subpara. 7(b) will not apply to treat the interest on the Canco Debt as not having been paid to or derived by USCo

Canco and U.S. Holdco

Canco, which is an unlimited liability company, is wholly owned by U.S. Holdco, which is resident in the U.S. for purposes of the Canada-U.S. Income Tax Convention (the "U.S. Treaty"), but is not a qualifying person for purposes of the U.S. Treaty.

Foreign Holdco and Foreign Sub

X% of the shares of U.S. Holdco are owned by Foreign Sub which, in turn, is a wholly-owned owned subsidiary of Foreign Holdco. Foreign Holdco and Foreign Sub are resident in Country 1 (not the U.S. or Canada), are not qualifying persons under the U.S. Treaty and are entitled to all the benefits of the Treaty ("Treaty 2") between Canada and Country 1. The common shares of Foreign Holdco are publicly traded on Exchanges 1, 2 and 3.

Proposed transactions

Canco will sell its investment in a Canadian business held through a Canadian LP to an unrelated 3rd party. It will distribute the net proceeds of disposition to U.S. Holdco by adding an amount to its paid-up capital account pursuant to the applicable provincial Company Act, and then distribute the amount of that addition to U.S. Holdco as a return of capital on its shares. The representations are made that:

no income, profit or gain will arise or will be recognized under the taxation laws of the United States as a result of the[se] transactions….Similarly, no amount of income, profit or gain would arise or be recognized under the taxation laws of the United States as a result of those transactions if Canco were not fiscally transparent under the taxation laws of the United States….The proposed transactions… will not affect the tax treatment in the United States of any subsequent distribution on the Canco shares owned by U.S. Holdco….

Rulings

include:

• Art. IV, para. 7(b) of the U.S. Treaty will not apply to treat the s. 84(1) dividend arising to U.S. Holdco as not having been paid to it.
• U.S. Holdco will be entitled to the benefits of the U.S. Treaty in respect of such dividend by virtue of Art. XXIX A, para. 4

USLLC, whose central management and control is in the U.S. and which is owned by two related Canadian residents, owns residential rental properties in the U.S. Where USLLC is treated as a partnership in the US:

It is CRA's view that a fiscally transparent entity (such as USLLC) is not a resident of the United States for purposes of applying the Treaty as the USLLC is not itself liable to tax in the US. Therefore, Treaty benefits will not be applicable.

As CRA is not in agreement with the decision in TD Securities (which, in any event, involved pre-5th Protocol timeframes). Accordingly:

Treaty benefits [under the Canada-U.S. Treaty as amended by the 5th Protocol] claimed by a fiscally transparent LLC with respect to an amount of income, profit or gain will be permitted only if the amount is considered to be derived, pursuant to Article IV(6), by a person who is a resident of the United States and that person is a "qualifying person" or is entitled, with respect to the amount, to the benefits of the Treaty pursuant to paragraph 3,4 or 6 of Article XXIX-A.

ECo, which is fiscally transparent for U.S. purposes and resident in the U.S. (a.k.a., Country 1) but is not a qualifying person (as defined in Art. XXIX-A of the Canada- U.S. Convention), makes a loan (the "Charlie Debt") bearing non-participating interest to CCo, which is a CBCA corporation and affiliated with Eco. (Both Eco and CCo are indirect wholly-owned subsidiaries of a public company (ACo), which is resident in Country 2.) ECo is a wholly-owned subsidiary of DCo, which is resident in the U.S. but is not a "qualifying person (as so defined). ECo acts as a lender to various affiliates in various countires (although no financing has been provided to CCo to date), and raises much of the necessary financing through public issuances of debt and commercial paper. CCo uses the proceeds of the Charlie Debt for an income-producing purpose.

The following four rulings are given:

A. For any interest paid by CCo to ECo in respect of the Charlie Debts, such interest will be considered to be derived by DCo pursuant to paragraph 6 of Article IV of the Treaty.

B. Paragraph 3 of Article XXIX-A of the Treaty will apply so that the benefits of the Treaty will apply to DCo in respect of any interest paid on the Charlie Debts.

C. Paragraph 1 of Article XI of the Treaty will apply to reduce the Canadian withholding tax rate to nil for any interest paid by CCo to ECo.

D. Subject to the rate of interest being reasonable and subject to the limitations of subsection 18(4), the interest payable on the Charlie Debts will be deductible pursuant to paragraph 20(1)(c).

Canco1 is a Canadian-resident unlimited liability company which is a wholly-owned subsidiary of Parentco, which is a qualifying person for purposes of the Canada-US Income Tax Convention and has elected to be taxed in accordance with subchapter S of Chapter 1 of the Code. Canco1 is the shareholder of another ULC (Canco2), which is the parent of an LLC (USCo1) which, in turn, is the preferred shareholder of another LLC (USCo2), whose common shareholder is Parentco. Parentco has elected to treat direct and indirect subsidiaries of USCo2 as qualified subchapter S subsidiaries, as defined in s. 1361 of the Code.

In lieu of declaring and paying a cash dividend, Canco 1 will:

(a) increase, in accordance with the provisions of the applicable Canadian company legislation, the paid-up capital in respect of its shares held by Parentco by an amount equal to the amount of cash that it wishes to distribute to Parentco;

(b) reduce, as soon as practicable, the paid-up capital of those shares in accordance with the provisions of such company legislation by an amount equal to the amount of such increase; and,

(c) distribute an amount of cash as a return of paid-up capital on its shares held by Parentco equal to the amount of such reduction.

Before ruling, CRA states representations that:

Notwithstanding that the proposed transaction... would, pursuant to subsection 84(1) of the Act, result in a deemed payment of a dividend on the shares of Canco 1, no amount of income, profit or gain will arise or will be recognized under the taxation laws of the United States as a result of that transaction. Similarly, no amount of income, profit or gain would arise or be recognized in the United States as a result of that transaction, if Canco 1 was not fiscally transparent under the taxation laws of the United States....The proposed transaction...will not affect the United States tax treatment of any subsequent distributions on the shares of Canco 1.

Ruling (not in these words) that Parentco will be entitled to the Treaty-reducded rate of 5% on the dividend that it is deemed to receive under s. 84(1), as the rule in Art. IV, para. 7(b) of the Convention will not apply.

Where the members of a fiscally transparent LLC are entitled to Treaty benefits in accordance with Art. XXIX-A of the Canada-US Income Tax Convention, then the effect of Art. IV, para. 6 "is to suppress Canadian taxation of the LLC to give effect to the benefits available under the Treaty to the U.S. resident members of the LLC in respect of the particular amount of income , profit or gain of the LLC." The LLC will file a Canadian return in which it will claim the Treaty benefits and complete Form NR303 and include a list of all of its members on Worksheet A of the NR303.

CRA indicated that if s. 94(3) applied to deem a US grantor trust with US-resident settlors to be a resident of Canada, then Art. IV(6) of the Canada-US Convention would not apply to dividends paid to the grantor trust by a Canadian corporation as both that corporation and the trust would be residents of Canada.

in the situation where a Canadian unlimited liability company ("ULC"), which is a disregarded entity for US tax purposes, pays an excessive management fee to its US parent (Xco) that is deemed to be a dividend under s. 214(4)(a) and Xco is an LLC that has two qualifying persons (ACo and BCo) as its members, Art. IV, para. 6 of the Canada-US Convention would not apply to treat the management fee as being derived by ACO and BCO because such amounts would be disregarded under the Code in this situation. Similarly, if XCo were a partnership with two partners, ACo and BCo, who were qualifying persons, Article IV(7)(b) would apply because they would be treated under the Code as deriving a management fee or shareholder benefit if ULC were not a disregarded entity, whereas such amounts would be disregarded if ULC were disregarded.

If XCo is an S-Corp, although CRA has taken the position that any Canadian source income received by an S-Corp may be considered to be derived instead by its shareholders pursuant to Art. IV, para. 6, the S Corp will continue to be ordinarily accepted by CRA as being itself a resident of the US, so that the S Corp may benefit from the reduced 5% dividend withholding rate on the (deemed) dividend on the basis that it owns more than 10% of the ULC.

Canco1, which is an Canadian unlimited liability company that is owned, in part, by S corps and by a US limited partnership whose partners are US-resident individuals and trusts and that has elected to be taxed as a partnership for US tax purposes, increases the capital account of its shares through a transfer from retained earnings and then makes a cash distribution to each shareholder as a return of capital.

No amount of income or gain wil arise to any person under US taxation laws as a result of the capital increase; nor would there be any such recognition if Canco1 were not fiscally transparent. Accordingly, Article IV(7)(b) of the US Treaty will not apply to treat any portion of the dividend deemed to arise under s. 84(1) on the capital increase as not being derived by the beneficial owners thereof.

Canco, a ULC and fiscally transparent under the Code, is wholly-owned by USCo, which is a C-Corp and a qualified person for purposes of the Canada-US Treaty. Canco will pay interest on the "new Note" issued by it to US Loanco, which also is a qualified person. Article IV(7)(b) is not applicable such interest, because the US tax treatment of the interest income to the recipient is the same regardless of whether the Canadian-resident company was fiscally transparent. In particular, US Loanco will include the interest in its income under either alternative, notwithstanding that the dual loss consolidation loss rules may apply at the level of determining the consolidated taxable income of the US group.

If a ULC is prohibited from increasing its paid-up capital, it will instead declare and pay a stock dividend of additional common shares having full paid-up capital, with the number of its common shares thereafter immediately being consolidated, and cash being distributed as a paid-up capital distribution on the common shares. Before a ruling was given that Art. IV.7(b) of the US Convention did not apply to this transaction (or the alternative transaction entailing a paid-up capital increase), there was a statement that:

Notwithstanding that the payment of the stock dividend...will be treated as a taxable dividend under the Act, the integration of the payment of the stock dividend and the subsequent share consolidation will result in no income, profit or gain arising or being recognized under the taxation laws of the United States. Similarly, no amount of income, profit or gain would arise or be recognized under the taxation laws of the United States as a result of those transactions if Canco ULC Amalco were not fiscally transparent under the taxation laws of the United States for the purpose of the Convention.

It is the current practice to treat an S Corporation as a resident of the U.S. for purposes of the Canada-U.S. Convention provided that it is a qualifying person or otherwise eligible for benefits under paragraph 3 or 6 of Article XXIX - A of that Convention.

However, treaty benefits under Article X(6) claimed by an LLC with respect to an amount of profit attributable to a Canadian permanent establishment will be recognized by CRA only if the amount is considered to be derived, pursuant to Article IV(6), by a corporation that is a resident of the U.S. and a qualifying person (or entitled to benefits under paragraph 3 or 6 of Article XXIX-A).

In finding that a French venture capital corporation ("VCC"), that was resident in France for French taxation purposes by virtue of its domicile as well as its effective place of management, and that had elected to be exempt from French corporate income tax respecting current income and capital gains on the sale of securities included in its portfolio, was a resident of France for purposes of the Canada-France Income Tax Convention, CRA stated:

[A] VCC is liable to tax in France by reason of its domicile, residence, place of management or any other criterion of a similar nature, as provided for in paragraph 1(a) of Article IV of the Convention, notwithstanding the fact that it may have opted for exemption from French corporation tax. It should be noted that a VCC may still be taxed in France on its gains from the disposal of securities which have remunerated it for its contribution of ancillary activities, as well as on income realized in accordance with the company's objects but not coming from the portfolio, such as profits from the disposal of movable or immovable property, and subsidies, all as described … above.

A Canadian ULC has interest accrue on a loan from its US-resident parent ("USCo"), with the election being made under s. 78(1)(b) of the Act at the beginning of the third year to have the accrued interest deemed to be paid on that day. In response to an argument that this deemed payment was not subject to Article IV(7)(b) of the US Convention "because the deemed receipt in itself is not recognized under the taxation laws of the United States and would not be recognized if the ULC were not fiscally transparent", CRA indicated that what was required was "an analysis of the treatment of the item of income to which the deemed receipt relates" and that, in this instance, the interest itself would have been recognized under US laws if the ULC were not fiscally transparent. Accordingly, Article IV(7)(b) would apply to the interest deemed to be paid under s. 78(1)(b).

The Canadian rate of withholding tax on a dividend paid by a Canadian corporation, that is fiscally transparent for U.S. purposes, to an S Corp of which an individual resident of the U.S. is the shareholder, will be subject to a 25% withholding tax due to Article IV(7)(b) of the Canada-U.S. Convention. Furthermore, Article IV(6) will not apply to treat the dividend as being derived by the shareholder of US Co because for U.S. purposes the shareholder will not be considered to have derived a dividend through US Co given the fiscally transparent nature of the Canadian corporation.

A SOPARFI that has a material economic nexus to Luxembourg will be considered to be a resident of Luxembourg for purposes of the Canada-Luxembourg Convention.

Canco incorporated a wholly-owned subsidiary in Dubai, in the United Arab Emirates (Dubai Co), whose management and control, and the sole establishment of its business will be in Dubai. Art. 4(1)(b)(ii) of the Canada UAE Convention, defined a resident of the UAE to include a company incorporated there where “all or substantially all of the company’s income is derived by the company from the active conduct of a trade or business, other than an investment business, in the United Arab Emirates and all or substantially all of the value of the company’s property is attributable to property used in that trade or business.” CRA stated:

The terms "all or substantially all" and "active conduct of a trade or business" are not defined in the CAN-UAE Convention. As stated in Article 3(2) of the CAN-UAE Convention: “As regards the application of the Convention by a Contracting State at any time, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies.” In the light of the foregoing, expressions not defined for the purposes of the CAN-UAE Convention shall, unless the context otherwise requires, have the meaning which they have for the purposes of the Act.

The CRA's administrative position is that the "all or substantially all" test is usually considered to be satisfied where a level of 90% or more is reached. However, the "all or substantially all" test could, depending on the circumstances and context, be satisfied even if the 90% level is not strictly met.

Ruling that a German open-end real estate fund would be treated as a resident of Germany for purposes of Article 4 of the German Treaty.

Three entities (a unit trust, investment company and limited partnership) which were certified by the Irish Revenue Commissioners to be investment undertakings which were resident in Ireland for income tax purposes and thereby subject to Irish tax legislation were found not to be resident under the new Treaty as they were not subject to comprehensive taxation in Ireland (i.e., they currently were not chargeable to Irish tax on their income).

A corporation registered as an Undertaking for collective investment in transferable securities in Ireland would not be eligible as a resident of Ireland for purposes of the new Canada-Ireland Treaty signed on October 8, 2003 as it would not be subject to tax in Ireland. (Its gains would be attributed as chargeable gains accruing to unitholders.)

It has been a long-standing position of the CRA that FCPs, SICAVs and SICAFs are not "liable to tax" and so are not residents of Luxembourg for purposes of the Canada-Luxembourg Convention.

An Irish Investment Undertaking would not be considered to be a resident of Ireland for purposes of the Canada-Ireland Convention given that it was not subject to comprehensive taxation in Ireland. Instead, only tax in the nature of a withholding tax was imposed on distributions made to Irish residents.

Ruling that Mr. X is a resident of France under the Canada-France Tax Convention given that he is liable to tax on worldwide income in France, his permanent home is in France (where his family now is), and his home in Canada is rented to arm's length third parties so that it is not available to him or his family.

A qualified subchapter S subsidiary is a resident of the U.S. for purposes of the Canada U.S. Convention, given that the position of the Agency on the resident status of an S corporation has remained unchanged.

Before concluding that Canada had the right to tax a trust that was resident in Barbados and which was deemed to be resident in Canada under s. 94(1)(c), Revenue Canada stated:

"... A trust is an entity on its own, distinguishable from an individual for the purposes of the Treaty. This interpretation is consistent with the scheme of the Treaty as well as the clear distinction which is made between an individual and a trust in the definition of person in Article III of the Treaty. In addition, the wording in paragraph 2 in Article IV and the relevant literature indicates that paragraph 2 is intended to deal with human beings only."

A U.S. LLC that elects to be treated as a corporation under the check-the-box rule will be considered a resident of the U.S. given that, as a result of so electing, it would be treated under the Code as a regular domestic Corporation that, therefore, is taxable in the U.S. on its world income.

Sociétés d'investissement à capital variable are not considered by RC to be residents of a contracting state as they are not liable to taxation in their own right. However, in the case of France an amending protocol will provide that Sicavs will be resident in France to the extent that their shareholders are liable to French tax on the income from the Sicav. This is an extension of the policy on LLCs.

After indicating that the ten-year tax holiday for Barbados Enclave Enterprises does not, by itself, disqualify them from being considered as being resident in Barbados, RC indicated that the phrase "liable to taxation" refers to "full liability to tax", being the most comprehensive form of taxation of a person under the law of Barbados (i.e., taxation based on world income).

A foreign affiliate incorporated in Barbados and licensed under the Exempt Insurance Act, 1983 will not be considered to be "liable to taxation" in Barbados given that its main and, most likely, source of income will effectively be exempt from taxation in Barbados for a guaranteed period of 30 years with the exception of amounts, which although expressed as an income tax, in substance represent an annual licence fee of Bds. $5,000.

Because an S corporation will be subject to tax in the U.S. on its world-wide income if certain conditions are not met, it is considered to be a resident of the U.S. for purposes of the Canada-U.S. Convention.

An S corporation, unlike a limited liability company, is considered to be an entity resident in the U.S. under the Canada-U.S. Income Tax Convention.

If any limited liability company is treated as a partnership for purposes of the Internal Revenue Code such that the shareholders rather than the limited liability company are liable to tax under the Code on the income of the limited liability company, the limited liability company will not be considered to be a resident of the U.S. under Article IV, paragraph 1, of the Canada-U.S. Convention. If the central management and control of the limited liability company is situate in Canada, it will be a resident of Canada for such purposes. Where the mind and management of the limited liability company is situate in the U.S., it will be considered resident in the U.S. for Canadian tax purposes, but will not be considered a resident of either contracting state under the Convention.

If a Delaware limited liability company is treated as a partnership for purposes of the Internal Revenue Code such that the shareholders rather than the company are liable to tax under the Code on the income of the company, such company will not be considered to be a resident of the U.S. under paragraph 1 of Article IV of the Canada-U.S. Convention.

Where a taxpayer has not severed his residential ties with Canada, RC must analyze the personal and economic ties over a period of time in order to make a determination of those more meaningful or significant ties. In this regard, RC "would be inclined to think that a house owned in Canada versus a home rented for the length of the stay in the United States or a long-term job in Canada versus a temporary job in the United States should be viewed as the more meaningful or significant ties".

Tax-exempt entities are resident in the jurisdiction in which they are organized.

The Canada-U.S. Convention is not intended to benefit individuals, wherever resident, who were subject to tax in the U.S. only by virtue of being citizens of the U.S. Accordingly, a citizen of the U.S. is a resident of the U.S. for the purposes of the Convention only if he or she is ordinarily resident in the U.S. or is deemed to be a resident of the U.S. under domestic U.S. law.

In the case of a corporation incorporated in Canada and having its place of effective management in The Netherlands, Canada will not agree that the corporation is a resident of The Netherlands in the absence of evidence that Canadian tax is not being avoided.