Source: http://taxinterpretations.com/tax-topics/treaties/article-4
Timestamp: 2019-04-21 18:41:59+00:00

Document:
CRA reasonably considered that TD Securities did not apply where the dividend was not fully and comprehensively taxed in the U.S.
The taxpayer (“CGI”) was a Delaware LLC which, in 2007, was subject to 25% withholding tax on a dividend of $142 million from a Nova Scotia ULC (“NSULC”), as the result of a corporate reorganization. The decision in TD Securities, finding that the LLC in that case was eligible for Treaty benefits, was released beyond the expiry of the 2-year limitation period in s. 227(6) to apply for a refund of the withholding tax so as to reduce the effective rate to 5%. CGI instead requested the IRS to engage CRA in competent authority proceedings so as to obtain the refund. In 2014, CRA sent a letter advising the IRS that it had concluded that Treaty relief was not available and that the case was concluded.
The basis for CGI’s application for a refund was the TD Securities decision. A review of that decision shows that the issues of full taxation and tax avoidance are specifically addressed by the Court in its decision (see para 87-105). Further, the record shows that the CRA put CGI on notice of its position that TD Securities was distinguishable.
Lamarre J. found that the taxpayer, a U.S. citizen, was resident in Canada during the relevant tax period, pursuant to Art. IV(2)(b) of the Canada-U.S. Convention. The taxpayer had spent only 69 of 623 days in the United States.
The taxpayer's residence could not be determined under Art. IV(2)(a). He had permanent homes in both Tennessee and Ontario, both of which were purchased after his first work contract in Ontario. His employment was in Ontario, but his prior work history and his investments were mainly in the U.S. He maintained hobbies and family ties in Tennessee, but established social ties and health coverage in Ontario. Lamarre J. found that this evidence was not determinative of his centre of vital interests.
[T]he proper approach to determining whether the Appellant had an habitual abode in the United States is to enquire whether he resided there habitually, in the sense that he regularly, customarily or usually lived in the United States.
The [vital interests] test to be applied under the Convention is one of fact: in which, if any, state does the individual have closer personal and economic relations?
Furthermore, the trial judge had made no error in applying the habitual abode test, as stated most recently in Lingle at para. 6.
Barbados trusts, which were resident in Barbados under ordinary principles but which were deemed to be resident in Canada under s. 94(1)(b), were not resident in Canada for purposes of the Canada-Barbados Income Tax Convention given that s. 94 did not deem a foreign trust to be a person resident in Canada for all purposes of Part I, but only for the purposes of Part I that were relevant to the determination of its Canadian source income and its foreign accrual property income.
In finding that a Barbados trust was resident in Barbados and not in Canada for purposes of the Barbados-Canada Income Tax Convention, Simpson, J., after noting Crown arguments that the trust potentially might be deemed to be resident in Canada under s. 94, stated (at para. 37) that the trust met "the physical criteria associated with actual residence of the kind described in Article IV, paragraph 1, of the Treaty which speaks of 'domicile', 'place of management' and 'criterion of a similar nature'. In my view, similar criteria would include other aspects of actual physical presence and not more esoteric concepts such as deemed residence."
The taxpayer, who lived and worked in the United States for ten months in 2001 (throughout which period his wife continued to live in the family home in Mississauga) as a result of accepting a position which he believed to be of indefinite duration, but returned to Canada after ten months when the job ended unexpectedly. The trial judge had not committed a reviewable error in finding that the centre of vital interests of the taxpayer under the tie-breaker rule in the Canada-U.S. Income Tax Convention remained in Canada.
The taxpayer, who held a green card and worked in the hospital industry selling hospital supplies throughout the United States, was thereby a resident of the United States for purposes of Article IV of the Canada-U.S. Convention, as green card status was a "criteria of a nature" similar to United States residents. Accordingly, a decision of the Tax Court that Article IV did not apply because, on common law principles, the taxpayer was resident in Canada and not resident in the U.S., should be set aside and the matter referred back to the Tax Court for re-determination.
Some of the income derived from a corporation incorporated in the Bahamas was effectively connected with the conduct by it of a business in the United States. However, Norsk paid no U.S. tax on barge rental payments received by it, including barge rental payments received from the Canadian taxpayer, by virtue of the exemption for international shipping companies contained in s. 883 of the U.S. Internal Revenue Code.
Norsk was liable to U.S. tax by reason of being "engaged in a trade or business" in the U.S. rather than on the basis of having a place of management in the U.S. Furthermore, liability for income effectively connected to a business engaged in the U.S. was not a "criterion of a similar nature" to those listed in Article IV, para. 1, of the Canada-U.S. Income Tax Convention because the other criteria entailed being subject to a comprehensive tax liability on the entity's world-wide income. Accordingly, Norsk was not a U.S. resident for purposes of that convention, with the result that rentals paid by the taxpayer to Norsk were not eligible for a reduced rate of withholding tax.
A Panamanian corporation was resident in Switzerland for purposes of the Canada-Swiss Convention given that its Panamanian incorporation was "a mere flag of convenience" (p. 6486), that its directors were Swiss and that the corporation was managed from Switzerland, with the exception of negotiations carried out on its behalf in Montreal by a Canadian lawyer.
The assesses were non-resident companies (“GE Overseas”) in the General Electric (GE) group who used the services of (i) expatriate employees of U.S.-resident GE company (“GEII”), who were then “deputed” to them, and (ii) services of Indian-resident employees of an Indian GE company (“GEIIPL,” with the term “GE India” apparently also referring to GEIIPL) whose services were charged out to them on a cost-plus basis, in connection with the marketing of their products, e.g., gas turbines, to Indian customers.
Bhat J held that the leased premises of one of the assesses in India where many of these personnel worked was a place of business of the assessees in India, having regard to the OECD recognized proposition that a “place of business” references “even a certain amount of space at its disposal” (para. 40). In rejecting the assessees’ submissions that the services performed at this office were merely of “a preparatory or auxiliary character,” he noted that the process of securing contracts with the Indian customers “involved a complex matrix of technical specifications, commercial terms, financial terms” (para. 57) that required the stationing in India of high ranking and mid-level employees who were required “to intensively negotiate the intricacies and commercial parameters of the articles” (para. 60). Accordingly, “the assessee’s employees were not merely liaisoning with clients and the headquarters office” (para. 58). Accordingly, such office constituted a fixed place of business of the assessees and, thus, a permanent establishment for purposes of the India-U.S. Tax Treaty.
He also found that, given the extensive involvement of GE India in negotiations (albeit subject to ultimate ratification overseas) that GE India also constituted a dependent-agent permanent establishment given that “the participation of representatives or employees of a resident company and another resident entity may fall within the concept of authority to conclude contracts in the name of the foreign company” (para. 70).
3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both States, the competent authorities of the States shall endeavour to settle the question by mutual agreement ... . In the absence of such agreement, such person shall be deemed not to be a resident of either State for the purposes of Articles 6 to 21 inclusive and Articles 23 and 24.
However, the Appellant argues that it is a resident of the Netherlands where it is domiciled (though no expert evidence was lead on the issue of Dutch law) in which case it is possible to conclude that the Appellant “is a resident of both States”. If the Appellant is liable for tax in both Canada and the Netherlands on the subject capital gain, then the competent authorities (as described in Article 4(3) of the Tax Treaty), and not this Court, must resolve the issue: McFadyen v. the Queen,  4 CTC 2573, para. 154; Malcolm Fisher v. the Queen,  CTC 2011, para. 46.
Since I have already concluded that the Appellant was a resident of Canada for tax purposes, I also conclude that the Tax Treaty does not have a direct bearing on this appeal.
an individual who was well advanced in his steps to return to Canada had a “habitual abode” in the U.S.
The taxpayer (Mr. Davis) had moved to Massachusetts to work as an engineer for 10 years before his return to Canada following the elimination of his position at the end of 2012. He owned two homes in Massachusetts, one of which he sold in 2012 and one of which he continued to own. He also owned and maintained with his platonic girlfriend a rural home in Canada since 2009, which he visited frequently. On his entry into Canada on April 9, 2013 for one of those visits, he declared on a customs “personal effects accounting document” that he “returned to Canada to resume residence on April 9, 2013”.
On May 6, 2013, and before his subsequent exit from the U.S. on May 9, he withdrew the funds in his U.S. 401(k) retirement fund, net of U.S. federal and state withholding tax. At issue was whether the proceeds were excluded from his income on the ground that he was not resident in Canada at that time.
In the U.S., Mr. Davis had certain connections of a personal and economic nature. The largest value of Mr. Davis’ collected assets remained in the U.S. until May 9, 2013. Mr. Davis continued to own a house and have bank accounts in the U.S. Mr. Davis’ family lived in Canada, but in Alberta just as far from Nova Scotia as such province is from Massachusetts. His job had ended, but the residual assets derived from employment remained stateside. Lastly, his effective health insurance and driver’s licence remained at least during the material time in the U.S.
In Canada, Mr. Davis did not maintain a conjugal relationship, gain employment or return to his previous home province and family.
He regularly, customarily or normally lived there prior to and immediately after the [401(k)] receipt date. … Mr. Davis’ residency in Canada before May 9, 2013 was preparatory to disengaging from the U.S. and permanently ceasing to be a resident after May 9, 2013. Before May 9, 2013, Mr. Davis … habitually lived in the U.S. based upon frequentcy, duration and regularity.
The words "the same" are ordinary English words. ...[A] degree of pragmatism in their application may be necessary...for example where differences between UK and foreign accounting and tax rules prevent a precise matching of the income by reference to which tax is computed in the two jurisdictions.
See summary under Art. 24.
The appellant ("RCF") was a Caymans limited partnership, with more than 97% of its capital held by a diversified group of US residents, principally funds and institutions. For Australian income tax purposes, it was deemed to be a corporation; whereas for Code purposes, it was a (fiscally transparent) foreign partnership, so that under Code s. 701, any liability for US tax on partnership income was that of its partners (except to the extent they also were fiscally transparent). It was assessed under the Australian equivalent of the Canadian taxable Canadian property rules on its gain from the sale of an Australian company with two underground gold mines in Western Australia.
Article 1 of the Australia-US Convention provided that the Convention applied only to persons (defined to include partnerships) who were residents of one or both of the Contracting States; and Article 4 provided that a person is a US resident if the person is a US corporation "or any other person…resident in the United States for purpose of its tax…." Article 13 provided that gains of a US resident from the disposition of real property situated in Australia (including, in this case, the shares of the Australian company) may be taxed in Australia.
The primary judge held that RCF was not a resident of the US. It follows from that finding that the DTA does not apply to the gain in the hands of RCF because RCF was neither a resident of the US nor a resident of Australia: see Article 1 of the DTA.
US law attributes to the partners the liability for any tax payable on the gain made by RCF, Australia attributes the liability for any tax payable to RCF. It may be open to argument by the US partners that they should obtain the benefits of the DTA on the basis that it was appropriate for Australia to view the gain as derived by the partners resident in the US, and to apply the provisions of the DTA accordingly, as discussed in the OECD commentary (about which we express no view) but that consideration is a separate issue to the question of whether the effect of the provisions of the DTA was to allocate the liability for the tax on the gain differently to the Assessment Act.
In 2002, the taxpayer was resident both in Canada and the U.K. for domestic tax purposes, but by virtue of Art. 4, para. 2(a) of the Canada-U.K Income Tax Convention (the "Convention") he was a resident of the U.K. for purposes of the Convention. S. 250(5) of the Act, which otherwise might have explicitly deemed his non-residence under the Convention to apply for purposes of the Act, did not apply to him in 2002.
The taxpayer argued that, even in the absence of s. 250(5), his treaty non-residence caused him to not be resident under the Act, so that he was not subject to tax under the Act on non-Canadian sourced income such as $2.9 million of U.S. employment income, imputed benefits of $1.4 million from free use of a corporate jet, and interest and dividends.
In rejecting this submission, Rip CJ indicated that the stipulation in Art. 4 that the taxpayer was resident in the U.K. for "purposes" of the Convention engaged only a "particular object" being "the Convention itself, nothing else" (para. 26), that "it is clear that if an income or capital item is not provided for in the Convention, Canada's authority to tax that item is not restricted" (para. 29), that in the OECD discussions of the residence tie-breaker rules "no mention is made of an override of domestic law" (para. 33), and that the Convention merely "allocates to each country the authority to tax" (para. 51).
…when partners are liable to tax in the country of their residence on their share of partnership income it is expected that the source country (in this case, Australia) will apply the provisions of a convention "…as if the partners had earned the income directly so that the classification of the income for purpose of the allocative rule of Articles 6 to 21 will not be modified by the fact that the income flows through the partnership."
(iv) the only ties they established to Canada were those necessary for, or reasonably incidental to, the requirement that they physically be in Canada for the period they were working on the Syncrude project.
The taxpayer, which was a U.S. limited liability company ("LLC") that carried on business in Canada through a Canadian branch with the income from such branch being included in the consolidated return of the "C-Corp" parent of the taxpayer's immediate parent (also a U.S.-incorporated C-Corp.) was assessed on the basis that the profits of the Canadian branch were subject to Canadian branch tax at the non-treaty reduced rate of 25% (rather than 5%). Before finding that the taxpayer was entitled to the treaty-reduced rate of 5%, Boyle, J. indicated (at para. 86) that "the treatment of partnerships and of LLCs should be analogous for purposes of the interpretation application of the U.S. Treaty" and noted (at para. 76) that a partnership which is not liable to tax in its home country by virtue of being fiscally transparent should nonetheless get the benefit of the tax convention based on the residence of its members. The taxpayer should be considered to be a resident of the U.S. for purposes of the U.S. Treaty, and its income should be considered to be subject to full and comprehensive taxation under the U.S. Internal Revenue Code by reason of a criterion similar in nature to the enumerated grounds in Article 4, namely the place of incorporation of its members (para. 101).
He also noted (at para. 103) that the U.S. Treaty as amended by the Fifth Protocol would not necessarily be interpreted and applied in a similar manner.
It follows that the proper approach to determining whether the Appellant had an habitual abode in the United States is to enquire whether he resided there habitually, in the sense that he regularly, customarily or usually lived in the United States. Paragraphs 27 to 32 of the Agreed Statement of Facts and Issue contain pertinent statements which assist in the determination of whether the Appellant "normally lived" in the United States. It was agreed between the parties that the Appellant "consistently and repeatedly returned to his home in Canada for the majority of the days in this period." In the settled routine of his life "he regularly, normally and customarily lived in Canada." He "did not have any other contracts clients or business in the USA." In addition, he spent only 69 days out of 623 days in the relevant period at his home in the United States.
In the Court of Appeal, Létourneau JA (at para. 6, 8) indicated "in light of the clearer French version" ("séjourne de façon habituelle") that "habitual abode"
The taxpayer, who worked on a succession of jobs in the United States and stayed at different places there, was found to have a permanent home available to him in Canada given that his separated wife, children and mother stayed at a home in Canada and it did not "seem plausible that his mother, as a former Russian General, would take orders from the Appellant's spouse (her daughter-in-law) if the Appellant's spouse should attempt to deny him (the taxpayer) entry to the home" (para. 14).
The taxpayer, who was resident both in Canada and the United States in 2003 when he received a bonus that had been earned in 2002, was found to be resident for Treaty purposes in Canada given that he owned a home in Canada and did not own, rent or occupy any home, permanent or otherwise, in the U.S. It was not relevant that he may have purchased a Canadian home with the idea in mind that his stay in Canada would only be temporary (two or three years).
The taxpayer, when he was moved by his employer to Australia rented the Canadian home of him and his wife under 22 1/2 month lease which, under Quebec law, was not terminable other than on six months notice, and was provided with a furnished house in Australia. In these circumstances, the Canadian house was not a permanent home available to him under Article 4 of the Canada-Australia Income Tax Convention, so that he was resident in Canada for purposes of that Treaty and for purposes of the Act by virtue of s. 250(5).
Given the depth of her roots in South Korea, the taxpayer's centre of vital interests was in South Korea rather than Canada. South Korea also was the country of her habitual abode given that she stayed there more frequently.
The taxpayer, who stayed in Michigan in a condominium owned by her friends without paying rent and who visited, on a weekly basis, her husband and children in Windsor, did not have a permanent home in either Canada or the U.S. She had a centre of vital interest both in Canada (where she had closer personal ties notwithstanding that most of her friends were in Michigan) and in the U.S., where she earned her living. However, her habitual abode was in the U.S., so that under the tie-breaker rule in Article 4, paragraph 2(b), she was a resident of the United States.
The taxpayer, who had moved with his wife to Egypt for a four-year work assignment and who maintained their home in Ontario in addition to an apartment in Egypt, was found to have his centre of vital interests in Canada throughout the period given that he "did not really maintain any economic relations with Egypt apart from those he needed to have in order to meet his day-to-day living expenses" (p. 73).
The taxpayer, who was a resident of Canada and was employed as a commercial airline pilot by a wholly-owned subsidiary of a Hong Kong airline company ("Cathay Pacific"), took the position that his employment income was exempt from Canadian tax by virtue of the Canada-China Convention because it was earned in respect of an employment exehrcised aboard aircraft operated in international traffic by an enterprise resident in China (i.e., Cathy Pacific). The term "resident of a Contracting State" was defined in the Convention as "any person who, under the laws of that Contracting State, is liable to tax therein by reason of his ... residence ... ." For the purposes of this definition, Hong Kong's Internal Revenue Ordinance was not a law of the People's Republic of China (but, instead, was derived from an independent authority to enact taxation laws); and Cathay Pacific was not "liable to a tax therein" (given that the term "tax" must be interpreted against the background of the phrase "under the laws of that Contracting State", and as the Ordinance was not a law of the PRC, the taxes under the Ordinance were not a PRC tax). Furthermore, to the extent that the definition of "tax" for these purposes was found in Article 2 of the Treaty, which described various types of taxes imposed in the Mainland of China in 1986 and also referred to any identical or substantially similar taxes imposed after 1986, the Hong Kong income taxes were not "identical or substantially similar" to such taxes as Hong Kong imposed income taxes on a territorial basis and the PRC taxed on world-wide income of residents.
A Chinese national who entered Canada in April 1998 after receiving landed immigrant status and was paid $19,000 by a Chinese company in order for her to attend school in Canada and to cover her living expenses was found to have her centre of vital interest in China given her family ties there, the provision to her by the company of housing in China which continued to be available to her as well as her ownership of an apartment unit in China which was also available to her and her maintenance of bank accounts and credit cards in China, her maintenance of personal belongings, a driver's licence and membership in an association there.
"Although I do not decide the matter, I doubt that this Court has the authority to apply the tie breaker rules referred to in the Canada-Japan Income Tax Convention. The words of the Convention state specifically that 'the competent authorities of the Contracting States shall determine by mutual agreement the Contracting State of which that person shall be deemed to be a resident for the purposes of this Convention' and this should be done by resorting to the tie breaker rules. It therefore appears that the Contracting States intended that the application of the 'tie breaker rules' is a matter for the competent authorities of the Contracting States and not for this Court."
The taxpayer was posted to Malaysia, where he lived in rented premises. His wife whom he was having marital difficulties with continued to live in their Edmonton home. The taxpayer was found to have a center of vital interests in Malaysia rather than Canada given that he reported for work there every day and given that, in the years in question, his personal life was centered in Malaysia.
The taxpayer, who had business interest both in Canada and the United States, commenced spending most of the year, other than the summers, in North Carolina and acquired with his wife a home in North Carolina. He was found to be resident in the United States for purposes of Article IV of the Canada-U.S. Income Tax Convention because the house in North Carolina was their permanent home whereas the house in Nova Scotia (which they continued to own) was leased for the major part of each year with minimal furniture. Moreover, North Carolina was the center of their vital interests given that their children were being educated in North Carolina, more of his business life was conducted there, North Carolina was the center from which their yachting and skiing was conducted, and her social and household life was centered there.
The taxpayer, who was born in Germany but had landed immigrant status in Canada, and who had bank accounts, credit cards, real property, a driver's licence, insurance policies, a telephone listing and a summer residence in Canada, was found to have his center of vital interest in West Germany for purposes of Article 4(2) of the Canada - West Germany Convention given that his family, business and community service ties were there.
A Jersey partnership comprising over 100 U.K. resident partners and carrying on a trade which was managed and controlled in Jersey, was a body of persons resident in Jersey rather than in the U.K. in the context of the provisions before the English court.
[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?
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.
[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.
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.
Opco will declare and pay a dividend to Holdco.
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).
ULC (which will not have any E&P pool) will increase the stated capital of its shares.
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.
U.S. Parent will use those funds to fund a stock buy-back.
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."
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.
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.
U.S. Parent (as the x% general partner) and one of its shareholders (as the (100-x)% Limited Partner form LP.
U.S. Parent contributes the U.S. Note, and the Limited Partner contributes some cash, to LP.
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.
LP makes regular distributions equal to its income (net of expenses, if any) to its partners.
"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."
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.
(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.
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.
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.
[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.
(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.
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.
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.
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….
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. LLC not resident in U.S.
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.
Are there any new issues with respect to Article IV(6) and (7) of the US treaty?
: Since the 5th Protocol to the Canada-U.S. Treaty, CRA has considered many strategies designed to ensure that either Art. IV, para. 6 applies to a particular amount, or that para. (7) of that Article does not apply, along with the possible application of the general anti-avoidance rule. CRA has recognized that some structures may be utilized for legitimate reasons. Among the strategies previously considered, the CRA is aware of some structures designed to avoid the application of para. (7) through the introduction of an interposing entity located in a third jurisdiction. In this regard, the CRA has previously expressed its long-standing concerns over "treaty shopping;" and Finance bolstered these concerns in Budget 2013, in announcing consultations on these practices. In addition, the GAAR Committee recently approved the application of the GAAR to a treaty shopping case. Accordingly, taxpayers should not expect the Directorate to look favourably upon the interposition of an entity in a third jurisdiction to avoid the application of para. (7).
1.41 [T]o be considered liable to tax for the purposes of the Residence article of Canada's tax treaties, an individual must be subject to the most comprehensive form of taxation as exists in the relevant country. For Canada, this generally means full tax liability on worldwide income. This is supported by ... The Queen v Crown Forest Industries Limited,  2 S.C.R. 802, 95 DTC 5389... .
1.42 An individual does not necessarily have to pay tax to another country in order to be considered liable to tax in that country under paragraph 1 of the Residence article of the tax treaty with Canada. There may be situations where an individual's worldwide income is subject to another country's full taxing jurisdiction, however, the country's domestic laws do not levy tax on an individual's taxable income or taxes it at low rates. In these cases, the CRA will generally accept that an individual is a resident of the other country... .
1.44 [H]olders of a United States Permanent Residence Card (otherwise referred to as a Green Card) are considered to be resident in the United States... .
"…the permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at a school, etc)."
1.49 Where an individual has two permanent homes while living outside Canada (for example, a dwelling place rented by the individual abroad and a property owned by the individual in Canada that continues to be available for his or her use, ... the permanent home test will not result in a residency determination.
"If the individual has a permanent home in both Contracting States, it is necessary to look at the facts in order to ascertain with which of the two States his personal and economic relations are closer. Thus, regard will be had to his family and social relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his property, etc. The circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention. If a person who has a home in one State sets up a second in the other State while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has his family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first State."
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.
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.
(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.
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.
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).
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.
Income Tax Technical News, No. 35, 26 February 2007, "Treaty Residence - Residence of Convenience"
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.
IC75-6R2 "Required Withholding from Amounts Paid to Non-Resident Persons Performing Services in Canada"
Discussion of limited liability corporations in para. 10 of Appendix A.
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).
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.
9 October 2009 Roundtable, 2009-0327031C6 F - REER et CR - art. IV(7)(b) Conv. Canada - É.-U.
Discussion of Crown Forest case.
"... 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.
22 August 1995 T.I. 952040 (C.T.O. "Treaty ('Residence') Status of a 'S' Corporation"
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".
The continuance of a corporation incorporated in Canada to the United States will not result in that corporation ceasing to be considered to have been created in Canada for purposes of Article IV of the U.S. Convention notwithstanding s. 250(5.1).
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.
This consequence seems inappropriate given that individuals would not be subject to branch tax had they carried on the branch business directly. This adverse result could potentially be addressed from a structuring perspective by interposing S Corps as the members of the LLC, since, as discussed above, S Corps have retained their status as corporations that are Treaty residents….
[C]ontrarily to LLCs, S Corps are considered residents of the U.S. by the CRA for purposes of the Treaty and can benefit from the 5% withholding rate on dividends. CRA has adopted this position because S Corps are taxable on their worldwide income unless it makes the election, while LLCs are not taxable unless it makes the election [fn 56: … 9822230]. CRA also added that "there is significantly less potential for the entity [S Corp] to be used for tax avoidance" [fn 57: … 9713129] since all of the shareholders are taxable in the U.S. on their worldwide income.
[I]f the financial instrument between CanLP and Canco was interest bearing debt, an interest payment would be deductible (assuming all other conditions of the ITA are met for deductibility of intere3st) from the taxable income of the ULC while not being included in the income of USco (as it would be “blocked” at the CanLP from a U.S. tax perspective) until ultimately distributed.
…[A] RRSP and a retirement compensation arrangement would not be FTEs [flow-through entities] for Canadian tax purposes. Trusts that qualify as RRSP for the purposes of the ITA, which include deemed trusts in accordance to subsection 248(3) of the ITA, should not be considered as being transparent since they are exempt from tax under a system which we perceive to be integrated. For their part, retirement compensation arrangements are not exempt from tax [fn 61: … 2009-0327031C6].
[T]he same conclusion was given where the shareholders of the ULC were two sister S-corporations held by the same U.S. shareholder [fn 68: … 2010-0376751E5]. The fact that the S-corporations were sisters is relevant as it is the factor that made the ULC a partnership for U.S. federal income tax purposes. In such context, we understand the structure would be flow-through for U.S. federal income tax purposes as the ULC is a partnership and the S-corporation flow their income to their shareholders for U.S. federal income tax purposes and in accordance with U.S. tax laws.
In Gaudreau, … the Court ruled that … if a person who has a home in one state sets up a second in the other state while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first state.
CRA recently agreed with the position of a U.S.-resident individual who had a services permanent establishment in Canada under the Canada-U.S. Treaty but did not otherwise have a Canadian permanent establishment, that he did not earn income in any province. Accordingly, rather than being subject to provincial tax on his servicing income, he was subject to additional federal tax thereon of only 48% of federal tax.
The same analysis would apply (at least for the common law provinces) to a U.S. corporation which had only a Canadian services PE, so that it would enjoy an additional federal rate of 10% (in effect imposed under s. 124(1)) rather than facing provincial rates running from 12% to 16%.
A second example considered by the CRA in the internal technical interpretation, [fn 18: See, also, ... 2009-0348041R3, 2010] which is depicted in figure 2, involves a USco that once again wholly owned a regarded subsidiary (USsub), with USco alone holding the subordinated debt of the ULC. In this case, USsub was the sole shareholder of the ULC. The example assumes that USco and USsub file a consolidated group tax return for US federal tax purposes (a reasonable assumption to make). In this case, the ULC was a disregarded entity for US federal tax purposes, so that USco is considered to have loaned the debt proceeds to USsub and includes the interest income from the loan in the computation of its "separate taxable income" for US federal tax purposes. This is effectively the same as the treatment that would occur for USco if the ULC were not a fiscally transparent entity (USco would be receiving interest from the ULC as a regarded corporation). The CRA noted that, for US federal tax purposes, USsub is considered to owe the loan to USco and deducts the interest expense in respect of the loan in the computation of its separate taxable income.…the CRA once again noted that only the US tax treatment of the interest income to USco as an item of income, not the treatment of the corresponding expense item to USsub, is relevant for the purposes of the sameness-of-treatment analysis under article IV(7)(b)….
[A] common variation, which is depicted in figure 3, occurs when a USco wholly owns both a US regarded subsidiary ("USsub") and the ULC, so that USsub and the ULC are sister entities, and it is USsub (not USco) that makes the interest bearing loan to the ULC. [fn 19: See ... 2011-0429261R3, 2012.] From a US federal tax perspective, the ULC is disregarded, with the result that the loan is considered to have been made by USsub to USco and USsub is required to include the interest income from the loan in the computation of its separate taxable income. This is effectively the same as the treatment that would occur for USsub if the ULC were not a fiscally transparent entity (it would be receiving interest from the ULC as a regarded corporation)….
The LLC transaction led to the enactment of section 894(c)(1) of the IRC as part of the Taxpayer Relief Act of 1997. [fn 36: Taxpayer Relief Act of 1997, Pub. L. no. 99-514.] Under section 894(c)(1), treaty benefits are not available to a foreign person with respect to an item of income derived through a partnership (or other fiscally transparent entity) if (1) the item is not treated as an item of income of the person under the tax laws of the foreign country, (2) the treaty does not address the treatment of income derived through a partnership, and (3) the foreign country does not impose tax on a distribution of the item of income from the partnership to the foreign person….
Article IV(7)(a) achieves the same result as section 894(c)(1). The operative test under article IV (7)(a) is satisfied by the LLC transaction: because the LLC is not fiscally transparent under the laws of Canada, the treatment respecting amounts received by the LLC is not the same as it would be if the resident had derived the amounts directly. If received directly, the Canadian parent would have received interest income for Canadian tax purposes, rather than a dividend….
Article IV(7)(a) appears to apply to US-source dividends received by a fiscally transparent LLC even if the LLC immediately distributes the cash to its members. This can create a particularly harsh result for a Canadian pension fund receiving portfolio dividends through an LLC. Pursuant to article XXI, a complete exemption from US withholding tax would generally be available if the pension fund holds the portfolio investment directly or through a partnership. However, article IV(7)(a) appears to deny treaty benefits, resulting in a 30 percent withholding tax. To resolve a similar issue under the treaty between the United States and the Netherlands for Dutch pension funds investing in the United States through LLCs, the competent authorities agreed to in effect treat dividends and interest paid to an LLC for the benefit of a pension fund as derived by a resident to the extent of the pension fund's share in the dividends and interest paid to the LLC.
[S]ection 894(c) generally applies only to withholding taxes on so-called fixed, determinable, annual, periodical (FDAP) income [fn 39: FDAP income is "fixed or determinable annual or periodic gains, profits, and income" such as interest, dividends, rents and wages. IRC sections 871(a)(1)(A) and 881(a)(1)] and not to regular business income.
The technical explanation makes clear that article IV(6) applies to business profits derived through an entity, in addition to FDAP income….
One unresolved issue under article IV(7)(a) involves the application of the US branch profits tax to a Canadian corporation (Canco) that is engaged in a trade or business within the United States through an LLC that is fiscally transparent for US federal tax purposes….
The uncertainty as to whether article IV(7)(a) would be applied by the United States to the Canco/LLC example to deny the lower 5 percent rate of US branch tax has had a chilling effect on the use of the Canco/LLC structure….
[F]oreign investors in certain jurisdictions may prefer investing in a RElT formed as a partnership. However, in that case a Canadian resident is precluded under article IV(7)(b) from claiming reduced withholding rates under the treaty. Forming the REIT as a corporation or LLC that elects to be treated as a corporation avoids the problem.
[D]oes the anti-hybrid rule apply to the payment of interest by DLP to the Canadian partner and debtholder, such that the Canadian partner and debtholder is not be entitled to the treaty-reduced rate of withholding tax on interest (which is nil)?
Article IV(6) provides relief from Canadian withholding tax for US residents only. Assume that a US resident and a UK resident form an LLC to license computer software to Canadian clients. Under article XII of the Canada-US treaty, Canadian withholding tax does not apply to licence payments for computer software made to a US resident. Under the Canada-UK treaty, a similar payment made directly by a Canadian resident to a UK resident is also exempt from Canadian withholding tax. However, if the payment is made to the LLC, the pro rata portion allocable to the US resident is Canadian withholding-tax-exempt, but the portion allocable to the UK resident is subject to 25 percent Canadian withholding tax. The UK resident is penalized for investing through an LLC rather than directly from the United Kingdom.
…[B]ecause Article X(6) only refers to “companies”, the CRA takes the view that it does not operate to reduce the branch profit tax rate on income that is deemed to have been derived by Non-Corporate Members through the US LLC. Thus, in effect, the CRA interprets Article X(6) as only providing for a reduced branch profits tax in respect of income derived directly (or indirectly, through a US LLC) by US-resident corporations.
In general terms, these non-discrimination provisions prevent Canada, inter alia, from subjecting US-resident taxpayers to taxation in Canada that is more burdensome than that imposed on Canadian-resident taxpayers. Since Canada does not impose branch profits tax on Canadian residents, Article XXV should, unless expressly provided for elsewhere in the Treaty, operate to preclude Canada from imposing branch profits tax on any person (including a corporation) who is otherwise entitled to claim Treaty benefits.
Read in light of Article XXV, it is clear that the purpose of Article X(6) of the Treaty is not, contrary to the interpretation favoured by the CRA, to relieve US residents from the imposition of branch profits tax – Article XXV already does that. Rather, the purpose of Article X(6) of the Treaty is to permit Canada to impose branch profits tax, despite Article XXV, but only on corporations and only at a rate of 5% (subject to the $500,000 Exemption). This interpretation is strongly supported by the introductory language of Article X(6) which reads: “[n]othing in this Treaty [i.e., Article XXV] shall be construed as preventing [Canada] from imposing a tax on the earnings of a company attributable to a permanent establishment in [Canada]...”.
[T]he alternative interpretation advocated in this article, to the effect that Article X(6) serves as an exemption to the non-discrimination provisions contained in Article XXV of the Treaty and only permits Canada to impose a 5% branch profits tax on corporations, is, we would submit, entirely consistent with both the text and the spirit of the Treaty.
We are aware of several instances recently (either at the audit or the objection stage) where the CRA has backed away from its published views on the branch profits tax provisions, and instead opted to apply the interpretations advocated herein.
Edward Tanenbaum noted that in Podd v. Comr., 2: T.C. Memo 1998-238, aff'd, T.C. Memo 1998-418, the Tax Court initially determined that a Canadian citizen had a permanent home available to him in both Canada (he kept many belongings, including two automobiles, and maintained an office) and in the U.S. (as he had his girlfriend's apartment in Florida available to him, stayed there frequently, conducted business from there and docked his boat at its marina).
The rules in Articles IV(6) and (7) of the Canada-US Convention might be summarized by stating that if the taxpayer and the fiscally transparent entity reside in the same country, treaty benefits apply.
Brian Cleave, "The Treaty Residence of Trusts in the United Kingdom and Canada: Some Thoughts on the Smallwood and Garron (or St Michael Corp) Cases", British Tax Review, 2011, No. 6. p. 705.
Kristen A. Parillo, "Canada Will Litigate U.S. LLC Questions under Fifth Protocol", Tax Notes Internationals, 4 October 2010, p. 7.
Richard Lewin, "Oh What a Tangled Web ..", International Tax, August 2010, No. 53, p. 10.
Discussion of Article IV(7)(b) of the Canada-U.S. Income Tax Convention.
Kevin Duxbury, "Canadian-Owned US LLCs More Costly After the Fifth Protocol", Tax for the Owner-Manager, Vol. 9, No. 4, October 2009, p. 8.
Paul K. Tanaki, amp; Sarah Davidson Ladly:, "Payments by Hybrid Entities under the Revised Canada-United States Income Tax Convention", Corporate Finance, Vol. XV, No. 4, 2009 p. 1710.
Richard Lewin, "A Change in Protocol: The Fifth Protocol to the Canada-U.S. Income Tax Convention", International Tax, CCH, October 2007, No. 36.
John Avery Jones, "Place of Effective Management as a Residence Tie-Breaker", International Bureau of Fiscal Documentation Bulletin, January 2005, p. 20.
R. Ian Crosbie, "Recent Development affecting Residence under Canada's Income Tax Conventions", Corporate Finance, Vol. VII, No. 2, 1999, p. 606.
D. Ward, "A Resident of a Contracting State for Tax Treaty Purposes: A Case Comment on Crown Forest Industries", 1996 Canadian Tax Journal, Vol. 44, No. 2, p. 408.
Discussion (at pp. 45:14-23) of issues respecting the treatment of partnerships.
Bissell, "Canada Interprets Tax Treaty Narrowly or U.S. Citizens Here Temporarily", Taxation of Executive Compensation and Retirement, December/January 1992, p. 531.

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