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CCCA_V4No3_Col-MillerThom-FIN.qxd:CCCA_V1No2_Col-LabrEmpl-V1.qxd 9/2/10 1:04 PM Page 44 Legal Update – Miller Thomson LLP Cross-border taxation Canada Revenue Agency and Treaty benefits on dividends paid by Canadian ULCS reaty benefits will generally be denied that allows U..S resident members of U.S. income in their country of residence. Tunder the new anti-hybrid rule under LLCs to access treaty benefits.CRA has not The Tax Court of Canada recently con- Article IV(7)(b) of the Canada-US Tax changed its position on U.S. LLCs as a cluded in the TD Securities (USA) LLC v. Treaty (“Treaty”) on dividends paid on or result of the coming into force of this new The Queen case that a U.S. LLC was a resi- after Jan. 1, 2010, by Canadian Unlimited rule and continues to view U.S.LLC as the dent of the U.S. forTreaty purposes on the Liability Corporations (ULCs). One possi- only visible taxpayer for Canadian tax pur- basis that U.S. LLC was liable to U.S. taxa- ble solution to this denial is the implemen- poses. However, CRA will now look- tion by virtue of all of its income being tation of a two-step distribution involving through U.S. LLCs in accordance with fully and comprehensively taxed in the U.S. an increase in the paid-up capital (“PUC”) Article IV(6) to determine whether share- because of the place of incorporation of its of the shares of Canadian ULC followed holders of U.S. LLCs are entitled to treaty member. The Fifth Protocol (including by a reduction of the PUC of such shares benefits and will “suppress” Canadian taxa- new Article IV(6)) to the Treaty did not (“Two-Step Distribution”). tion of U.S. LLCs to give effect to benefits apply to the taxation years under review in Canada Revenue Agency (“CRA”) available to its U.S. resident shareholders. this case. commented favourably on this possible In February 2010, CRA expressed the In July 2010, CRA provided written solution for the first time in November view that treaty benefits would be denied guidance on the application of theTreaty in 2009.The situation involved a U.S. compa- on dividends paid by Canadian ULC to its light of the findings in TD Securities. CRA ny (“USCo”) that owns shares of a sole shareholder U.S.LLC on or after Jan.1, continues to maintain its view that a U.S. Canadian ULC that carries on business in 2010 on the basis that no amount would be LLC that is fiscally transparent under U.S. Canada where the Canadian ULC is a dis- considered derived by the shareholder of tax laws is not a resident of the U.S. for regarded entity for U.S.tax purposes.CRA U.S.LLC for purposes of Article IV(6).This Treaty purposes. However, CRA indicated was asked whether the new anti-hybrid would also mean that the Two-Step that it will accept claims for treaty benefits rule would apply to deny treaty benefits to Distribution would not be a solution in this made by U.S. LLCs where new Article USCo under theTwo-Step Distribution. case because under the first step there would IV(6) is not in effect. CRA was of the view that USCo should be no amount derived by the shareholders CRA reiterated its position expressed in not be denied treaty benefits in these cir- of U.S. LLC for purposes of Article IV(6). February 2010 that where new Article cumstances provided that the deemed divi- CRA has also consistently taken the posi- IV(6) is in effect, such article will establish dend resulting from the PUC increase is tion that a U.S.“S”corporation is entitled to the parameters under which treaty benefits subject to the same U.S. tax treatment as it treaty benefits notwithstanding that such may be claimed by a fiscally transparent would be if Canadian ULC were not fiscal- entity is not itself subject to U.S. taxation. U.S. LLC. U.S. LLCs will only be entitled ly transparent for U.S. tax purposes. Since Rather,it is the shareholders of U.S.“S”cor- to claim treaty benefits with respect to an November 2009, CRA has issued various poration that are subject to taxation. CRA amount of income, profit or gain if such favourable tax rulings on the Two-Step also adopted a favourable approach with amount is considered to be derived for pur- Distribution in situations where shares of foreign partnerships by looking through poses of Article IV(6). This confirms that Canadian ULCs are held by U.S.“C” cor- such partnerships and giving effect to treaty CRA has not changed its position onTwo- porations, U.S.“S”corporations,and foreign benefits available to partners resident in for- Step Distributions by Canadian ULCs to partnerships with U.S. resident individuals eign jurisdictions. Given the similarities U.S. LLCs as a result of the TD Securities and U.S.“S” corporations as partners. between U.S.“S” corporations and foreign decision. CRA has consistently taken the position partnerships on the one hand and U.S.LLCs that U.S. LLCs are not entitled to treaty on the other, it is difficult to understand Lyne Gaulin is a partner in theToronto office of benefits because U.S.LLCs are not liable to why CRA would adopt a different MillerThomson LLP whose tax practice focuses U.S. taxation and therefore are not resident approach for U.S. LLCs where the share- predominantly on mergers and acquisitions,reor- in the U.S.forTreaty purposes.NewArticle holders of U.S.LLCs are subject to compre- ganizations, corporate finance and international IV(6) of theTreaty includes a relieving rule hensive taxation on their share of U.S.LLC’s taxation. (lgaulin@millerthomson.com) 44 CCCA Canadian Corporate Counsel Association FALL 2010