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.