A UK corporation (“GP Co”) is the general partner (with a 1% interest) of a UK limited partnership which is fiscally transparent for UK purposes and a partnership for ITA purposes (“UK LP” – all of whose partners are non-residents), and the Limited Partners include LP1 and LP3, which provide benefits under a “recognized pension plan” (as defined in Art. 10, para. 4 of the Canada-UK Treaty) and own 7% and 11% partnership interests, and LP2, a UK corporation owning a 19% partnership interest. In addition to being unrelated, the partners factually deal with every other at arm’s length. UK LP wholly owns Holdco, which wholly owns Canco, also a taxable Canadian corporation. UK LP used the subscription proceeds from the issuance of its partnership interests to make a loan to Canco (the “UK LP Loan”), the interest on which is not a “participating debt interest.”
Would LP1, LP2 and LP3 be considered to be dealing at arm’s length with Canco for purposes of Art. 11, subpara. 3 (c) of the Treaty? CRA responded:
Absent the Treaty, interest paid by Canco to UK LP will be subject to a 25% withholding tax… because paragraph 212(13.1)(b) will deem the UK LP to be a non-resident person for Part XIII withholding tax purposes and since UK LP and Canco would be considered to be related persons under subsection 251(2)…..
Under subparagraph 3(c) of Article 11 of the Treaty, interest arising in Canada and paid to a resident of the UK shall be exempt from Canadian withholding if the beneficial owner of the interest is a resident of the UK and is dealing at arm's length with the payer.
Pursuant to the Interpretative Protocol, whether persons are considered to be dealing at arm's length with each other… is determined by subsection 251(1)....
[W]e will consider GP Co to control Holdco and Canco. … Folio S1-F5-C1 [states] “when a partner is not in a position to control a partnership and that partner has little or no say in directing the operations of the partnership, it is generally recognized that the partner is dealing at arm's length with the partnership.” … By analogy, you reason that a partner who is considered to be dealing at arm’s length with a partnership should also be considered to be dealing at arm’s length with the corporation controlled by the partnership. We generally agree with your reasoning….
Provided that each LP1, LP2 or LP3 is factually dealing at arm’s length with Canco, LP1, LP2 and LP3’s respective share of the interest paid by Canco to UK LP will be exempt from Canadian withholding tax by virtue of subparagraph 3(c) of Article 11….