Principal Issues: Where a US resident corporation derives business income through a US Limited Liability Company (USLLC), which entity's taxable year is relevant when considering the coming into force provision in subparagraph 2(b) of Article 27 of the Fifth Protocol?
Position: The USLLC's taxation year.
Reasons: The USLLC is the relevant taxpayer for Canadian tax purposes.
XXXXXXXXXX 2010-035566 S. Sivarulrasa February 15, 2010
Dear XXXXXXXXXX :
Re: Paragraph IV(6) of the Canada-U.S. Tax Convention
This is in response to your email dated January 25, 2010 regarding the application of paragraph IV(6) of the Canada-United States Tax Convention ("the Treaty") in the context of the facts given below.
1. USco was incorporated under the laws of the United States and is a resident of the United States for the purposes of the Treaty. USco is a "qualifying person" under paragraph XXIX A(2) of the Treaty.
2. USco owns 100% of the capital stock of a limited liability company incorporated under the laws of the United States ("USLLC"). USLLC is fiscally transparent under the taxation laws of the United States. Thus, all of the income earned by USLLC is considered, under the taxation law of the United States, to be derived by USco.
3. USLLC carries on business in Canada. USLLC's presence and activities in Canada are not sufficient to constitute a permanent establishment ("PE") in Canada.
4. For Canadian tax purposes, USLLC and USco both have taxation years ending in 2009. USLLC was incorporated, and commenced operations, on March 1, 2009 and had its first taxation year-end on October 31, 2009. USco's taxation year began on November 1, 2008 and ended on October 31, 2009.
Assuming the above facts, you question which entity's taxation year would be relevant to the application of paragraph IV(6) of the Treaty - the taxation year of USLLC ending on October 31, 2009 or the taxation year of USco ending on October 31, 2009.
The situation outlined in your email appears to deal with specific taxpayers and existing facts and circumstances. It is not this Directorate's practice to comment on existing facts and circumstances relating to specific taxpayers other than through an advance income tax ruling. For more details on our approach to rulings and interpretations, please see Information Circular IC 70-6R5, "Advance Income Tax Rulings", which is available through the Canada Revenue Agency ("CRA") website at www.cra-arc.gc.ca. Although we cannot comment directly on your specific situation, we are prepared to provide the following general comments.
Comments
Paragraph IV(6) of the Treaty provides as follows:
An amount of income, profit or gain shall be considered to be derived by a person who is a resident of a Contracting State where:
(a) The person is considered under the taxation law of that State to have derived the amount through an entity (other than an entity that is a resident of the other Contracting State); and
(b) By reason of the entity being treated as fiscally transparent under the laws of the first-mentioned State, the treatment of the amount under the taxation law of that State is the same as its treatment would be if that amount had been derived directly by that person.
Paragraph IV(6) was added to the Treaty by the Fifth Protocol. In the scenario you have described, the relevant coming-into-force provision is subparagraph 2(b) of Article 27 of the Fifth Protocol, which provides that, for taxes other than taxes withheld at source, the provisions of the Protocol shall have effect for "taxable years" that begin after 2008.
In the scenario described above, USLLC is not a resident of the United States under the Treaty because it is not liable to tax in the United States within the meaning of paragraph IV(1) of the Treaty. Thus, USLLC is not eligible for benefits under the Treaty unless it may claim benefits on behalf of USco. USLLC may claim benefits under the Treaty if the business income earned by USLLC is considered, by paragraph IV(6) of the Treaty, to have been derived by USco.
The Technical Explanation (TE) to the Fifth Protocol confirms that the entity described in paragraph IV(6) (i.e., the USLLC) remains the only 'visible' taxpayer for Canadian tax purposes and that the application of paragraph IV(6) would not alter the entity's status under Canadian law. The TE also states:
...Canada will not require the shareholders of USLLC to file Canadian tax returns in respect of income that benefits from new paragraph 6. Instead, USLLC itself will file a Canadian tax return in which it will claim the benefit of the paragraph and supply any documentation required to support the claim....[I]f the income in question is business profits, it will be necessary to determine whether the income was earned through a permanent establishment in Canada. This determination will be based on the presence and activities in Canada of USLLC itself, not of its shareholders acting in their own right.
Given that, in the circumstances described above, the USLLC remains the only visible taxpayer for Canadian tax purposes, it is our view that the "taxable year" referred to in the coming-into-force provision under subparagraph 27(2)(b) of the Fifth Protocol is the taxation year of USLLC. Accordingly, it is our view that paragraph IV(6) of the Treaty could apply to the income earned by USLLC for its taxation year that began on March 1, 2009.
We trust our comments are of some assistance.
Yours truly,
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch