Emergis financed a U.S. acquisition through a tower structure under which:
- it made an interest-bearing loan to a subsidiary Canadian partnership (“USGP”);
- USGP funded such interest payments out of dividends received from a wholly-owned Nova Scotia ULC (“NSULC”);
- NSULC, in turn, received dividends out of the exempt surplus of a wholly-owned LLC; and
- the LLC received s. 95(2)(a)-recharacterized interest on the acquisition-financing loan made to the successor by amalgamation to the U.S. acquisitionco of Emergis.
Emergis’ 99.9% effective share of the interest deduction of USGP for the loan largely offset its interest income from that loan and, in addition, it claimed the s. 112(1) deduction for its effective share of the dividend income from NSULC. From a U.S. perspective, the interest on the loan owing by USGP was deductible interest paid by a U.S. corporation (USGP) to a Canadian resident (Emergis), and was subject to U.S. withholding tax.
In the course of reversing the finding below that Emergis could not deduct such tax pursuant to s. 20(12) because such tax could (in accordance with the exception at the end of s. 20(12)) “reasonably be regarded as having been paid by a corporation [Emergis] in respect of income from a share … of a foreign affiliate [the LLC],” Webb JA and Goyette JA stated (at paras. 32, 35-36):
… Envision Credit Union … noted that when the ITA considers the assets held by a corporation to be the assets held by the shareholders, it does so explicitly … .
… The income from the shares of LLC was paid to NSULC. There is nothing in the language of this provision that explicitly provides that the separate existence of the two corporations (Emergis and NSULC) is to be ignored and that the income of NSULC is to be considered to be the income of Emergis. The text of subsection 20(12) of the ITA is insufficient to displace the general rule that the assets and income of a corporation are not the assets and income of its shareholders.
Therefore, there is no basis to find that subsection 20(12) of the ITA explicitly (or as the Tax Court Judge stated, “clearly”) provides that NSULC’s income from its LLC shares should be treated as the income of Emergis, and hence as the income on which Emergis paid the taxes to the US Government.