Canco1, which is an Canadian unlimited liability company that is owned, in part, by S corps and by a US limited partnership whose partners are US-resident individuals and trusts and that has elected to be taxed as a partnership for US tax purposes, increases the capital account of its shares through a transfer from retained earnings and then makes a cash distribution to each shareholder as a return of capital.
No amount of income or gain wil arise to any person under US taxation laws as a result of the capital increase; nor would there be any such recognition if Canco1 were not fiscally transparent. Accordingly, Article IV(7)(b) of the US Treaty will not apply to treat any portion of the dividend deemed to arise under s. 84(1) on the capital increase as not being derived by the beneficial owners thereof.