Principal Issues: Whether a trust may be considered related to its beneficiary for purposes of paragraph 3 of Article XXIX:A of the Canada-US Tax Convention?
Position: Yes.
Reasons: Consistent with our views in 2009-0311891I7, to the extent that a trustee of a trust solely controls the beneficiary, that is a corporation, of that trust, the trust and beneficiary may be related under subparagraph 251(2)(b)(i) for purposes of the Act and thus, the Trust and beneficiary may be related for purposes of paragraph 3 of Article XXIX:A of the Canada-US Tax Convention in connection with Canadian taxes to which the Treaty applies.
XXXXXXXXXX 2014-054977 J. Chang (416) 973-0022 September 8, 2017
Dear XXXXXXXXXX:
Re: Application of Article XXIX-A of the Canada-US Income Tax Convention
We are writing in response to your email dated October 8, 2014, in which you requested our views on the application of paragraph 3 of Article XXIX-A of the Canada-US Income Tax Convention (the “Treaty”). We apologize for the delay in responding.
Specifically, you asked us whether a trust (the “Trust”), formed under the laws of the United States (the “US”) and a resident of the US for purposes of the Treaty, may be considered related to another person for purposes of paragraph 3 of Article XXIX-A of the Treaty. In your email, you described the following hypothetical situation:
- The sole trustee of the Trust is the parent of a US group of entities (“US Parent”);
- The sole beneficiary of the Trust, a corporation formed and resident in the United States, is a wholly-owned subsidiary of US Parent (“US Opco”);
- A corporation formed and resident in Canada is a subsidiary of the US group of entities and carries on business in Canada (“Canco”); and
- The US group of entities has funded the Trust which has then financed Canco by way of debt.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Generally, under paragraph 3 of Article XXIX-A of the Treaty, a non-qualifying person that is resident in a Contracting State may benefit from the provisions of the Treaty to the extent that, amongst other conditions, the non-qualifying person or a person related thereto, is engaged in the active conduct of a trade or business in that State.
Although the phrase “person related thereto” is not defined in the Treaty, paragraph 2 of Article III of the Treaty states that any term not defined therein shall, unless the context otherwise requires, and subject to the provisions of Article XXVI, have the meaning which it has under the law of the State concerning the taxes to which the Convention applies. As such, unless the context otherwise requires, the meaning of “related thereto” should take its meaning from the domestic law of the State applying the Treaty, being Canada in the scenario outlined. This is supported by section 3 of the Income Tax Conventions Interpretation Act. Accordingly, given that the phrase “person related thereto” used in the Treaty is analogous to the wording used in subsection 251(2) of the Act, which sets out the meaning of “‘related persons’, or persons related to each other” for the purposes of the Act, the phrase “person related thereto” should take its meaning from subsection 251(2) of the Act.
Pursuant to subsection 104(1), a reference to a trust shall, unless the context otherwise requires, be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property. Moreover, pursuant to subsection 104(2), a trust shall be deemed to be, in respect of the trust property, an individual for purposes of the Act. Accordingly, the reference to the trust in paragraph 104(2) of the Act is a reference to the trustee having ownership or control of the trust property pursuant to paragraph 104(1) of the Act. Therefore, that trustee will be deemed to be an individual in respect of the trust property.
According to subparagraph 251(2)(b)(i) of the Act, “related persons” or persons related to each other includes a corporation and a person who controls the corporation, if it is controlled by one person. The trustee will be an individual in respect of the trust property and if the beneficiary is a corporation that is solely controlled by the trustee, the trust and the beneficiary will be “related persons” or persons related to each other for purposes of the Act. This is consistent with our view in 2009-0311891I7.
As such, in the hypothetical scenario described, given that US Parent, which is the sole trustee of the Trust, wholly owns US Opco, being the beneficiary of the Trust, and thus controls US Opco, in our view, US Opco may be considered a “person related thereto” in respect of the Trust for the purposes of paragraph 3 of Article XXIX-A in connection with Canadian taxes to which the Treaty applies.
Please note that we have not considered the application of paragraph 3 of Article XXIX-A to the situation you described, only whether US Opco is related to the Trust for purposes of that paragraph.
We trust that our comments will be of assistance.
Yours truly,
Terry Young, CPA, CA
Section Manager, International Section I
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch