Principal Issues: May 10, 2004 IFA Conference, Montreal, Question 3 - Whether the CRA would rule that the lower withholding rate in a treaty would apply where corporate partners are resident for treaty purposes and their economic interest via the partnership represents at least 10% ownership of shares of a Canadian company paying dividends to the partnership?
Position: No
Reasons: It has been a longstanding position of the CRA that a partner does not own a specific percentage of the shares of a corporation held by the partnership (see Question 1 of the 1991 CTF Revenue Canada Round Table). Accordingly, corporate partners are not entitled to the lower withholding rate under a treaty. However, in Ruling 2003-0032923, this position was avoided and GAAR was not applied. We are prepared to revisit the position.
2004-007223
Memo to Close
DATE: June 10, 2004 SUBJECT: May 10, 2004 IFA Conference, Montreal, Question 3 OFFICER: Gilles Gosselin
We were asked by Pierre Bourgeois of the International Fiscal Association (IFA) to provide responses to certain questions for the May 10, 2004 IFA Conference in Montreal. Below are Question 3 and the response that was presented at the conference and that was subsequently emailed to Pierre on June 10, 2004. The time that was spent on this file was to research and prepare our response. We are now closing the file.
Q.3 Partnerships and Treaty Rate for Dividends
The Agency has taken the view in the past that dividends paid to a partnership do not benefit from the lower withholding rate under a treaty as the shares are owned by the partnership and not the partners. In a recent ruling (2003-0032923), the situation involved shares of a Canadian corporation that were held by a partnership governed under the Delaware Revised Uniform Partnership Act. In this ruling, the corporate partners subscribed for preferred shares giving them the requisite 10% ownership to benefit from the 5% withholding rate under the Canada-US Income Tax Convention. The Agency also ruled favourably with respect to the application of the General Anti-Avoidance Rule. Could the Agency indicate that it would rule favourably in situations where the partners are resident for treaty purposes and whose economic interest via the partnership represents at least 10% ownership?
Response
It has been a longstanding position of the CRA that a partner does not own a specific percentage of the shares of a corporation held by the partnership (see Question 1 of the 1991 CTF Revenue Canada Round Table). In Ruling 2003-0032923, this position was avoided where the corporation issued sufficient voting preferred shares directly to each partner in order to comply with the formal requirement in the Canada-U.S. Convention, Article 10, paragraph 2(a), that the beneficial owner of the dividend must own at least 10% of the voting stock of the corporation paying the dividend. We also ruled that the General Anti-Avoidance Rule ("GAAR") did not apply to the issuance of the preferred shares in this case. However, we make such GAAR determinations only on a case-by-case basis.
The CRA is prepared to revisit the position but it may be difficult to overturn because the issue is directly relevant to certain provisions in the Income Tax Act. The CRA will publish its views in reference to this matter along with details of its findings in connection with the issues raised in Questions 2 and 5 of the IFA Roundtable in an Income Tax Technical News article when our review is complete. In the meantime, our current position that the corporate partners are not entitled to the lower withholding rate under a treaty continues to apply.