Parentco, a U.S.-resident, is the only member of Parentco LLC, which is the only member of Sisterco LLC, and also wholly-owns Canco. Canco resides in Canada for purposes of the Canada-US Income Tax Treaty (the “Treaty”).
CRA proposed an inclusion in Canco’s income under s. 247(2) of the difference between an arm’s length price for goods sold by Canco to Sisterco LLC and the consideration paid, and also proposed a secondary adjustment under s. 247(12) on the basis that a resulting benefit conferred on Sisterco LLC was deemed to be a dividend that was paid by Canco that was subject to a Pt. XIII remittance obligation.
The Directorate found that the s. 247(12) amount (which was a deemed dividend under ITA s. 2121(2)) was also a dividend for Treaty purposes, stating:
Although Sisterco LLC is not a shareholder of Canco, the transfer pricing income adjustment made under subsection 247(2) results from the fact that they are not dealing at arm’s length (or to paraphrase paragraph 29 of the OECD Commentary, that “the persons receiving such benefits are closely connected with a shareholder; this is the case, for example, where the recipient is a relative of the shareholder or is a company belonging to the same group as the company owning the shares”).