A U.S. resident owns a French entity (that is fiscally transparent for U.S., but not Canadian or French purposes) that earns Canadian-source dividends and interest. Alternatively, the French entity is the partnership property of a partnership whose partners are residents of the US, and of other countries with which Canada does and does not have a treaty. Can the Canadian payor of the dividends and interest determine its withholding tax obligations in accordance with the relevant articles under either the Canada-France Treaty or Canada-US Treaty, as appropriate?
Respecting the first, single US resident, scenario, CRA noted that when the Canadian company pays a dividend to the French company, the Technical Explanation released with the Protocol regarding the introduction of IV(6) of the Canada-US Treaty concluded that, if the conditions of IV(6) are met, that payment could benefit from the application of the US Treaty, on the basis that the French entity is looked through for US tax purposes.
Alternatively, CRA would also grant the application of the benefits under the French Treaty because, from a Canadian perspective, the French company is a legal entity, to which a dividend is paid. Thus, either treaty is applicable for determining the withholding obligations of the Canadian payor. CRA further noted that the answer would not change if a fiscally transparent partnership was inserted between the US resident and the French company.
Regarding the multi-resident partner scenario, CRA noted that the first option is that, if IV(6) applies, and some of the dividend paid by the Canadian company to the French company are deemed to be derived by the US partners, US Treaty benefits can be claimed to reduce the withholding rate on the portion of the dividend attributable to those partners, under Art. IV(6).
The second option is that, from a Canadian perspective, there is a single dividend payment from a Canadian entity to a French entity, so that the French Treaty is applicable to the entire amount of the dividend.
The two options are mutually exclusive and exhaustive – either the French Treaty applies to the full amount of the dividend, or the US Treaty applies pro-rata to the US partners.