19 May 2010 IFA Roundtable, 2010-0366521C6 - Canada-United States Tax Convention -- summary under Article 4

A Canadian ULC has interest accrue on a loan from its US-resident parent ("USCo"), with the election being made under s. 78(1)(b) of the Act at the beginning of the third year to have the accrued interest deemed to be paid on that day. In response to an argument that this deemed payment was not subject to Article IV(7)(b) of the US Convention "because the deemed receipt in itself is not recognized under the taxation laws of the United States and would not be recognized if the ULC were not fiscally transparent", CRA indicated that what was required was "an analysis of the treatment of the item of income to which the deemed receipt relates" and that, in this instance, the interest itself would have been recognized under US laws if the ULC were not fiscally transparent. Accordingly, Article IV(7)(b) would apply to the interest deemed to be paid under s. 78(1)(b).