5-902992
Dear Sirs:
This is in answer to your letter of October 23, 1990 in which you requested we reconfirm our opinion to you of May 20, 1986 that for Canadian tax purposes the undistributed earnings of a United States "S" corporation are not considered to be income of a Canadian Resident shareholder unless paid out as a dividend. You also asked whether, in a situation where a particular "S" corporation carries on business solely in Canada as a branch operation, we would confirm that the undistributed earnings of the corporation would be subject to Part XIV branch tax reduced by the appropriate deductions under paragraph 6 of Article X of the Canada-U.S. Income Tax Convention (1980).
With respect to your first query, it remains our opinion that notwithstanding the deeming provisions of the United States Internal Revenue Code., an "S" corporation for Canadian tax purposes is considered to be a corporation under U.S. corporate law and as such, absent any FAPI implications, a Canadian resident shareholder thereof is only subject to Canadian income tax on amounts received from or benefits conferred by the "S" corporation and is not subject to such tax on the undistributed earnings of that corporation.
Regarding your second query it is our view that the income of a Canadian branch operation of an "S" corporation would be subject to Part I tax in Canada and the branch earnings would be subject to Part XIV tax with the said tax being reduced by the applicable deduction as provided for under paragraph 6 of Article X of the Canada-U.S. Income Tax Convention (1980).
We trust that this information will be of assistance to you.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch