1 August 1990 Income Tax Severed Letter AC59682 - Canada-U.S. Income Tax Convention on Interest and Dividend Payments

24(l)                                            5-9682
                                                  S. Shinerock
                                                  (613) 957-2108

Attention:          19(1)

AUG 1 1990

Dear Sirs:

Re: Article.-I of the Canada-U.S. Income Tax Convention (1980) (the "Convention")

We refer to your letter of February 27, 1990, in which you requested our views on the application of Article XX1 of the Convention to the hypothetical situation set out below.

A limited partnership (the "Partnership") resident in the United States (the "U.S.") owns all the shares and debt of a Canadian corporation ("Canco"). All the limited partners of the Partnership are U.S. pension funds (the "Funds") which in aggregate are entitled to at least 95% of the income of the Partnership. The Funds are tax exempt entities for U.S. income tax purposes. The general partner is a corporation resident in the U.S. ("U.S.Co"). U.S.Co. is an investment manager and is entitled to a nominal percentage of the income of the Partnership and a management fee based on revenues of the Partnership.

Canco owns real estate in Canada. The Funds contribute cash to the Partnership, which uses the cash to make loans to and acquire shares of Canco. For the purposes of subsection 18(4) of the Income Tax Act (the "Act"), the debt of Canco would not exceed three times the total of its retained earnings and issued and outstanding share capital. Canco uses the cash so contributed to acquire the real estate referred to herein, and pays interest on the loans and dividends on the shares of Canco held by the Partnership out of the rental income earned from the real estate.

Pursuant to Article XXI of the Convention, the Funds are exempt from withholding tax under Part Kill of the Act on the interest and dividends paid to them by Canco.

Based on the above, it is your view that withholding tax under Part XIll of the Act will only apply to that proportion of the dividends and interest paid by Canco to the Partnership that will not be beneficially owned by the Funds; i.e. that relates to U.S Co's share of the income of the Partnership. In this regard, you observe that, as In Canada, the income tax laws of the U.S. do not apply' to tax a partnership, but rather subject each partner to taxation in accordance with the tax status and residence of the particular partner.

You also consider that the rates of tax provided for In Articles X and XI of the Convention will apply rather than the rate of 25% required to be withheld pursuant to subsections 212(I) and (2) of the Act.

Opinions

We agree that, for the purposes of the Convention, a U.S. partnership should be treated as a conduit since a partnership is not taxed as a separate entity in either country. Accordingly, in the hypothetical situatIon set out above, only U.S.Co., the general partner, would be subject to withholding tax under Part XIll of the Act, as modified by Articles X and XI of the Convention. The appropriate amounts of dividends and Interest that would be subject to tax in the hands of the general partner would be governed by the terms of the partnership agreement, in which regard, the provisions of subsection 103(l) of the Act should be borne in mind.

We would also mention that, in order to obtain exemption from withholding where some partners are exempt from withholding tax pursuant to Article XII of the Convention, it is necessary to comply with paragraph 76 of Information Circular 77-16R3. Persons making payments to a partnership that includes non-exempt U.S. partners who are the beneficial owners of interest or dividend payments are also advised to contact the Department. Paragraph 76(g) of Information Circular 77-l6R3 outlines the procedures to be followed by the person paying amounts exempt from tax under paragraph 2 of Article XXI of the Convention before making such payments. For further information as to the administrative procedures to be followed in this or similar situations you are advised to write to:

                                        Revenue Canada, Taxation
                                        Non-Resident Tax Division
                                        Room 200C
                                        360 Laurier Avenue West
                                        Ottawa, Ontario
                                        K1P 5K2 

You may also contact a staff member of the non-resident tax division at (613) 954-1311.

Yours truly,

for Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch