The 1,000 common shares of Canco (a Canadian-resident corporation), which had an aggregate fair market value (FMV) and stated capital of $1,000 and $100, respectively were owned equally by five shareholders, and an Israeli corporation held 100,000 preferred shares with an FMV and stated capital of $1,000,000 and $100, respectively, which were redeemed in its hands.
Article 10(2)(a) of the of the Canada-Israel Treaty provided for a reduced withholding rate of 5% on dividends paid by a company resident in Canada to a resident of Israel where “the beneficial owner of the dividends is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends.”
After referring to para. 15, of the 2014 OECD commentary to Article 10, which stated inter alia that “[a]s a general rule … the term “capital” … should be understood as it is understood in company law,’ CRA stated:
Accordingly, the stated capital of the Class A preferred shares of Canco held by IsraeliCo is the amount that should be used for the purpose of determining if the conditions in Article 10(2)(a) of the Treaty are met. Since IsraeliCo holds less than 25% of Canco’s capital computed on that basis, IsraeliCo does not qualify for the 5% withholding tax rate on the $999,990 deemed dividend pursuant to Article 10(2)(a) of the Treaty.
CRA also noted that, in light of Art. 7(1) of the MLI, the 15% Treaty-reduced rate of 15% might not be available if the principal purposes of any person involved in the transaction included obtaining the benefits of Article 10 of the Treaty.