Regarding a corporation (the “Inverted Payer Corporation”) incorporated under the laws of Canada that is subject to the “anti-inversion rules” in IRC §7874(b) (so that it is resident in the U.S. for IRC purposes), the Directorate indicated that under the “tie-breaker” rule in Art. IV(3) of the Canada-U.S. Convention (the “Convention”), the Inverted Payer Corporation is resident for Convention purposes in Canada because it had been incorporated there, so that s. 250(5) would not apply to deem it to be a non-resident. Accordingly:
- Dividend payments made by the Inverted Payer Corporation to a U.S. resident would be subject to Part XIII tax and to potential treaty-rate reductions in accordance with the normal rules (and dividend payments made to other non-residents also would be subject to Part XIII tax subject to potential reductions under any applicable treaty).
- No Part XIII tax would apply to dividends paid by it to Canadian residents (including to any other such Inverted Payer Corporation).
- Dividends paid by it to a Canadian resident would be Canadian-source income, so that the resident would not be entitled any foreign tax credit for the U.S. withholding tax on such dividends if it does not have other sources of U.S. non-business income.
- Although Art. X(5) of the Convention bars the U.S. from taxing such dividends, IRC §7874(f) provides that the anti-inversion rules apply despite U.S. treaty obligations, and a U.S. court would respect this treaty override (see Jamieson v. C.I.R., 584 F.3d 1074 (D.C. Cir. 2009)).
- U.S. dividend withholding tax might generate a deduction to the Canadian recipient under ITA s. 20(12).