2022-0936261I7 Application of the Canada-US treaty to expats

Principal Issues: 1. What are the Part XIII withholding obligations on dividend payments made by a corporation incorporated under the laws of Canada that is subject to the so-called “anti-inversion rules” set forth in §7874(b) of the U.S. Internal Revenue Code (Inverted Payer Corporation) to: a. a corporation resident of the US that is entitled to treaty benefits under the Canada-US Income Tax Convention (Treaty); b. another Inverted Payer Corporation (incorporated in Canada); c. a Canadian resident taxpayer; d. a resident of a country other than Canada or the US (without regard to any applicable treaty provisions). 2. Where US withholding tax is also imposed on that dividend paid by the Inverted Payer Corporation and the recipient is a taxpayer resident in Canada, will the recipient be entitled to claim a foreign tax credit in respect of the US withholding tax?

Position: 1. a. The Inverted Payer Corporation is responsible to remit the Part XIII tax on Payments made to non-resident persons since it is a resident of Canada under Canadian domestic law and the Treaty. b. No Part XIII tax will apply on the Payments made by the Inverted Payer Corporation to another Inverted Payer Corporation that is resident in Canada under Canadian domestic law. c. Part XIII tax will not apply to the Payment made by the Inverted Payer Corporation to a Canadian resident taxpayer. d. Part XIII tax at 25%, which may be reduced by a tax treaty between Canada and the country of residence of the recipient of the Payment, should apply to the Payment made by the Inverted Payer Corporation to a non-resident person. 2. The dividend paid by an Inverted Payor Corporation to a Canadian resident will be not be income from a foreign country. Consequently, unless the Canadian resident recipient of the dividend has other US source income, no foreign tax credit for the US withholding tax on that dividend income will be available under subsection 126(1).

Reasons: Article IV of the Canada-US Treaty and application of the Canadian domestic laws to dual resident companies.

Author: Jourdain, Marilyn
Section: Article IV Canada-US Treaty, 126(1), 250(4) and (5), 212, 7874 IRC

                                                                                               February 6, 2024

Christopher Galvin                                                                 Income Tax Rulings
Senior Programs Officer                                                        Directorate
Non-Resident Audit Section                                                   International Division
Small and Medium Enterprises Dir.                                        Angelina Argento
Compliance Programs Branch

                                                                                               2022-093626

Application of the Canada-US Income Tax Convention to expatriated entities

This is in response to your request for a technical interpretation dated May 13, 2022, wherein you requested our views on the Canadian withholding obligations in respect of certain amounts paid or credited by a corporation incorporated under the laws of Canada that is subject to the so-called “anti-inversion rules” set forth in §7874(b) of the Internal Revenue Code of the United States of America (Inverted Payer Corporation) (footnote 1) .

Unless otherwise stated, all references to an Article or subset thereof are to the equivalent Article or subset thereof of the Treaty, all other statutory references are to the equivalent provision under the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (Act), unless otherwise indicated, and all terms and conditions used herein that are defined in the Convention between Canada and the United States of America with respect to taxes on income and on capital signed on September 26, 1980 as amended (Treaty); (e.g., “resident” as defined in Article IV) have the meaning given in such definition unless otherwise indicated. The singular should be read as plural and vice versa, where the circumstances so require.

QUESTIONS

1. What are the Part XIII withholding obligations on dividend payments made by an Inverted Payer Corporation to the following persons (Payments):

a. To a resident of the United States (“US”) that is entitled to benefits under the Treaty;

b. To a Canadian resident taxpayer that is entitled to benefits under the Treaty;

c. To another corporation subject to the anti-inversion rules that is also incorporated in Canada (Other Inverted Corporation); and

d. To a resident of a country other than Canada or the US (without regard to any specific treaty provisions).

2. Where US withholding tax is imposed on a dividend paid by an Inverted Payer Corporation and the recipient is a taxpayer resident in Canada, will the recipient be entitled to claim a foreign tax credit in respect of the US withholding tax?

OUR COMMENTS

General comments

1. US Anti-Inversion Rules (§7874 IRC)

For the purposes of this opinion, we assume that both the Inverted Payor Corporation and the Other Inverted Corporation are treated as domestic US corporations for all US federal income tax purposes pursuant to §7874(b) of the Internal Revenue Code.

2. The Act

Every non-resident person shall pay a Canadian income tax of 25% on every amount provided for in section 212 that a person resident in Canada pays or credit, or is deemed by Part I to pay or credit, to a non-resident person.

According to paragraph 250(4)(a), for the purposes of the Act, a corporation is deemed to be resident in Canada throughout a taxation year if it was incorporated in Canada. However, subsection 250(4) is subject to subsection 250(5) which confirms that residence under a tax treaty prevails. Specifically, subsection 250(5) provides that a person is deemed not to be resident in Canada at a time if, at that time, that person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of the Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.

Subject to subsection 250(5), since the Inverted Payer Corporation is incorporated in Canada, it is deemed by subsection 250(4) to be a resident of Canada for purposes of Part XIII.

It is our understanding that the Inverted Payer Corporation is treated as a domestic corporation for all US federal tax purposes and therefore is subject to the most comprehensive form of taxation in the US.

Under the tie-breaker rules of the Treaty in paragraph 3 of Article IV of the Treaty, the Inverted Payor Corporation is a resident of Canada because it is incorporated here. As a result, subsection 250(5) would not apply to deem the Inverted Payer Corporation to be a non-resident for purposes of the Act, which includes the liability to withhold and remit under Part XIII on behalf of non-residents. The same reasoning applies to the Other Inverted Corporation, such that it will be treated as a resident of Canada for purposes of the Act and the Treaty.

3. The Treaty

Under the Treaty, the withholding obligations on certain payments subject to Part XIII could be reduced or eliminated if the payment is made to a resident of a Contracting State (in this case, a resident of the US).

Question 1

a) Part XIII withholding obligations on dividend Payments made by the Inverted Payor Corporation to a resident of the US that is entitled to benefits under the Treaty

As noted above, the Inverted Payor Corporation is a resident of Canada for purposes of the Act and the Treaty. As a result, the Inverted Payor Corporation is responsible to withhold 25% (which rate could be reduced by Article X of the Treaty) on the Payments it makes to a non-resident person.

Under the proposed scenario, the Payments are received by a resident of the US that is entitled to benefits under the Treaty. As such, the US resident recipient of the Payments is entitled to the reduced rate of withholding tax on the Payments received from the Inverted Payer Corporation in accordance with the provisions of the Treaty. We cannot provide comments on the US resident recipient’s ability to claim a foreign tax credit or any other type of relief from Canadian withholding tax in the US.

b) Part XIII withholding obligations on dividend Payments made by the Inverted Payor Corporation to Canadian resident taxpayer

The Payments it makes to a Canadian resident taxpayer are not subject to Part XIII tax because Part XIII applies only to payments to a non-resident person.

c) Part XIII withholding obligations on dividend Payments made to the Other Inverted Corporation

As both the Inverted Payor Corporation and the Other Inverted Corporation are resident in Canada for purposes of the Act and the Treaty, no Part XIII tax is due on Payments made by the Inverted Payor Corporation to the Other Inverted Corporation.

d) Withholding obligations on dividend Payments made by the Inverted Payor Corporation to a resident of a country other than Canada or the US (without regard to any applicable treaty provisions)

As the Inverted Payor Corporation is a resident of Canada for purposes of the Act and the Treaty Payments it makes to a resident of a country other than Canada and the US are subject to a 25% Canadian withholding tax. That rate may be reduced by the provisions of an Income Tax Convention between Canada and the country of residence of the recipient of the Payments.

Question 2 : Where US withholding tax is imposed on a dividend paid by an Inverted Payer Corporation and the recipient is a taxpayer resident in Canada, will the recipient be entitled to claim a foreign tax credit in respect of the US withholding tax?

Considering our conclusion above, we are of the view that where an Inverted Payor Corporation pays a dividend to a Canadian resident, the reduced rate of US withholding tax provided in Article X of the Treaty should apply.

Pursuant to subsection 126(1), a Canadian resident taxpayer is entitled to deduct from its taxes otherwise payable in Canada the non-business income tax paid to the government of a country other than Canada on income from sources in that country.

In the Income Tax Folio S5-F2-C1 “Foreign Tax Credit” (footnote 2) , it is observed that, where a dividend is received on shares of a corporation, the source of the dividend income should be determined based on the tax residency of the corporation paying the dividend, unless the provisions of a tax treaty sources this payment otherwise:

1.59 [I]n determining a dividend-paying corporation's country of residence for purposes of a foreign tax credit, the possible impact of the following should be considered:

• the provisions in an income tax treaty (if any) between Canada and the particular foreign country in question, that can determine the corporation's residence for the purposes of the treaty; and

• subsection 250(5), which (in conjunction with such a treaty) may deem the corporation to be not resident in Canada.

As noted above, the Inverted Payor Corporation is resident in Canada for purposes of the Act and the Treaty, therefore, for purposes of subparagraph 126(1)(b) of the Act, dividends it pays are Canadian sourced income (and not income from a US source). Since Article X(5) bars the US from taxing such dividends, subparagraph 3(b) of Article XXIV of the Treaty confirms that in the above noted situation, the dividend income is sourced in Canada.

It is possible that the Inverted Payor Corporation will withhold US tax on the dividend paid to the resident of Canada, as we understand that in the US, in the case of a conflict between a treaty obligation and enacted legislation, the “later in time” provision (i.e., whichever of the treaty adoption or new legislation was adopted last) will prevail if the legislation is clearly intended to override a treaty obligation. That appears to be the case for Internal Revenue Code § 7874 provides:

(f)Special rule for treaties

Nothing in section 894 or 7852(d) or in any other provision of law shall be construed as permitting an exemption, by reason of any treaty obligation of the United States heretofore or hereafter entered into, from the provisions of this section.

That is, because this section treats the Inverted Payor Corporation as if it was a US corporation, this deeming rule applies despite US treaty obligations. The treaty tie-breaker rule is overridden. Accordingly, US withholding tax applies to dividend payments by such an entity. This provision is a specific exception to section 894 which otherwise requires that withholding requirements be applied with due regard to the treaties of the US.

The US Court of Appeals demonstrated the deference the US courts have to income tax provisions which are clearly written to override the treaty obligations of the US. In the case of W. D. Jamieson and J. A. Jamieson v. Commissioner of Internal Revenue, 584 F.3d 1074 (D.C. Cir. 2009), involving the application of the Canada-US Treaty to claim a foreign tax credit against the US alternative minimum tax, the Court held:

“Moreover, to the extent that there might be any ambiguity about whether Congress intended § 59(a)(2) to apply to taxpayers in countries with which the United States has “double taxation” treaties, Congress resolved that ambiguity with the Technical and Miscellaneous Revenue Act of 1988 (“TAMRA”), Pub. L. No. 100-647, 102 Stat. 3342.There it provided that certain amendments made by the Tax Reform Act of 1986, including those made by its title VII (of which § 59(a)(2) was a part), “shall apply notwithstanding any treaty obligation of the United States in effect on the date of the enactment of the [1986 Tax] Reform Act.” Id. § 1012(aa)(2) (codified at 26 U.S.C. § 861 note) (emphasis added). We found in Kappus that “TAMRA thus made it crystal clear that Congress intended the 90% cap on the AMT foreign tax credit to supercede any preexisting treaty obligation with which it conflicted.” 337 F.3d at 1058.”

If the Canadian resident recipient has other sources of US non-business income (i.e., other than the dividend income from the Inverted Payer Corporation), the US withholding tax could be applied against such income in the form of a foreign tax credit under subsection 126(1). To the extent that the Canadian resident recipient doesn’t have any non-business income that is US-sourced, the U.S. tax withheld would not entitle the recipient to a foreign tax credit in the above-noted situation.

It may be a possible to claim a deduction for the US withholding tax paid on the dividend under subsection 20(12) since this provision does not limit the deduction to income sourced in a particular foreign country.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We hope that the above comments are helpful to you.

Yves Moreno
Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The request came from the Canadian Depository for Securities Limited (CDSL) regarding its Canadian withholding obligations on payments made on behalf of Inverted Payer Corporations. CDSL provides clearing, depository and settlement services for exchanges trades on Canadian stock markets. CDSL acts as the depository of the funds for stockholders and does not have any legal title in the shares it holds as depository.

2 CRA, Income Tax Folios S5-F2-C1 “Foreign Tax Credit” (February 6, 2014) at para 1.59

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