FROM PRINCIPLES TO PLANNING International Tax Treaties - Canada FROM PRINCIPLES TO PLANNING

International Tax Treaties Knox Teague, Dixon Hughes Goodman LLP William Inchoco, WeiserMazars LLP Mark Pearlman, MNP LLP

The U.S. - Canada Treaty Mark Pearlman, MNP LLP

5 th Protocol to the U.S.-Canada Treaty Discussion Topics LLC’s Prior to 5 th Protocol Article IV(6) Payments to LLC’s Article IV(7) The U.S. – Canada Treaty

LLC’s Canada doesn’t have the concept Only Flow through entities for Canadian purposes Partnership Trusts LLC treated as a Corporation by Canada The U.S. – Canada Treaty

LLC’s Prior to 5 th Protocol CRA’s position “As you know, it is our view that a U.S. LLC that is treated under U.S tax law as a partnership and which is therefore not liable to tax in the U.S. is not a resident of the U.S. for purposes of Article IV of the Convention (see, for example, Technical News Issue No. 16). Thus, the LLC would not be a resident of the U.S. for purposes of the Convention, unless it fits in the specific inclusions in the definition of "resident" in Article IV(1)(a) or (b) of the Convention. We have assumed that the LLC itself is not considered to be a political subdivision or local authority of any State of the U.S. or any agency or instrumentality of such subdivision or authority and therefore would not satisfy the requirements of Article IV(1)(a) of the Convention.” 1 1. Technical Interpretation The U.S. – Canada Treaty

LLC’s Previous Position Based on “resident of a Contracting State” (Article IV (I)) Resident of Contracting State is liable to pay tax because: Domicile Resident Citizenship Management LLC fiscally transparent in U.S. so not itself subject to U.S. tax. Previously no treaty protection The U.S. – Canada Treaty

Article IV (6) 5 th Protocol deals with this through Article IV. (Paragraph 6 & 7) Amounts considered derived by a U.S. member of an LLC who is a resident of the U.S. where: U.S. Law considers that the member derived it from the LLC (because it’s transparent) and The treatment of the amount under U.S. law is the same as it would be if the amount was derived directly by the member The U.S. – Canada Treaty

Article IV (6) Canada continues to regard the LLC as a corporation and view it as a taxpayer. LLC now benefits from treaty reductions to extent that the members are U.S. Treaty residents. Treaty benefits not applicable to LLC members who are non-U.S. residents. Article IV(6) applies to all fiscally transparent entities in the country of residence of the taxpayer. Examples include: LLC Grantor Trust Partnerships The U.S. – Canada Treaty

Article IV (6) Same Treatment Need to have the same treatment as would have if amount derived directly Technical Explanation says that for U.S. purposes it is determined by Code Section 894 & Treasury Regulation Section (d)(3)(iii). Reported currently regardless of whether or not paid. No similar provision in Canada’s domestic law. CRA noted it will use comparable principals Said will be considered the same if 1.Timing of recognition 2.Character 3.Quantum of the amount are the same The U.S. – Canada Treaty

Article IV (6) Example Technical Explanation provides some examples U.S. Resident French Canada Corp in France & Canada 100% Disregarded in U.S. Dividend The U.S. – Canada Treaty Canada sees this as a dividend to a French company Look to Canada/France Treaty

Article IV (6) Canada pays Dividend Treaty applies Ultimate recipient receives the income through a U.S. entity that is fiscally transparent The treatment is the same for the ultimate recipient whether the payment flows through the transparent entity or not The U.S. – Canada Treaty U.S. Resident U.S. LLC Canada Dividend

Article IV (6) Deems the payment as amounts derived by MEMBERS of the LLC LLC is the taxpayer for Canadian purposes (viewed as a corporation) Because of this paragraph members of the LLC may now be treaty protected on many payments that were previously not covered The U.S. – Canada Treaty

Passive Income Prior to 5 th Protocol 25% withholding on passive income and management payments made to LLC Now rates will be lowered for U.S. resident if fall under IV(6) If the LLC member is a U.S. C or S Corp then withholding on Dividends 5% (own at least 10% of common shares) Interest 0% Management fees 0% Royalties 10% The U.S. – Canada Treaty

Disposition of Canadian Property Now treaty protected if sold by LLC If > 50% value Canadian real property pay tax in Canada (Same as all entities) The U.S. – Canada Treaty

Business Income Canadian Rules Taxable if carrying on Business in Canada Deemed carrying on Business in Canada if offer anything for sale through an agent regardless of where the contract is completed If treaty protected then to be taxable need to be carrying on business through a P.E. The U.S. – Canada Treaty

Business Income (cont’d) Pre 5 th Protocol, LLC often caught if sold into Canada with no P.E. Now look through LLC to members to determine status under the treaty If U.S. residents are the only members of LLC then covered under the treaty If others not eligible for treaty protection are members of the LLC then only portion of income related to U.S. resident is exempt The U.S. – Canada Treaty

Non U.S. resident members not entitled to treaty relief U.S. Resident LLC U.K Resident Canadian Corporation 15% withholding tax on portion to U.S. 25% withholding tax on portion to U.K. Should consider Luxemburg or Dutch intermediary 50 Dividend Non-U.S. Members of LLC’s The U.S. – Canada Treaty

LLC Operating in Canada as a Branch Treaty provides for reduced rate of Branch tax to 5% for treaty protected Corporation U.S. C Corp LLC Branch tax at 5% for U.S. C. Corp & U.S. S Corp Branch tax at 25% for Cayman Corp & U.S. Individual Operates through P.E. in Canada 25 Cayman Corp U.S. S Corp U.S. Resident Individual 25 The U.S. – Canada Treaty

Article IV (7) – Anti-Hybrid Rule Applies when the Flow through entity is in one country and the owner of the entity is in the other Could apply to Canadian members of LLC’s or U.S Entities owning Canadian disregarded entities If applies amounts received are deemed not to be from an entity resident in a treaty country so no treaty benefits Will not get treaty protection if payment from disregarded entity in one country to recipient in the other country will have a different tax treatment than if they entity making the payment was not disregarded The U.S. – Canada Treaty

LLC No treaty protection – Not the same treatment Position is that IV(7)(b) overrides IV(6) ULC Example The U.S. – Canada Treaty

Deemed Dividend Solution No treaty protection if ULC disregarded – Not the same treatment ULC C Corp S Corp The U.S. – Canada Treaty

Deemed Dividend Solution (cont’d) Convert Retained Earnings to PUC Deemed Dividend for Canadian No impact for U.S. if ULC disregarded or not 5% withholding on conversion Reduction of PUC a non taxable event for Canadian purposes If LLC is Parent then rate on conversion depends on members ULC C Corp or S Corp The U.S. – Canada Treaty

Interest Solution Interest – C Corp Loan between grandparent ULC gets treaty protection if grandparent is a C Corp C Corp ULC The U.S. – Canada Treaty

Interest Solution (cont’d) ULC considered as a Partnership for U.S. purposes Interest payments gets treaty protection because retains character as interest S Corp 1 ULC The U.S. – Canada Treaty Loan S Corp 2 Interest

U.S. Entity Luxembourg SARL Cdn ULC Dividend Withholding 0% Dividend Withholding 5% Luxembourg Intermediary The U.S. – Canada Treaty

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Contact Information Knox Teague, Dixon Hughes Goodman LLP William Inchoco, WeizerMazars LLP Mark Pearlman, MNP LLP