CRA rules on a PUC increase and distribution from a Canadian qualified REIT subsidiary of a US REIT so as to skirt Art. IV(7)(b) of the Canada-US Treaty

A corporation (the “Corporation”), which has elected to be taxed as a REIT for US tax purposes and is a qualifying person for purposes of the Canada-US Income Tax Convention (the “Treaty”), wholly owns a Canadian holding company (“CS1”) which, in turn, wholly owns a Canadian operating subsidiary (“CS2”). CS1 and CS2 are qualified REIT subsidiaries and fiscally transparent for U.S. tax purposes.

CS1 will increase the corporate capital of its shares in an amount not exceeding its retained earnings, and then distribute an equal amount of capital to the Corporation in cash (less the amount of Part XIII tax withheld and remitted by it). The resulting deemed dividend will not be included in the income of the Corporation under U.S. tax law, nor would such an amount be included in its income if CS1 were not fiscally transparent.

Rulings by CRA included that Art. IV(7)(b) of the Treaty will not apply to treat the above dividend as not having been paid to or derived by the Corporation, and that the 5% withholding rate pursuant to Art. X(2) will apply.

Neal Armstrong. Summary of 2024 Ruling 2023-0984461R3 under Treaties – Income Tax Conventions – Art. 4.