2024 Ruling 2023-0984461R3 - Application of Article IV(7)(b)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Various rulings relating to the withholding tax rate applicable to a deemed dividend from a Canadian resident qualified REIT subsidiary to a US resident REIT.

Position: See below.

Reasons: See below.

XXXXXXXXXX 									2023-098446

XXXXXXXXXX, 2024

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence and discussions in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in this letter:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a Tax Services Office or Taxation Center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a ruling previously issued by the Directorate.

Our understanding of the facts, additional information, proposed transactions and the purpose of the proposed transactions is as follows:

DEFINITIONS

Unless otherwise stated:

i. all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C. 1977, c.945, as amended, (the “Regulations”);

ii. all terms and conditions used in this letter that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars, unless otherwise noted; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to, as follows:

“Capital” has the meaning assigned by, and, as referenced in sections 72 to 75 of, the Statute;

“Capital Dividend” has the meaning assigned by subsection 248(1) and subsection 83(1);

“Corporation” means XXXXXXXXXX, a REIT (as defined below), whose shares are listed on the Exchange under the symbol XXXXXXXXXX;

“Country 1” means the United States of America or U.S.;

“Country 1 Tax Law” means the XXXXXXXXXX, as amended;

“CRA” refers to the Canada Revenue Agency;

“CS1” means XXXXXXXXXX;

“CS2” means XXXXXXXXXX;

“Exchange” means Country 1 NASDAQ Stock Exchange;

“Fiscally Transparent” means a qualified REIT subsidiary within the meaning assigned by §856(i)(2) of Country 1 Tax Law;

“GAAR” means the general anti-avoidance rule and encompasses the provisions set out in section 245;

“Paragraph” refers to a numbered paragraph in this letter;

“Permanent Establishment” has the meaning assigned by Article V of the Treaty;

“Proposed Transactions” means the transactions described in the Proposed Transactions segment of this letter;

“paid-up capital” has the meaning assigned by subsection 248(1) and subsection 89(1);

“Qualifying Person” has the meaning assigned by Article XXIX - A of the Treaty;

“REIT” means a real estate investment trust, within the meaning assigned by §856(a) of Country 1 Tax Law;

“Request” means your request for an advance income tax ruling dated XXXXXXXXXX;

“State” means the state of XXXXXXXXXX in Country 1;

“Statute” means the Business Corporations Act XXXXXXXXXX;

“Taxable Canadian Corporation” has the meaning assigned by subsection 248(1) and subsection 89(1); and

“Treaty” means the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital signed on XXXXXXXXXX.

FACTS

Our understanding of the facts, as derived from the Request, is summarized as follows:

1. Corporation is a corporation organized and existing under the corporate laws of State and has a XXXXXXXXXX taxation year-end. Corporation operates in the XXXXXXXXXX and related support services in Country 1 and XXXXXXXXXX.

2. Corporation has only issued one class of common shares. XXXXXXXXXX. All issued and outstanding shares of Corporation’s common stock entitle their holders to one vote per share on all matters to be voted on.

3. Corporation is, and will be at the time of the Proposed Transactions, a Qualifying Person. A substantial portion of Corporation’s shares are held by XXXXXXXXXX investors, and include holders who are not resident in Country 1.

4. Corporation owns, either directly or indirectly, various entities across Country 1, Canada and other jurisdictions.

5. CS1 is incorporated under the Statute, a Taxable Canadian Corporation, and has a XXXXXXXXXX taxation year-end. The authorized share capital of CS1 consists of an unlimited number of common shares. All of the issued and outstanding common shares of CS1 are directly owned by Corporation.

6. Corporation is the beneficial owner of the shares, and of all distributions made on the shares, of CS1.

7. CS2 is a corporation formed by amalgamation on XXXXXXXXXX. It is a Taxable Canadian Corporation and has a XXXXXXXXXX taxation year-end. The authorized share capital of CS2 consists of an unlimited number of common shares. All of the issued and outstanding common shares of CS2 are owned by CS1.

8. CS2 is the main operating entity in Canada, and renders XXXXXXXXXX services and related support services directly to Canadian customers.

9. For Country 1 Tax Law purposes:

i) Corporation has elected to be taxed as a REIT starting from its XXXXXXXXXX taxable year. In computing its REIT taxable income, Corporation is permitted to claim deductions for dividends that it pays to its shareholders. Hence, Corporation is liable for tax under Country 1 Tax Law on any taxable income not distributed in a particular year; and

ii) CS1 and CS2 are Fiscally Transparent and are not treated as corporations separate from Corporation under Country 1 Tax Law. As a result, Corporation treats the assets, liabilities and items of income, deduction and credit of CS1 and CS2 as its own according to Country 1 Tax Law, so all income of CS1 and CS2 (as computed according to Country 1 Tax Law) is taxed in Country 1 on a current basis, subject to the deductions available to Corporation.

10. Corporation does not carry on business through a Permanent Establishment located in Canada. Similarly, neither CS1 nor CS2 carries on business through a Permanent Establishment located in Country 1.

11. Although CS1 intends to transfer funds earned from the Canadian business carried on directly and/or via CS2 to Corporation through a distribution of dividends, to date, CS1 has neither declared nor paid any dividends to Corporation.

ADDITIONAL INFORMATION

12. The increase of Capital in respect of CS1’s shares as described in Paragraph 17(A) below will result in a dividend deemed to have been paid by CS1 and received by Corporation pursuant to subsection 84(1). However, no amount will be added to Corporation’s income, profit or gain under Country 1 Tax Law as a result of that transaction. Similarly, no amount would be added to the income, profit or gain under Country 1 Tax Law as a result of such transaction if CS1 was treated as a corporation separate from Corporation (i.e., was not Fiscally Transparent) under Country 1 Tax Law.

13. The increase in Capital described in Paragraph 17(A) below will not result in the increase of the value of CS1’s assets less liabilities and/or decrease CS1’s liabilities less the value of its assets.

14. CS1 will not elect, in accordance with subsection 83(2), to deem any portion of the dividend that it will be deemed to have paid by virtue of subsection 84(1) to be a Capital Dividend.

15. The Proposed Transactions in Paragraph 17 will be disregarded for Country 1 Tax Law purposes, and as such, will not result in any income inclusion or deduction in computing the taxable income of Corporation for Country 1 Tax Law purposes.

16. The Proposed Transactions will be effected in a taxation year of CS1 in which CS1 is Fiscally Transparent and Corporation is a Qualifying Person.

PROPOSED TRANSACTIONS

17. CS1 will:

(A) increase the Capital of the issued and outstanding shares of its capital stock under the applicable provisions of the Statute, and in accordance, their paid-up capital, by the amount it wishes to distribute to Corporation, which will not exceed the amount of CS1’s retained earnings at the date of the increase.

(B) reduce, as soon as practicable after the increase referred to in Paragraph 17(A), the Capital of the issued and outstanding shares of its capital stock under the applicable provisions of the Statute, and in accordance, their paid-up capital, without redeeming or cancelling those shares, by the amount equal to the amount of the increase described in in Paragraph 17(A); and

(C) return the amount of Capital referred to in Paragraph 17(B) by distributing cash to Corporation of an amount equal to the amount of the reduction of Capital referred in Paragraph 17(B) less the amount of taxes remitted by CS1 on Corporation’s behalf under Part XIII of the Act in respect of the distribution.

PURPOSE OF THE PROPOSED TRANACTIONS

18. The purpose of the Proposed Transactions is to distribute the after-tax earnings generated in Canada to Corporation in a tax-efficient manner such that the distributions qualify for benefits under the Treaty. Corporation will use the funds received from CS1 either in its active business activity or to fund a distribution to its shareholders.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, additional information, proposed transactions, and purpose of the proposed transactions, and provided further that the Proposed Transactions are carried out as described above, our Rulings are as follows:

A. To the extent that CS1 is deemed to have paid, and Corporation is deemed to have received, a dividend pursuant to subsection 84(1) as a result of the Proposed Transactions described in Paragraph 17(A), that dividend will be a taxable dividend as referred to in paragraph 212(2)(a).

B. For the purposes of applying Article X of the Treaty, the amount of the dividend referred to in Ruling A will, in the absence of paragraph 7(b) of Article IV of the Treaty and the GAAR, be considered to be income, as described in the definition of “dividends” in paragraph 3 of Article X of the Treaty, that is derived by Corporation.

C. Paragraph 7(b) of Article IV of the Treaty will not apply to treat the dividend referred to in Ruling A as not having been paid to or derived by Corporation.

D. The amount of the dividend referred to in Ruling A will be subject to Part XIII withholding tax at the rate of 5% pursuant to paragraph 2(a) of Article X of the Treaty.

E. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in Rulings A, B, C, and D.

The above-noted Rulings are based on the Act, the Country 1 Tax Law and the Treaty in their present form and do not take into account any proposed amendments to the Act, the Country 1 Tax Law or the Treaty which, if enacted, could have an effect on the Rulings provided herein.

Caveats

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts, Additional Information, and Proposed Transactions, other than those specifically described in the Rulings given above and in particular, without limiting the generality of the foregoing, in respect of:

(a) whether Corporation is a Qualifying Person;

(b) the determination of the paid-up capital or fair market value of any shares or other property referred to herein;

(c) the amount of any dividend that will be deemed to be paid by CS1 as a consequence of the transaction described in Paragraph 17(A);

(d) the amount of CS1’s retained earnings;

(e) whether CS1 or CS2 are Fiscally Transparent under Country 1 Tax Law;

(f) whether the deemed dividend resulting from the transaction described in Paragraph 17(A) is disregarded under Country 1 Tax Law or would be disregarded if CS1 were not Fiscally Transparent under Country 1 Tax Law;

(g) Country 1 Tax Law consequences described in Paragraphs 9, 12 and 15; and

(h) any tax consequences relating to the Facts and Proposed Transactions, other than those described in the Rulings given above. or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, including, whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R12 Advance Income Tax Rulings and Technical Interpretations, dated April 1, 2022 and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before the date that is six months from the date of this letter.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Your truly,

XXXXXXXXXX
Section Manager
for Division Director
Division 30
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch