Article 10

CRA was asked how the principal purpose test (PPT) in Art. 7(1) of the MLI) would apply in the situation where:

Canco is wholly-owned by a Foreign Entity (FE) and FE is owned by a foreign multinational (Foreign MNC). Foreign Entity (FE), with no employees and only holding shares of Canco, enjoys a treaty-reduced rate of 5% on its dividends from Cano under the relevant “Treaty 1” with Canada (a Covered Tax Agreement) and, in turn, is wholly-owned by Foreign MNC, who also would enjoy a reduced 5% withholding tax rate under “Treaty 2” had it received Canco dividends directly.

A variant of this situation was the same except that a holding company (HC), resident in a non-treaty country, was interposed for non-tax reasons between Foreign MNC and FE – but with the funding for the acquisition of the Canco shares still having come from Foreign MNC.

CRA indicated that it wished to provide only general comments which, regarding the first Situation, included:

• Regarding the transaction “principal purpose” element of the PPT, the OECD Commentary on Art. 29 in paras. 178-79 indicates that this is an objective/subjective determination which include an examination of the surrounding facts, with reasonable inferences therefrom.
• Here, the relevant factors were that FE is a pure holding corporation with no employees and that both Treaties provided a 5% withholding rate.
• Regarding the “object and purpose” part of the PPT test, para. 174 of the OECD Commentary on Art. 29 gives some indications that the treaty is meant to provide benefits in respect of bona fide exchanges of goods and services, and movements of capital and persons, as opposed to arrangements whose principal objective is to obtain favourable tax treatment.
• Another element that might inform the object and purpose part of the test is whether FE is a genuine resident of the Treaty 1 country.
• Also relevant is that the Treaties provide a reduction to a 5% dividend rate.

The same considerations would be relevant for the variant Situation. The initial factors here might be the timing of the transaction (when was HC introduced into the structure), the non-tax reasons for the structure, and any other judicial doctrines, provisions or treaties which might be relevant.

A UK-resident corporation increased its voting shareholding of Canco the day before a dividend was paid so as to hold 10% of the shares. How would CRA apply the principal-purpose test (PPT) in Art. 7(1) of the MLI in this situation? CRA noted:

• Example E of the 2017 OECD Commentary on Art. 29 describes the similar situation of a shareholder who is slightly below the threshold for access to the lower dividend rate, and who acquires shares for the purpose of taking advantage of the reduced rate. The view in the Commentary is that such transaction would be in accordance with the object and the purpose of Art. 10(2), which provides the reduced rate.
• This OECD answer was conditional on the taxpayer’s acquisition "genuinely increas[ing]" its participation in the company. CRA understood “genuinely increasing” to suggest that there be no manipulation of the shareholding in the form of transitory acquisitions where, for example, a person, holding 8% of the shares, bought just enough shares to exceed the threshold for accessing the 5% reduced rate and, right after the dividend, returning to its initial 8% shareholding.

CRA indicated that that the PPT had supplanted Art. 10(8) of the Canada-UK Treaty, so that this answer nullified the adverse position in 2019-0792651I7.

The Directorate confirmed the position in 9408985 that in light of the branch profits limitation under Ar. X(6) of the Canada-US Treaty of 10% of cumulative untaxed "earnings," a two-step process should be followed under which branch tax is first computed in accordance with Part XIV, then the upper limit is computed under Art. X(6) which, if applicable, reduces the branch tax computed under the first step.

Regarding the effect on “earnings” under Art. X(6) where a non-resident corporation applied a loss carryback to reduce its taxable income earned in Canada in the prior year, the Directorate noted that, in contrast to the Part XIV rules, the earnings for a particular year are not reduced by the carryback of losses to that year from a subsequent year, so that such loss only reduces the cumulative earnings for Art. X(6) purposes in the loss year. Furthermore, although Art. X(6)(b) contemplates the deduction of Part I federal, and provincial income tax, in computing earnings, when there is a loss carryback to a prior year which reduces such taxes for that year, the impact of such tax reduction on earnings for Art. X(6) purposes should be to reduce the loss for the current year rather than to increase earnings for the prior year.

The Directorate provided a detailed numerical example showing the impact in different years of losses being available for carryback for Part XIV purposes but not for purposes of the “cap” under Art. X(6).

The Directorate further stated:

[T]he amount of Allowance for Investment Property in Canada claimed in the prior year and that is being added back to the branch tax base under paragraph 219(1)(g) should not be added back in the same manner in computing “earnings” under Article X(6). Instead, the amount of Allowance for Investment Property in Canada for the current year, calculated under Regulation 808, would be deducted in the “earnings” calculation in accordance with subparagraph (c) of Article X(6).

The 1,000 common shares of Canco (a Canadian-resident corporation), which had an aggregate fair market value (FMV) and stated capital of $1,000 and $100, respectively were owned equally by five shareholders, and an Israeli corporation held 100,000 preferred shares with an FMV and stated capital of $1,000,000 and $100, respectively, which were redeemed in its hands.

Article 10(2)(a) of the of the Canada-Israel Treaty provided for a reduced withholding rate of 5% on dividends paid by a company resident in Canada to a resident of Israel where “the beneficial owner of the dividends is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends.”

After referring to para. 15, of the 2014 OECD commentary to Article 10, which stated inter alia that “[a]s a general rule … the term “capital” … should be understood as it is understood in company law,’ CRA stated:

Accordingly, the stated capital of the Class A preferred shares of Canco held by IsraeliCo is the amount that should be used for the purpose of determining if the conditions in Article 10(2)(a) of the Treaty are met. Since IsraeliCo holds less than 25% of Canco’s capital computed on that basis, IsraeliCo does not qualify for the 5% withholding tax rate on the $999,990 deemed dividend pursuant to Article 10(2)(a) of the Treaty.

CRA also noted that, in light of Art. 7(1) of the MLI, the 15% Treaty-reduced rate of 15% might not be available if the principal purposes of any person involved in the transaction included obtaining the benefits of Article 10 of the Treaty.

Art, 10(8) of the Canada-U.K. Convention provides:

The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.

The day before a dividend was paid to it by a Canadian-resident corporation, a UK corporation undertook transactions to ensure that it owned shares giving it control of 10% of the total votes of the Canadian corporation, and claimed the reduced rate of 5% pursuant to Art. 10(2) of the Treaty.

After reviewing the history of Art. 10(8) (in particular, the expansion of the purpose test in 2003) and the OECD Commentaries, the Directorate concluded that “the intention of both Canada and the UK [was] that paragraph 8 of Article 10 of the Treaty not be limited to situations where the degree of connection of the ultimate dividend recipient with Canada is questioned,” i.e., it was not limited to situations of treaty-shopping.

The Directorate also concluded that application of Art. 10(8) would result in the UK corporation being subject to a withholding rate of 25% (on the basis of denying any benefits under Art. 10), rather than the rate being 15% on the basis of only the benefit of Art. 10(8)(a) being denied.

The Directorate also stated:

Consideration was given to whether paragraph 8 of Article 10 of the Treaty could apply only to dividends paid on a particular tranche of shares (i.e. the initial acquisition of shares or a subsequent acquisition of shares resulting in 10% beneficial ownership, either directly or indirectly). We are of the view that would not be supported by the language of the provision as the determination of whether it is paragraph 2(a) or 2(b) of Article 10 of the Treaty that applies to a dividend is conditional on the percentage of votes controlled directly or indirectly by the beneficial owner of the dividend and paragraph 8 of that Article denies the benefit of the applicable paragraph.

Background/ structure

A collective investment scheme (the “Fund”) established under Swiss law is an arrangement by which investors pool their assets to be managed by and in the name of a Swiss regulated fund management company (the “Management Company’) for the account of the investors, whose proportionate entitlements to income and cash or in-kind redemption proceeds are represented by non-voting units. The Fund was established by a contract of the investors with the Manager and the non-resident custodian of the Fund assets (the “Custodian”), and lacks legal personality. The Custodian delegated the custody of Canadian securities (being mostly listed shares of Canadian companies) to the “Canadian Sub-Custodian.” The Fund unitholders are all Swiss entities providing pension or retirement plans.

Ruling

To the extent that an amount paid or credited from the Fund Assets to the [representative Swiss] Taxpayer or reinvested in the Fund Assets under the Fund Contract in the interest of the Taxpayer is paid, credited or reinvested out of a dividend paid or credited on Canadian Securities that are part of the Fund Assets, such dividend will be exempt from Canadian tax imposed by paragraph 212(2) of the Act by virtue of subparagraph 3(b) of Article 10 of the [Canada-Swiss] Treaty.

The person who pays, credits or provides such dividend will not be required to deduct and withhold an amount under subsection 215(1) of the Act from such dividend and the Canadian Sub-Custodian will not be required to deduct and withhold under subsection 215(3) in respect of such dividend.

Two individuals (Mr. and Mrs. A), who had been resident in Hong Kong from before 2013, each transferred 50% of the shares of a Canadian-resident corporation (Canco) to a new Hong Kong company (HKCo). Art. 10(2) of the Canada-Hong Kong Treaty reduced the dividend withholding tax rate on a dividend paid by a Canadian company to a HK resident (under Art. 10(2)(a)) to 5% if the beneficial owner is a company controlling directly or indirectly 10% of the voting power of the dividend payer, or to 15% for other HK residents. However, Art. 10(7) denied Treaty benefits to a resident if “one of the main purposes of any person concerned with … [a] transfer of the shares … or with the establishment … of the person that is the beneficial owner of the dividend, is for the resident to obtain the benefits of this Article.”

CRA noted that for dividends paid after 2023, it was no longer necessary to satisfy the test in Art. 10(7) of the Treaty in order for the rate reduction to occur, and that instead the relevant test was the principal purpose test (PPT) in Art. 7(1) of the MLI.

CRA emphasized that even if the purpose test in Art. 7(1) was satisfied, Art. 7(1) nonetheless states that it does not apply to deny a Treaty benefit if “it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.” CRA then briefly stated:

Article 7(1) of the MLI will generally not apply to deny the benefits of Article 10(2)(a) of the Agreement on such dividends paid on or after January 1, 2024.

There was no similar object-and-purpose exception in Art. 10(7) of the Treaty so that, for dividends paid before 2024, it was necessary that one of the main purposes of transferring to the HK corporation was not accessing a rate reduction under Art. 10. If there was such a main purpose, the effect would be to increase the dividend withholding rate from 15% to 25%.

A partnership whose partners are resident in the U.S. and in other countries with which Canada does and does not have a treaty owns a French entity (that is fiscally transparent for U.S., but not Canadian or French purposes) that earns dividends and interest from a Canadian company. Can the Canadian payor of the dividends determine its withholding tax obligations in accordance with the relevant articles under either the Canada-France, or Canada-US, Treaty?

CRA noted that the first option is that, if IV(6) of the Canada-US Treaty applies, and some of the dividend paid by the Canadian company to the French company is deemed to be derived by the US partners, US Treaty benefits can be claimed to reduce the withholding rate on the portion of the dividend attributable to those partners, under Art. IV(6).

The second option is that, from a Canadian perspective, there is a single dividend payment from a Canadian entity to a French entity, so that the French Treaty is applicable to the entire amount of the dividend.

CRA indicated that the two options are mutually exclusive and exhaustive – either the French Treaty applies to the full amount of the dividend, or the US Treaty applies pro-rata to the US partners.

Parentco, a U.S.-resident, is the only member of Parentco LLC, which is the only member of Sisterco LLC, and also wholly-owns Canco. Canco resides in Canada for purposes of the Canada-US Income Tax Treaty (the “Treaty”).

CRA proposed an inclusion in Canco’s income under s. 247(2) of the difference between an arm’s length price for goods sold by Canco to Sisterco LLC and the consideration paid, and also proposed a secondary adjustment under s. 247(12) on the basis that a resulting benefit conferred on Sisterco LLC was deemed to be a dividend that was paid by Canco that was subject to a Pt. XIII remittance obligation.

The Directorate found that the s. 247(12) amount (which was a deemed dividend under ITA s. 2121(2)) was also a dividend for Treaty purposes, stating:

Although Sisterco LLC is not a shareholder of Canco, the transfer pricing income adjustment made under subsection 247(2) results from the fact that they are not dealing at arm’s length (or to paraphrase paragraph 29 of the OECD Commentary, that “the persons receiving such benefits are closely connected with a shareholder; this is the case, for example, where the recipient is a relative of the shareholder or is a company belonging to the same group as the company owning the shares”).

Two U.S. corporations that were “qualifying persons” for purposes of the Canada-U.S. Treaty (USCo1 and USCo2) held 58% and 42%, respectively, of LLC1 which held LLC2 which, in turn, held LLC3. LLC3 operated a Canadian branch business.

Headquarters stated:

[T]he fact that there may be more than one fiscally transparent entity in the corporate chain does not alter the fact that the condition of there being an entity that is fiscally transparent and through which a U.S. resident person derives income is already met.

Accordingly, if all the LLCs were fiscally transparent for U.S. income tax purposes (so that LLC1 was a partnership for U.S. purposes), USCo1 and USCo2 would be considered to be deriving income through LLC3 that met the same tax treatment condition in Art. IV(6) – and, similarly, LLC1 Itself would be considered to be deriving such income as a qualifying person if it had chosen to be treated as a corporation. Thus, in both scenarios, such income would be entitled to the branch profits rate reduction in Art. X(6).

A UK corporation (“GP Co”) is the general partner (with a 1% interest) of a UK limited partnership which is fiscally transparent for UK purposes and a partnership for ITA purposes (“UK LP” – all of whose partners are non-residents), and the Limited Partners include LP1 and LP3, which provide benefits under a “recognized pension plan” (as defined in Art. 10, para. 4 of the Canada-UK Treaty) and own 7% and 11% partnership interests, and LP2, a UK corporation owning a 19% partnership interest. In addition to being unrelated, the partners factually deal with every other at arm’s length. UK LP wholly owns Holdco, which wholly owns Canco, also a taxable Canadian corporation. UK LP used the subscription proceeds from the issuance of its partnership interests to make a loan to Canco (the “UK LP Loan”), the interest on which is not a “participating debt interest.”

Issue 1

Would LP2 and LP3 be considered to have “indirect control” over the voting power of Holdco, the shares of which are held by UK LP, for purposes of Art. 10, subpara. 2(a)?

Issue 2

Would LP1 and LP3 be considered to own indirectly shares of Holdco for purposes of Art. 10, para. 3?

CRA responded:

Issue 1…

The 5% withholding rate under subparagraph (2)(a) of Article 10 of the Treaty applies if the beneficial owner of the dividend “is a company which controls, directly or indirectly, at least 10 per cent of the voting power in the company paying the dividends.” …

[O]nly GP Co would be considered to control directly or indirectly at least 10% of the voting power in Holdco unless the partnership agreement specifically provided the limited partners with the ability to vote on the shares of Holdco. Therefore, LP2 and LP3 would not qualify for the 5% withholding rate under subparagraph 2(a) of Article 10. In addition, it is unclear…that LP3 would meet the definition of a “company” in Article 3….

Issue 2...

Paragraph 3 of Article 10… provides an exemption from withholding tax on dividends beneficially owned by a “recognized pension plan” if, among other conditions, such an organisation “does not own directly or indirectly” more than 10% of the capital or 10% of the voting power of the company paying the dividends.

…LP1 and LP3 will be considered to own indirectly the shares of Holdco and accordingly Holdco’s capital in proportion to their partnership interests in UK LP. While…fractional ownership under the partnership law would generally prevent partners from owning a particular percentage of the partnership’s property…the words “directly or indirectly” enable to attribute a particular percentage of ownership of partnership property to a partner….

Consequently, the requirements of subparagraph 3(b) would be satisfied in respect of LP1 but not in respect of LP3.

A corporation resident in Switzerland ("Swissco") wholly-owns "Holdco," which wholly-owns "Canco"). S. 214(3)(a) deems Canco to pay a dividend to Swissco. The rate of withholding tax would be 15% under the English version of the Swiss Treaty but 5% under the French version. How would Art. 10(2)(a) of the Swiss Treaty apply? CRA responded:

[T]axpayers should, in these circumstances, apply the version of the Swiss Treaty that gives them the most favourable result. We would normally expect that this would be the French version… .

What is CRA's position on the application of the GAAR to treaty shopping arrangements? CRA stated:

The…comments on treaty shopping… made in the February 2014 Budget as well as in the August 2014 Finance news release [do not] preclude[e] the application of the GAAR to treaty shopping arrangements.

The CRA continues to contemplate the application of the GAAR to transactions undertaken primarily to secure a tax benefit afforded by a tax treaty and, in fact, the GAAR Committee has recently approved the application of the GAAR to certain treaty shopping arrangements.

An IRA account of Mr. X (who is a citizen and a resident of the US) receives a distribution on units held in a REIT as defined in s. 122.1(1). Before concluding that the REIT distributions would not be eligible for 0% withholding under Art. XXI, para. 2 of the Canada-U.S. Treaty as the REIT was not a SIFT trust, CRA stated:

[A] distribution of income from a SIFT Trust is deemed to be a dividend pursuant to subsection 104(16)… and is similarly treated as a dividend for the purposes of the Treaty pursuant to the 2007 Protocol Annex B in regards to paragraph 3 of article X.

A Canadian-resident corporation (CanCo1) and its wholly-owned Canadian-resident subsidiary (CanCo2) are the 99% limited partner and 1% general partner, respectively, of CanLP. CanLP lends $1 million to the immediate Netherlands-resident parent of CanCo1 (Foreign Parent) or, alternatively ("situation 2"), lends $1 million to the Netherlands parent of Foreign Parent (Foreign Grandparent). In either situation, the loan is not repaid on a timely basis, so that in the absence of Treaty relief, Foreign Parent or Foreign Grandparent is deemed under s. 214(3)(a) to receive a dividend which is subject to Part XIII withholding tax of 25%. Subpara. 2(a) of Art. 10 of the Canada-Netherlands Treaty provides that if the recipient of the dividend (i.e., Foreign Parent or Foreign Grandparent, as applicable) owns at least 25 per cent of the capital of, or controls directly or indirectly at least 10 per cent of the voting power in, the company paying the dividend, a 5 per cent withholding tax rate would apply.

In finding that the 5% Treaty-reduced rate applied to either deemed dividend, CRA stated:

In the context of applying the provisions of Article 10 of the Treaty, subsection 96(1) of the Act does not apply and CanLP is not considered a separate person. As CanLP is not a separate person, each of the partners thereof would be viewed as having made their pro rata share of the loan described in hypothetical situations 1 and 2 above. It follows, in our view, that each of CanCo1 and CanCo2 would be considered, for the purposes of Article 10 of the Treaty, to have paid their pro rata share of the dividend deemed to have been paid pursuant to paragraph 214(3)(a)….

Furthermore, the above structure would satisfy the indirect voting control test in para. 2(a) so that, for example, it would be considered that Foreign Grandparent "satisfies the controlling threshold of controlling directly or indirectly at least 10 per cent of the voting power in each of CanCo1 and CanCo2."

A US LLC, which has two US-resident members (either two corporations or an individual and a corporation) who qualify for Treaty benefits, carries on business in Canada through a permanent establishment. CRA indicated:

To facilitate the computation of the relevant Article X(6) earnings that may be eligible for a reduced 5% branch tax, the earnings are computed by the LLC as if it were the company referred to in Article X(6). Once the LLC has computed its earnings attributable to permanent establishments in Canada, they are then allocated to the LLC's members by applying Article IV(6). Accordingly, the LLC can generally pay the reduced rate of branch tax in Article X(6) in respect of the share of branch profits that are considered to be derived by its corporate members.

After indicating that the LLC may not claim the reduction under Art. X(6) in respect of the portion of its "branch profits that are considered, by virtue of Article IV(6), to be derived by individual members," CRA stated:

It is the CRA's view that a LLC has only one $500,000 cumulative exemption. It must be shared by associated companies with respect to the same or similar business and reduced by any portion which has previously been deducted.

The two partners of a partnership which has elected to be a domestic corporation for Code purposes are: a corporation which is resident in the U.S. for purposes of the Canada- U.S. Income Tax Convention; and a corporation resident in a non-Treaty country.

CRA indicated that a member of the partnership can access benefits under Article X(6) of the US Treaty ("partnership-level benefits") to the extent that the partnership could have claimed such benefits had the partnership been the entity subject to Canadian branch tax. Although the partnership would not so qualify as a "qualifying person" as defined in Art. XXIX A(2) of the US Treaty due to the absence of share capital for the partnership, "partnership-level benefits" under Art. X(6) may apply to business profits earned by a US-resident partnership through a Canadian permanent establishment in accordance with the "active trade or business" test under Art. XXIX A(3), or, if treaty benefits are granted by the Canadian competent authority, under Article XXIX A(6).

Additionally, a member of the partnership that is itself eligible to claim treaty benefits under Article X(6) may still apply the reduced branch tax rate to its share of the partnership's profits earned through a Canadian permanent establishment.

In the first "partnership-level benefits" situation, partnership profits will not be reduced by partner-level expenses or Canadian income tax liabilities. "Consequently, the member of the partnership may find that its share of the partnership's Article X(6) earnings amount exceeds the amount upon which Part XIV tax is otherwise payable under subsection 219(1)."

Holdco, which had been a listed U.S. company, was taken private by L5, which was a fund whose members are not known. Holdco and its subsidiary, USCo (neither of which carry on a business of making or managing investments) filed a Chapter 11 Plan (following their filing of a petition in bankruptcy), and a Plan Administrator was appointed. Although a Canadian subsidiary of Holdco (Canco) ceased to sell assets to securitization trusts when the group financial difficulties became severe, it continues to earn income from obligations to it of those trusts, including the receipt of deferred purchase price. Canco will pay three cash dividends to Holdco, its sole shareholder. "Through the Plan Administrator under the Plan of Liquidation, Holdco will have full discretion and control over the Dividends throughout the period during which the Dividends are paid."

Ruling that the rate of withholding under Art. X will be 5%.

All of the Class A shares of two taxable Canadian corporations ("OpCo2" and "Salesco") are owned by a corporation ("USSalesco1") which is not fiscally transparent and is resident in the U.S. for purposes of the Canada- U.S. Treaty, and all their commons shares (with essentially identical attributes to the Class A shares) are owned by a taxable Canadian corporation ("OpCo1") which is a direct wholly-owned subsidiary of USSalesco1. OpCo2 and Salesco are not fiscally transparent for U.S. purposes.

Salesco and OpCo2 purchase for cancellation all the issued and outstanding Class A shares (held by USSalesco1) for cash or promissory note consideration equal to the shares' fair market value.

Rulings that provided that USSalesco1 is the beneficial owner of dividends paid on the Opco2 and Salesco Class A shares pursuant to Article XXIX-A(3) and Article X(2)(a) of the Treaty, the benefits of the Treaty will apply to USSalesco1 with respect to the s. 84(3) deemed dividend resulting from the redemptions.

Ruling that provided that USSalesco1 is the beneficial owner of dividends paid on the Opco2 and Salesco Class A shares, pursuant to Article XXIX-A(3) and Article X(2)(a) of the Treaty, the benefits of the Treaty will apply to USSalesco1 with respect to the subsection 84(3) deemed dividend resulting from the redemptions.

In response to a query as to whether the branch tax reduction in Art. X(6) of the Canada-US Tax Convention is available to a fiscally transparent LLC that is wholly-owned by US-resident individuals, CRA stated that such Treaty benefits may be claimed by an LLC on behalf of its members with respect to an amount of profit attributable to a Canadian branch only if the amount is considered to be derived, pursuant to Art. IV(6), by a US-resident company that is a "qualifying person" (or entitled, with respect to the amount, under Art. XXIX A(3)) – so that no such benefits would be available here as the earnings of the LLC are derived by individuals.

Where a US corporation that is a qualifying person is a 99.99% limited partner of a Delaware limited partnership which, in turn, is a 99.99% limited partner of a second Delaware limited partnership which owns all the shares of Canco, the US corporation will be considered to have an "ownership interest" in Canco, so that it will be entitled to the 5% rate on dividends paid by Canco.

In the Prévost Car case, "the Court implied that where an intermediary acts as a mere conduit or funnel in respect of an item of income, the intermediary would not have sufficient economic entitlement to the income to be considered the 'beneficial owner'. The CRA will examine future back-to-back dividend, interest and royalty cases that have encounters with a view to whether an intermediary could, on the facts, be considered a mere conduit or funnel".

a dividend deemed to be received by significant Japanese corporate shareholder of a Canadian corporation under s. 84(3) on the purchase for cancellation y the Canadian corporation of shares held by the shareholder was eligible for the treaty-reduced rate of 5% under the Canada-Japan Convention.

Although a partner is not considered to own a specified percentage of the shares of a corporation held by a partnership, a favourable ruling was granted where a corporation issued sufficient voting preferred shares directly to each partner in order to comply with the formal requirements, of the Canada-U.S. Convention, Article X, para. 2(a), that the beneficial owner of the dividend must own at least 10% of the voting stock of the corporation paying the dividend.

CCRA indicated, regarding whether a dividend paid by a French corporation to a Canadian mutual fund trust or Canadian pension fund would be reduced pursuant to Art. 10(2)(c) of the Canada-France Convention, that assuming that such funds were resident in Canada as defined in Art. 4(1), any doubt as to whether they were the beneficial owners of the dividends would appear to be eliminated by Art. 29(7)(a) of the Convention.

Following the repeal of U.K. ACT in 1999, paragraph 3 of the Canada-U.K. Convention continues to apply since individuals in the United Kingdom are still entitled to a tax credit in respect of dividends paid by a U.K. company. However, the U.K. Competent Authority has informed CCRA that non-resident individuals should no longer be eligible for any net refund from the U.K. because the tax credit available under paragraph 3(b) is now less than the tax allowed by paragraph 3(a)(ii).

A Canadian-resident received a $10,000 dividend from a French company as reduced by French withholding tax of 15% ($1,500) and by the 50% avoir fiscal (tax credit) withheld by the French company. The individual in the subsequent year then applied to the French government for a refund of the avoir fiscal. CCRA indicated that the subsequent payment of the avoir fiscal would also be considered to be a dividend for purposes of the Canada-France Convention and would be subject to 15% withholding.

A deemed dividend under s. 219(5.3) of the Act will be treated as a dividend governed by Article X, paragraph 2 of the Canada-U.S. Convention, rather than paragraph 6, notwithstanding that such deemed dividend could be attributed to the decision not to pay branch tax pursuant to s. 219(5.1) at the time the non-resident insurance company incorporates the Canadian branch.

Because the purpose of the "source country deemed dividend rule" in the definition of "dividend" in paragraph 3 of Article X of the Canada-U.S. Convention is only "to ensure that the source country's right to tax an amount that would not otherwise meet the definition of a 'dividend', but is treated as such in the source country, will be governed by paragraph 2 of Article X", that rule does not trammel the ability of Canada to tax as a dividend a distribution received by Canadian-resident shareholders of a Delaware corporation that might not be treated like a dividend under the U.S. Internal Revenue Code.

Where a Canadian subsidiary issues a demand note to its U.S. parent, the deemed dividend arising under s. 214(3)(a) will be eligible for the reduced rate of withholding tax under Article X, paragraph 2(a) of the Canada-U.S. Convention.

The word dividend in the Canada U.S.-Convention includes deemed dividends arising under s. 214(3)(a) of the Act.

Where s. 214(3)(a) imputes a shareholder benefit to U.S. resident shareholders of a U.S. corporation which allows them to use a Canadian vacation property free of rent, Article X(5) of the Canada-U.S. Convention will not grant relief to them because s. 214(3)(a) deems the dividend to have been paid by a corporation resident in Canada rather than by a U.S. corporation.