Canada - United States Tax Treaty

The Canada Revenue Agency (CRA) released Advance Income Tax Ruling 2009-0348581R3 on 4 March 2010, confirming in its results prior position statements by the CRA on the application of certain hybrid entity rules (article IV(7)(b)) in the amended Canada - U.S. tax treaty that generally deny treaty benefits to a U.S. resident that is considered under Canada's rules to have received an amount of income, profit or gain from a Canadian resident if U.S. rules consider the paying entity (e.g. a Canadian unlimited liability company or "ULC") to be fiscally transparent and the U.S. tax treatment of the amount received is different than if the entity were not fiscally transparent.

Specifically, the ruling states that article IV(7)(b) does not apply to deny tax treaty benefits on interest or royalty payments made by a ULC to a U.S. company related to the U.S. parent of the ULC, or on a deemed dividend arising for Canadian tax purposes as a result of a paid up capital increase by the ULC followed by a return of capital (in lieu of an actual dividend). The ruling also states (without reasons) that the general anti-avoidance rule will not apply in the circumstances presented.