Time to Restructure: Canadian ULC Structures Adversely Affected By Amended Canada-US Tax Treaty

The Canada-US Income Tax Convention (Canada-US Treaty) was recently amended to include a so-called hybrid denial rule. This rule will adversely affect Canada-US cross-border structures involving Canadian unlimited liability companies (ULC). Over the last several years ULCs were used in many cross-border structures, including those employed by technology enterprises.

The hybrid denial rule is subject to a delayed coming into force rule, so that it will generally apply after January 1, 2010.

The amended Canada-US Treaty will deny treaty benefits where a US resident receives income, profit or gain from an entity that is treated as being fiscally transparent under US laws but not under Canadian law (e.g., a Nova Scotia ULC). This rule is broadly worded and applies to many situations where there is no apparent tax policy abuse. Tax treaty benefits will be denied where a US resident receives dividends or interest from a ULC even where there is no double-dip in respect of