CRA Releases Treaty Guidelines For US-Owned UlCs But Planning Is Required

The Canada Revenue Agency has released guidelines for distributions from ULCs to United States persons, notably dividends and in some cases interest, which would otherwise be subject to 25% withholding tax starting January 1, 2010. This jump in withholding rates from current levels is a consequence of anti-hybrid provisions introduced in the last round of amendments to the Canada-U.S. tax Treaty. The guidelines will provide welcome relief for many common cases but taxpayers are cautioned that they do not equate to a narrowing of the anti-hybrid rules themselves. To avoid negative results, taxpayers must implement appropriate steps before any affected payments are made after 2009; a do-nothing approach will result in higher withholding tax. In addition, CRA reserves the right to challenge situations it considers abusive.