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ARTICLE · 18 JULY 2008

Technical Explanation Offers No Relief For U.S. Residents With Interests In ULCs

Blake, Cassels & Graydon LLP
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The Technical Explanation (TE) offers welcome interpretation of the new rules in the Fifth Protocol (the Protocol) to the Canada-United States Income Tax Convention (the Treaty) relating to hybrids and fiscally transparent (flow-through) entities.

CanadaTax
Blake, Cassels & Graydon LLP
Blake, Cassels & Graydon LLP
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Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, July 2008

The Technical Explanation (TE) offers welcome interpretation of the new rules in the Fifth Protocol (the Protocol) to the Canada-United States Income Tax Convention (the Treaty) relating to hybrids and fiscally transparent (flow-through) entities. However, the biggest disappointment is that it offers no relief from the anti-hybrid rules for unlimited liability companies (ULCs) paying dividends and other amounts to their U.S. shareholders.

Application of Anti-Hybrid Rules to ULCs

A ULC is a corporation for Canadian tax purposes but may be treated as a flow-through entity for U.S. tax purposes (i.e., as a branch if owned by a single U.S. shareholder) or a partnership if it has more than one shareholder. The discussion below assumes the ULC is such a "hybrid" entity. ULCs have been used

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