CRA releases comments on beneficial ownership

At the 2012 IFA conference, the CRA was asked to confirm its position on when a non-resident would be considered the beneficial owner of income (such as dividends, interest, or royalties) for tax treaty purposes. Canada’s tax treaties generally require that the foreign (resident) recipient of such income be the beneficial owner of it to qualify for reduced withholding tax rates. Citing the decisions in Velcro Canada Inc. v. The Queen (TCC) and Prévost Car Inc. v. The Queen (FCA), the CRA said it will consider a recipient to be the beneficial owner if the income is received for the recipient’s own use and enjoyment and the recipient assumes risk and control over the income (see 2012-0444041C6). The CRA further said that this test would generally be met if the recipient holds a sufficient degree of discretion with respect to the use or application of the income received. Finally, the CRA confirmed that the comments on transparent entities and beneficial ownership in the Technical Explanation (TE) to the Canada-US tax treaty would continue to apply (see TE Extract). For example, treaty benefits should be available to US resident members of a US LLC under Article IV(6) of the treaty, provided the LLC is itself the beneficial owner of the Canadian-source income (as just described).