ULC Problems and Solutions. Miller Thomson Seminar: Tax Update October 22, 2009

Transcription

1 MILLER THOMSON LLP Barristers & Solicitors Patent & Trade-Mark Agents Robson Court Howe Street Vancouver, BC Canada V6Z 2M1 Tel Fax VANCOUVER TORONTO CALGARY EDMONTON LONDON KITCHENER-WATERLOO GUELPH MARKHAM MONTRÉAL ULC Problems and Solutions Cheryl Teron Miller Thomson Seminar: Tax Update October 22, 2009 This presentation is provided as an information service only and is not meant as legal advice. Readers are cautioned not to act on the information provided without seeking specific legal advice with respect to their unique circumstances. Miller Thomson LLP All Rights Reserved. All Intellectual Property Rights including copyright in this presentation are owned by Miller Thomson LLP. This presentation may be reproduced and distributed in its entirety provided no alterations are made to the form or content. Any other form of reproduction or distribution requires the prior written consent of Miller Thomson LLP which may be obtained by contacting \\vanfil4\dept\common\marketing\templates\word Templates\Articles_Coverpage_Vancouver.DOC

2 CORPORATE STATUS For purposes of Canadian corporate and tax law, an unlimited liability corporation or company ( ULC ) is a body corporate separate from its owners indefinite existence capital divided into shares unlimited liability for its shareholders 2

3 CANADIAN TAX STATUS For Canadian income tax purposes, a ULC and its shareholders are taxed in the same manner as a limited corporation and its shareholders ULCs exist under Alberta, British Columbia and Nova Scotia corporate legislation 3

4 US TAX STATUS For US investment in Canada, the objective is to obtain flow-through treatment by having the Canadian entity classified as a partnership or disregarded entity Reduces overall tax in the US 4

5 US TAX STATUS (cont d) If no election is made under the US check-the-box regulations, the default classification for a Canadian ULC is: a partnership if it has two or more members a disregarded entity if it has a single owner Until fifth protocol, ULC an effective investment vehicle for US entities carrying on business in Canada 5

6 HYBRID A Canadian ULC (which does not elect to be classified as a corporation under the US check-the-box regulations) is a hybrid because: it is a corporation for Canadian tax purposes it is a partnership or a disregarded entity for US tax purposes 6

7 FIFTH PROTOCOL Signed on September 21, 2007 Entered into force on December 15, 2008 Article IV(7) will take effect on January 1,

8 HYBRID ENTITY PROVISION ARTICLE 1V(7)(b) An amount of income, profit or gain will not be considered paid to or derived by a person who is a US resident where: the person is considered under Canadian tax law to have received the amount from an entity that is a resident of Canada but by reason of the entity being fiscally transparent under US law, the treatment of the amount under US tax law is not the same as its treatment would be if that entity were not fiscally transparent under US law 8

9 DIVIDENDS A dividend paid after December 31, 2009 by a ULC to a US entity will be: treated under Canadian tax law as a dividend received from a Canadian resident corporation, and treated under US tax law as not being a dividend if ULC were not fiscally transparent, the payment would be a dividend under US tax law 9

10 DIVIDENDS (cont d) Therefore, a dividend paid in 2010 by ULC directly to a US entity will be: caught by the hybrid-entity provision in IV(7)(b), not entitled to Treaty protection, and subject to Canadian withholding tax at the rate of 25% rather than 5-15% under the Treaty 10

11 OTHER PASSIVE INCOME Royalties, rent and non-arm s length and participating interest paid by a Canadian ULC to a US entity in 2010 will be subject to 25%Canadian withholding tax 11

12 CERTAIN INTEREST AND ROYALTIES Where a ULC has two or more US shareholders: the ULC is classified as a partnership for US tax purposes, and a payment of interest or royalties by a partnership to its partner is not recharacterized under US tax law 12

13 CERTAIN INTEREST AND ROYALTIES (cont d) It is not known whether the CRA will accept that: the fiscal-transparency of a ULC with two o more shareholders does not affect the US tax treatment of interest and royalties, and the hybrid-entity provision does not apply in this situation 13

14 INTERPOSE FOREIGN CORP The Hybrid-entity provision applies to an amount received from a ULC, but not to an amount received from a third party, such as a purchaser of the shares of the ULC 14

15 INTERPOSE FOREIGN CORP (cont d) For purposes of ITA s. 116, the shares of a ULC are: taxable Canadian property, treaty-protected property, unless value of ULC shares derived principally from real property situated in Canada treaty-exempt property and excluded property if Holdco (related to ULC) gives notice to the CRA 15

16 INTERPOSE FOREIGN CORP (cont d) After reorganization, if Holdco is a resident of Luxembourg or the Netherlands, a dividend paid by ULC to Holdco (owning 10% or more of ULC voting shares) will be subject to Canadian withholding tax at the rate of 5% 16

17 INTERPOSE FOREIGN CORP (cont d) Canadian anti-avoidance issues: Beware of GAAR and beneficial-owner issue Helpful cases: The Queen v. MIL (Investments) S.A., 2007 DTC 5437 (F.C.A.), Prévost Car Inc., 2009 FCA 57, Garron Family Trust v. The Queen, 2009 DTC 1287 (T.C.C.) There is no limitation-on-benefits provision in the Canada-Luxembourg Treaty or the Canada-Netherlands Treaty 17

18 WIND-UP ULC ULC could be wound-up, resulting in the transfer of its assets to US owners US owners would then transfer the assets to a new fiscally transparent entity for both Canadian and US tax purposes, such as a partnership 18

19 WIND-UP ULC (cont d) These will be taxable transactions The fair market value of the assets may be equal to or less than the tax cost 19

20 NEW CANADIAN BRANCH A new branch could be formed New business opportunities would be undertaken in the new branch ULC would continue to exist, but slowly wind down and phase out its operations Eventually ULC could be dissolved (taxable) CRA might argue that there is in effect a transfer of goodwill 20

21 CONVERT ULC TO LIMITED LIABILITY CORP ULC could be converted to a limited liability corporation by amending its articles ULC may qualify to change its classification under the US check-thebox regulations to be treated as a corporation 21

22 CONVERT ULC TO LIMITED LIABILITY CORP (cont d) Canadian tax issues: An amendment of ULC s articles to convert it to a limited liability corporation could be viewed as a disposition by the CRA; see IT- 448 If there is a disposition, ITA ss. 51(1) or 86(1) should be available 22

23 CONVERT ULC TO LIMITED LIABILITY CORP (cont d) US tax issues: If ULC is reclassified as a corporation for US tax purposes, US tax could be payable US tax advice should be obtained 23

24 MAXIMIZE DISTRIBUTION BEFORE 2010 ULC could pay a dividend or prepay interest, rent or royalties to US owners before 2010, to take advantage of the current Treaty-reduced withholding tax If required, the cash could be reinvested by the US owners in ULC, using a taxefficient mechanism 24

25 DO NOTHING If there are no contemplated payments of dividends, interest, rent or royalties by ULC to the US owners, the status quo could be maintained to see whether remedial provisions will be implemented by amending the Treaty or the ITA 25

26 CONCLUSION ULC structures should be reviewed before December 31, 2009 to determine what, if any, action is required 26

27 Cheryl Teron Miller Thomson LLP Partner