PREVOST UPHELD - DUTCH INTERMEDIARY IS BENEFICIAL OWNER UNDER TREATY
By: Mathieu Champagne & Laura-Emanuela Gheorghiu

On February 26, 2009, the Federal Court of Appeal issued its decision in The Queen v. Prévost Car Inc., 2009 FCA 57 confirming the earlier decision of the Tax Court of Canada that a Dutch holding company was the "beneficial owner" of dividends for the purposes of the reduced withholding tax rate under the Canada-Netherlands Income Tax Convention.

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IMPORTANT NOTE TO US INVESTORS INTO CANADA USING HYBRID ENTITIES
By: Mathieu Champagne

Canadian unlimited liability companies ("ULCs") have been used by US-resident investors into Canada for a variety of reasons, including to finance Canadian activities. The benefit from the use of ULCs results from their hybrid nature. Although viewed as normal corporate bodies in Canada, ULCs may be fiscally transparent in the US if certain conditions are met. Moreover, payments received from ULCs by a resident of the US, such as interest and dividends payments, generally benefit from reduced withholding tax rate under the Canada-US Tax Convention (the "Treaty").

As of January 1, 2010 new anti-hybrid rules will come into force and seriously jeopardize the tax effectiveness of structures using fiscally transparent ULCs. Following the provisions of new paragraph IV(7)(b) of the Treaty, payments received from fiscally transparent ULCs may loose the benefit of the reduced withholding tax rates under the Treaty and be subject to the general 25% Canadian domestic withholding tax rate.

As a consequence, there may the a trend to interpose a foreign intermediary in current structures into Canada. This foreign intermediary could be formed in a favorable treaty country as a replacement to or as a holding company for a ULC. Hybrid instruments may also prove to be an interesting alternative. These instruments may take various forms but essentially the intent is to receive equity treatment on the US side of the border and debt treatment on the Canadian side. Other alternatives may also be considered, including "unchecking" the box for US purposes so that a ULC is not fiscally transparent anymore in the US or restructuring the flow of funds so that payments originating from ULCs are paid to affiliates of the US-resident investors in a third country with a favorable tax treaty with Canada.

US-resident investors into Canada should consider reorganizing their activities in order to avoid, or at least minimize, the impact of these anti-hybrid measures while taking into consideration the tax consequences of such reorganizations both in Canada and in the US.

US-resident investors are encouraged to contact their Gowlings tax professionals in order to discuss the available options.

A COMPLICATED SIMPLIFICATION - NEW RULES FOR THE SALE OF TAXABLE CANADIAN PROPERTY BY NON-RESIDENTS
By: A. Brent Kerr & Simon Labrecque

Commencing January 1, 2009, new tax rules apply when non-residents of Canada sell taxable Canadian property such as shares of a private Canadian company. The new rules are intended to streamline tax compliance for non residents who are protected from Canadian tax by an international tax treaty. Some taxpayers will benefit from the changes, but many will be disappointed with the changes, and buyers may find that they face increased risk of liability for tax.

Generally, non resident sellers are required to apply for clearance certificates, and tax must be withheld while the clearance certificate request is being processed by the tax authorities. Processing times have steadily increased over the past few years, and non-resident sellers are finding that their sale proceeds are being tied up for extended periods of time. It is not uncommon to wait three months for a clearance certificate and in some cases much longer.

The need for changes to these rules had been the subject of representations to the federal Department of Finance, particularly by the private equity and venture capital industry for which these rules are particularly troublesome. When the Department of Finance announced that these rules would be modified, many interested parties had hoped that these compliance and withholding tax requirements would be eliminated, at least in situations where treaty protection was available to the seller. Unfortunately, such is not the case.

Although some relief has been provided, the recent amendments to section 116 of the Income Tax Act (Canada) and the legal obligation to get a formal clearance certificate has been eliminated in many cases, in many cases not getting such a certificate could put buyers in a position of increased risk. It is therefore necessary for both buyers and non-resident sellers to familiarize themselves with the implications of these recent changes and to negotiate suitable terms and conditions for the sale of Canadian property. In all cases, the services of a tax professional should be sought as quickly as possible since the tax rules involved are complex and can have significant tax implications for both parties.

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The authors would also like to thank Laura-Emanuela Gheorghiu for the initial drafting of this article

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