Question
Assume that, in the situation described in the question entitled “Paid-Up Capital Increase by an Unlimited Liability Company” on page 4, ULC owes interest to USco. Payment of such interest would be denied treaty benefits under Article IV(7)(b), since the payment would be disregarded for US tax purposes, but it would not be disregarded if ULC were not fiscally transparent for US tax purposes.
What if the debt were rearranged so that instead of being payable to USco (ULC’s US parent corporation), it was payable to ULC’s US grandparent? For US tax purposes, the grandparent would be regarded as having received interest from the Canadian branch of its US subsidiary. For Canadian purposes, the interest would be treated as having been paid to the US grandparent directly from the Canadian ULC. In this case, the treatment would not be identical because of the US consolidated rules, but is likely essentially equivalent. Would the CRA generally regard the payment of interest by ULC to its US grandparent as satisfying the “same treatment” requirement in Article IV(7)(b)?
Response
Assuming that the interest is subject to the same treatment in the United States in the hands of the US grandparent as it would be if ULC were not fiscally transparent, we would agree that Article IV(7)(b) does not apply.
It is not possible to make any categorical statements regarding the application of GAAR to the restructuring of cross-border interest payments.
GAAR may apply if the ULC is part of a financing arrangement that results in, among other things, duplicated interest deductions or an internally generated interest deduction in one country without offsetting interest income in the other country.