The Canada-U.S. tax treaty generally treats U.S. limited liability companies (LLCs) as look-through entities for the purposes of applying the provisions of such treaty. Capitalization of a Canadian Corporation A Canadian corporation may be capitalized with equity or with a combination of debt and equity. As noted above, share capital of a Canadian private corporation can generally be returned to shareholders free of Canadian tax, including Canadian withholding tax applicable to non-resident shareholders. A distribution to a shareholder in excess of such share capital will be deemed to be a dividend for purposes of the Tax Act. Deemed dividends to non-resident shareholders are subject to withholding tax in the same manner and at the same rate (including any reduced treaty rate) as regular dividends. Repayment of principal loaned to a Canadian corporation by a non-resident shareholder is not subject to withholding tax, but, where applicable, tax must be withheld in respect of interest paid or credited on the loan. Subject to the thin capitalization rule discussed below and the limitations on interest expense and losses described above, a Canadian subsidiary may deduct interest paid or credited by it to a non-resident in computing its income. Thin Capitalization and Interest Imputation The thin capitalization rule is intended to prevent a Canadian-resident corporation or trust, as well as a non- resident corporation or trust that carries on business in Canada or earns rental income that is subject to tax on a net basis, or a partnership of which such a corporation or trust is a partner, from reducing its taxable Canadian profits, and hence its liability for Canadian tax, by maximizing its interest expense to related non-resident creditors.
The use of a ULC by a U.S. resident must be carefully considered and may require additional steps or intermediate entities in order to be beneficial.
82
Doing Business in Canada
Powered by FlippingBook