Unformatted text preview: derived by a us resident that is wholly owned by a third-country parent on the disposition of taxable Canadian property (such as the shares of a Canadian subsidiary). because the active trade or business test may not apply and the derivative benefits test does not apply, the capital gain realized on the disposition of the shares of a Canadian subsidiary by the us company carries a significant risk of double taxation. such a risk is not necessary to prevent treaty shopping, especially if the ultimate third-country parent is otherwise eligible for treaty benefits.
before the protocol came into force, a us company was not subject to the LOb provisions, and therefore was exempt from Canadian income tax on the gain under article xiii.60 However, once the protocol entered into force, the us company became subject to the LOb provisions and consequently to Canadian tax on the gain. This result is unfair because the gain is also subject to us tax.61
This problem has two potential solutions: 1. rely on the determination by a competen...
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