A little over a month ago, the Court of Federal Claims issued an opinion in South Saskatchewan Community Foundation Inc. v. United States.
SSCF is a tax-exempt Canadian charity; it invested a portion of its portfolio in the Greystone Fund, which was treated as a unit trust under Canadia law. Unlike SSCF, the Greystone Fund is neither a charity nor tax-exempt; rather, it is an investment fund. During the years at issue, a portion of the Greystone Fund’s investment assets were U.S. equities.
And U.S. corporations have to withhold when they pay dividends to foreign shareholders.
SSCF requested a refund for nearly $61,000, the pro rata withholding related to its interest in the Greystone Fund. Under the U.S.-Canada Income Tax Treaty Art. XXI, organizations that are exempt from tax on their income in Canada aren’t subject to taxation on their income in the United States, and vice versa.
Which means that if SSCF had directly invested in U.S. equities, there would have been no withholding. But it invested through the Greystone Fund, which attenuated its ownership. It sent the question to the treaty’s Mutual Agreement Procedure, but Canadian and U.S. officials couldn’t come to an agreement, so SSCF sued for a refund.
SSCF pointed to Art. IV(6) of the treaty, which says that a person owning a fiscally-transparent entity will be treated as receiving that entity’s income directly. Because the Greystone Fund was fiscally transparent, and because there was no argument that SSCF would have owed tax if it had directly owned the U.S. equity, SSCF said, it clearly did not owe taxes.
The IRS responded with Art. XXI(3), which provides that income earned by a trust that itself was generally exempt from income taxation and that operated exclusively to raise money for the benefit of a tax-exempt organization would be exempt from tax.
The court, for various reasons (including the Technical Explanation and the JCT explanation) decided that Article XXI(3) had been drafted as the exclusive means for charities in one country to receive dividends from the other country without paying taxes. The two provisions, it said, had to be read in harmony with each other.