Branch Profits Tax

[gabizzle]

I am a Canadian resident that owns a Canadian Corporation.
This Canadian Corporation is a 50% partner in a Limited Partnership in the US.
Here's an example:
At the end of the year, the LP shows 1 million of profit
500,000 is attributed to my Canadian Corporation
This is all US Sourced Income
From there I know that I owe the IRS 34% of 500,000 => 170,000
The LP pays the 170,000 on my behalf to the US government and I leave the remaining 330,000 in the US LP.
Now they're saying that I'm subject to Branch Profits Tax on the 170,000 which is treaty reduced to 5%
This means that they want me to pay an additional 8,500 on the TAX PAYMENT that went out to the IRS.
Does this make any sense?
Shouldn't I only be charged the Branch Profits on the remaining 330,000 once that's sent to my corporation in Canada?

Or better yet, am I supposed to be paying Branch Profits tax at all?

Thanks in advance

[JGCA]

Branch tax should not be paid under teh Canada Us tax treaty on teh first $500,000 of accumulated income, also under treaty branch tax is eliminated if the corporation has a permanent establishment in teh other country. Since you will be filing a 1020F in the US you are stating that you have a permanent establishment in the US so no branch tax should apply.

[gabizzle]

Thanks JG,

However, the 500,000 exemption was used in a prior year. Where in the treaty does it say that if my Canadian Corporation is deemed to have a permanent establishment in the US, then it would not be subject to branch tax?

[JGCA]

Having re read your post it seems you would not qualify because the LLC is not wholly owned by the Canadian Corp. If it were you would make the election to be trreated as a corp under Sec 17701-3(b)(1) and avoid the branch tax under Tax Code US.

Your only way to avoid the branch tax is to make sure you reinvest the proceeds back into equity otherwise its like you took a dividend subject to the branch tax.