The Canadian Department of Finance and U.S. Department of Treasury have announced that the Fifth Protocol to the Canada-U.S. Tax Treaty ("Treaty") came into force on December 15, 2008. The Protocol contains many new measures significantly impacting Canadian-U.S. cross-border transactions.
The new measures include:
- the extension of Treaty benefits to fiscally transparent entities, such as U.S. limited liability companies, effective for taxation years commencing after 2008;
- the restriction of benefits to certain hybrid entities such as Canadian unlimited liability corporations, effective January 1, 2010; and
- an extended definition of "permanent establishment," also effective January 1, 2010.
There are also measures addressing the resolution of cross-border income tax disputes between the Canada Revenue Agency and the Internal Revenue Service, as well as a limitation of benefits to "qualifying persons" in order to restrict Treaty shopping.
Perhaps the most anticipated new measure is the elimination of withholding tax on cross-border, non-arm's length interest payments. (Canada has already introduced domestic legislation eliminating withholding tax on interest payments by Canadian residents to arm's length non-residents, regardless of their country of residence, effective January 1, 2008.) Under the provisions of the Protocol, the withholding tax on most cross-border interest payments will be reduced from the current Treaty rate of 10% to 7%, effective January 1, 2008. The tax will then fall to 4% for the 2009 calendar year and will be eliminated entirely for the 2010 and subsequent calendar years. As a result of these changes, both Canadian and U.S. recipients of interest in 2008 will be entitled to obtain a refund for any overpayment.
For more detailed discussions of the Treaty amendments, see the Fall 2007 and Fall 2008 issues of Tax Alert following the release of the Protocol provisions on September 21, 2007 and the approval by the U.S. Senate on September 23, 2008, respectively. Contact your Collins Barrow advisor if you have any questions or would like further information.
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