The Canadian Department of Finance and U.S. Department of Treasury have announced that the Fifth Protocol to the Canada-U.S. Tax Treaty ("the Treaty") has entered into force on December 15, 2008. The Protocol contains many new measures significantly impacting Canadian-U.S. cross-border transactions.
These 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, 1010; 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 single measure most looked forward to 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 made by Canadian residents to all non-resident arm's length persons, 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 and falling to 4% for the 2009 calendar year, and 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.
If you have any questions or would like further information, your local Collins Barrow advisor.
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