Post by Tamaki on Jan 6, 2009 6:22:41 GMT 4
Canada - US treaty amendments
The fifth protocol to the Canada-US Income Tax Convention has cleared the US senate and appears poised to enter into force before 2009. All that remains is for the US President to sign an instrument of ratification and the exchange of instruments of ratification between Canada and the US.
While many of the changes are beneficial to US and Canadian taxpayers, some are not. New anti-hybrid rules could make dividends, interest, rents or royalties subject to 25% Canadian withholding tax if paid after 2009 by a Canadian unlimited liability company (ULC) to a US resident. US shareholders of a ULC that wish to restructure their holdings before this provision becomes effective may be affected by the limitation on benefits (LOB) provisions in the convention.
The LOB will take effect in Canada in the tax year after the protocol comes into force, which may mean January 1 2009 for some taxpayers. The LOB may deny treaty benefits to a US resident, such as a foreign-owned US private company, that is not a "qualifying person" for the purposes of the LOB.
There is a limited exception in respect of Canadian-source income derived by a US resident in connection with an active trade or business conducted in the US. There is concern that, for Canadian tax purposes, "income" may not include capital gains. If so, and a reorganisation results in a capital gain on shares of a Canadian corporation (including a ULC) derived by non-qualifying US resident, the gain would not be entitled to treaty relief from Canadian capital gains tax unless the US resident requests and obtains relief from the Canadian competent authority under the LOB.
Paul Tamaki (paul.tamaki@blakes.com;) and Jesse Brodlieb (jesse.brodlieb@blakes.com) of Blake Cassels & Graydon, Toronto, Canada
The fifth protocol to the Canada-US Income Tax Convention has cleared the US senate and appears poised to enter into force before 2009. All that remains is for the US President to sign an instrument of ratification and the exchange of instruments of ratification between Canada and the US.
While many of the changes are beneficial to US and Canadian taxpayers, some are not. New anti-hybrid rules could make dividends, interest, rents or royalties subject to 25% Canadian withholding tax if paid after 2009 by a Canadian unlimited liability company (ULC) to a US resident. US shareholders of a ULC that wish to restructure their holdings before this provision becomes effective may be affected by the limitation on benefits (LOB) provisions in the convention.
The LOB will take effect in Canada in the tax year after the protocol comes into force, which may mean January 1 2009 for some taxpayers. The LOB may deny treaty benefits to a US resident, such as a foreign-owned US private company, that is not a "qualifying person" for the purposes of the LOB.
There is a limited exception in respect of Canadian-source income derived by a US resident in connection with an active trade or business conducted in the US. There is concern that, for Canadian tax purposes, "income" may not include capital gains. If so, and a reorganisation results in a capital gain on shares of a Canadian corporation (including a ULC) derived by non-qualifying US resident, the gain would not be entitled to treaty relief from Canadian capital gains tax unless the US resident requests and obtains relief from the Canadian competent authority under the LOB.
Paul Tamaki (paul.tamaki@blakes.com;) and Jesse Brodlieb (jesse.brodlieb@blakes.com) of Blake Cassels & Graydon, Toronto, Canada