Canada: Cross-Border Transactions: Recent Tax Developments

In his 2007 Canadian Federal Budget (the Budget), the Minister of Finance (the Minister) announced that an agreement in principle had been reached on a number of significant amendments to the Canada-U.S. Tax Convention (the Treaty) that deal with some long-standing impediments to cross-border transactions. These proposed amendments are included in the 5th Protocol (the Protocol) to the Treaty which was signed on September 21, 2007. In addition, the Minister of Finance released draft legislation (the Proposals) to amend the Income Tax Act (Canada) (the Tax Act) on October 2, 2007 relating, but not limited to, a number of measures originally announced in the Budget.

Elimination Of Withholding Tax On Interest

The Protocol proposes to eliminate Canadian withholding tax on interest payments made by a resident of Canada to an unrelated U.S. resident and to phase out, over a 3 year period, such withholding tax on interest payments made to a related U.S. resident. The withholding tax rate is currently 25% under the Tax Act, which rate is reduced to 10% under the current Treaty if the U.S. resident is entitled to Treaty benefits.

A U.S. resident will only be entitled to benefits under the Treaty, including the proposed benefits described above, if such resident meets the requirements of the proposed Limitation on Benefits (LOB) provision. The Protocol makes the existing LOB provision reciprocal and provides a number of objective tests that both Canadian and U.S. residents seeking Treaty benefits must meet. The purpose of the LOB provision (which is the first of its kind in a Canadian tax treaty) is to prevent "treaty shopping" by denying Treaty benefits to an entity established by a resident of a third country in Canada or the U.S. merely for the purpose of claiming Treaty benefits.

In addition to the amendments to the Treaty noted above, the Proposals to amend the Tax Act also include an exemption from withholding tax on interest paid to arm's-length non-residents, regardless of their country of residence. This exemption will be effective January 1, 2008.

Limited Liability Companies (LLCs)

The Protocol will extend Treaty benefits, such as the reduced withholding tax rates on interest and the exemption for capital gains in certain circumstances, to U.S. LLCs. LLCs are currently not eligible for such benefits under the Treaty because the Canada Revenue Agency (the CRA) maintains the view that since LLCs are disregarded entities and not liable to tax in the U.S. they should not be considered residents of the U.S. for purposes of the Treaty.

The Protocol extends treaty benefits to LLCs by permitting each member of an LLC to obtain the applicable Treaty relief on the income that is considered to be derived by each such member, provided that the member is a resident of the U.S. that satisfies the requirements of the LOB provision and meets certain other conditions. Accordingly, U.S. residents who earn income or gains through LLCs will be entitled to the applicable reduced withholding tax rates or exemptions set out in the Treaty where the U.S. treatment of the income is identical to what would have been the treatment if the income had been earned directly by the U.S. resident.

In cases where an LLC that is treated as a partnership for U.S. tax purposes earns capital gains on the sale of shares of a private Canadian corporation that did not derive more than 50% of its value from Canadian real estate, the gain from the sale that is attributable to each partner is currently fully taxable, however, when the Protocol becomes effective, such gain should be exempt from Canadian tax, provided that the partner qualifies for Treaty benefits. Notwithstanding this exemption, it will be necessary for the LLC to obtain a clearance certificate under section 116 of the Tax Act, otherwise the purchaser will be entitled to withhold 25% of the gross proceeds and remit that amount to the CRA. However, in order to support a claim for Treaty benefits, the CRA would require evidence of residency of each of the LLC partners. For an LLC that is widely held, such as a U.S. investment fund, it may not be possible to obtain sufficient information concerning the limited partners. Therefore, U.S. investment funds may continue to use entities resident in third countries as a result of these administrative difficulties.

Initial Public Offerings On AIM

The Proposals provide for a complete change in the concept of a "prescribed stock exchange". The proposed "designated stock exchange" category will be comprised of stock exchanges that have been designated by the Minister and will include the stock exchanges that are currently "prescribed stock exchanges" in the Income Tax Regulations. The determination of whether a share of a Canadian company is "taxable Canadian property" will be based on this category. The Minister has not indicated whether certain stock exchanges which are currently not "prescribed stock exchanges", such as the Alternative Investment Market (AIM) of the London Stock Exchange, will become "designated stock exchanges". However, AIM will fall within the proposed "recognized stock exchange" category which will apply for the purpose of the section 116 withholding procedure. Therefore, non-resident vendors of shares listed on AIM will be exempt from the withholding and reporting requirements of section 116, but, as noted above, may still be taxable in Canada on any gain realized subject to only relief available under an applicable treaty.

Exchangeable Shares

Although it was announced in the 2000 Budget that the Tax Act was to be amended to provide a "rollover" for Canadian shareholders of a Canadian corporation in cross-border share-for-share acquisitions, the Budget and the Proposals did not address this issue. Canadian shareholders of a Canadian corporation currently do not receive tax-free rollover treatment on a share-for-share acquisition by a U.S. acquiror. This problem is often addressed through the use of an exchangeable share structure (typically by the issuance to the Canadian shareholders of preferred shares of a Canadian subsidiary of the U.S. acquiror, such shares being exchangeable for shares of the U.S. acquiror).

Implementation Of Proposed Changes

The above-noted proposed changes to the Treaty will become effective when both the Canadian and U.S. Governments ratify the Protocol. The earliest date on which the Protocol could become effective is January 1, 2008. The Proposals to amend the Tax Act were released in draft form for comment and the government has indicated that following this period, it will introduce the legislation in Parliament at the earliest opportunity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions