Originally published in Blakes Bulletin on Tax, July
The Fifth Protocol (the Protocol) to the Canada-United
States Income Tax Convention (the Treaty) modifies the Treaty
with respect to contributions and benefits under pension plans
(or certain other qualifying retire¬ment plans) by and on
behalf of individuals residing in one Contracting State and
working in the other (Commuters), as well as individuals who
move from one Contracting State to the other on short-term (up
to five years) work assignments, and continue to contribute to
a plan in the first country (Transferees). The Technical
Explanation (TE) emphasizes that, in general, the amount of
contributions that may be deducted or benefits that may be
tax-sheltered will be subject to the limits under the tax laws
of the country of employment in the case of Commuters, and the
country of original residence in the case of Transferees. In
addition, certain rules will be applied to prevent "double
dipping" so that individuals may not accrue benefits under
plans in both countries in respect of the same services or time
For U.S. citizens living and working in Canada, the TE makes
it clear that deductible contributions or tax-sheltered
benefits in respect of a qualifying Canadian retirement plan
must not exceed the lower of the limits on such contributions
or benefits under the law of the U.S. and the law of Canada,
notwithstanding the more general rule that deduction of
contributions and tax-sheltering of benefits is governed by the
laws of the country of residence where an individual is not a
The Protocol also amends the Treaty to clarify that
tax-exempt trusts, companies, organizations and other
arrangements that are investment vehicles for charitable and
similar organizations and/or tax-exempt trusts, companies,
organizations and arrangements operated exclusively to
administer or provide pension, retirement or employee benefits
(collectively, Employee Plans) will now be exempt from tax on
interest and dividend income pursuant to Article XXI of the
Treaty. The exemption under Article XXI is available to an
invest¬ment vehicle that is a "resident of" a
contracting state. In addition, Article XXIX, "A
Limitation on Benefits" extends the benefits of the Treaty
to charitable and pension investment vehicles that are
"exempt organiza¬tions" under Article XXI
provided the investment vehicle is a "resident of a
contracting state". "
Unlike Articles XXI and XXIX, Article IV of the Treaty,
which is concerned with who is to be a resident of a
contracting state, does not expressly address trusts that are
investment vehicles for Employee Plans and conse¬quently
there is a technical question as to the residence for Treaty
purposes of certain tax-exempt trusts, such as pension master
trusts under the Act. We understand that the Canadian and U.S.
tax authorities have gener¬ally been willing to treat such
trusts as residents of the contracting state in which they are
constituted. However, on its face, Article IV does not
specifically deal with such tax-exempt trusts and the general
rule is that trusts are residents of a Contracting State only
to the extent that they are liable to tax on their income in
that state, either directly at the trust level or in the hands
of a beneficiary. In the case of a pension master trust, both
the master trust and the registered pension plan trusts that
are beneficiaries of the master trust are exempt from tax under
Under the Protocol, new paragraph 6 of Article IV provides
that income will be considered to have been derived by a person
who is a resident of a Contracting State where the person is
considered to have derived the income from a "fiscally
transparent" entity. We had originally anticipated that
this new provision could be applied to tax-exempt trusts that
were investment vehicles for Employee Plans, but the TE
suggests that this will not be the case as it indicates that,
in the Canadian context, only "bare" trusts will be
considered fiscally transparent. From a Canadian perspective,
the new provisions in Articles XXI and XXIX that expressly
extend Treaty benefits to investment vehicles (including
trusts) for Employee Plans would be of limited utility if they
did not apply to elected master trusts under the Act, and we
see no reason for the Canadian and U.S. tax authorities to deny
Treaty benefits to elected master trusts and similar trust
arrangements. However, it would have been helpful if the TE
could have addressed this issue explicitly.
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 Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Please join members of the Blakes Commercial Real Estate group as they discuss five key provisions of a commercial real estate purchase agreement that are often the subject of much negotiation but are sometimes misunderstood.
Emotional culture is influenced in great part by the mindset and actions of leadership, although employees also play more of a role than they may realize in creating the culture that exists in the group.
The session will be led by Dr. Robert Brooks, an award-winning author and psychologist. In his presentation, Dr. Brooks will describe the mindset and realistic practices of leaders and staff that help to nurture and sustain a culture characterized by positive emotions, satisfying, respectful relationships, a sense of meaning and ownership for one’s work, and enhanced job performance. Examples will be offered to illustrate strategies for developing a positive emotional culture in an organization.
Join leading lawyers from the Blakes Pensions, Benefits & Executive Compensation group as they discuss recent updates and legal developments in pension and employee benefits law as well as strategies to identify and minimize common risks.
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).