The United States Senate approved the September 21, 2007
protocol (the Protocol) to the Canada-United States Income Tax
Convention (the Treaty) on September 23, 2008. The Protocol will
enter into force once the U.S. exchanges instruments of
ratification with Canada. Ratification procedures were completed on
December 14, 2007. The procedures will be completed in the U.S.
once the President and the Secretary of the Treasury sign the
Protocol (which is expected to occur before the end of
Among other changes to the Treaty, the Protocol:
eliminates withholding tax on most cross-border interest
payments (phased in over two years for related party interest) and
many guarantee fees;
allows (or denies) treaty benefits for certain amounts derived
through or paid by hybrid entities (with a delayed coming into
force in the case of the benefit denial rules);
introduces a comprehensive bilateral limitation on benefits
requires the tax authorities of Canada and the United States to
resolve certain issues through binding arbitration.
The effective date for many of the Protocol's provisions
varies. The changes in the Protocol related to withholding tax on
payments (other than interest) generally apply as of the first day
of the second month beginning after the Protocol comes into force.
The elimination (or, in the case of payments to related persons,
the first-phase reduction to 7%) of withholding tax on most
cross-border interest payments is retroactively effective to
January 1, 2008 (assuming the Protocol comes into force in
In that case, U.S. residents who received interest payments from
Canadians in 2008 in respect of which tax was withheld at the
previous 10% rate should apply to the Canada Revenue Agency for a
refund of the excess amount withheld. Recent Canadian case law
suggests that the recipient of the interest (and not the payer)
should apply for the refund, regardless of whether a tax gross-up
applied on the original payment. In the U.S. context, the recipient
of the interest (and not the payer) should apply for a refund of
over withheld U.S. withholding tax, although there is some
authority suggesting that the payer may have standing to claim such
a refund if it is subject to a gross-up obligation.
The Protocol's changes will generally be effective for other
(non-withholding) taxes for tax years that begin in 2009 (assuming
the Protocol comes into force in 2008). Such changes would
generally apply, for example, to a company with a November 30 year
end on December 1, 2009 (unless an earlier tax year end arises in
2009, resulting, for example, from an amalgamation in 2009
involving the company).
Special timing applies to certain other provisions in the
Protocol, such as the Treaty benefit denial rules in respect of
certain hybrid entities and the new "services permanent
establishment" rule. The application of these rules is delayed
until January 1, 2010 (assuming the Protocol comes into force in
Binding Arbitration Conditions
Members of the U.S. Senate Foreign Relations Committee have
expressed concerns about certain procedural aspects of the
mandatory arbitration process (including concerns about the lack of
direct taxpayer participation). As a result, ratification of the
Protocol by the United States Senate is subject to two conditions
relating to the binding arbitration provisions. First, within two
years of ratification and before the first arbitration proceeding
under the Protocol, the U.S. Secretary of Treasury must provide a
report on the "rules of procedure applicable to arbitration
boards, including conflict of interest rules to be applied to
members of the arbitration board." Second, within 60 days of
the tenth arbitration under the Protocol or under the United
States' tax treaties with Belgium and Germany (each of which
contains similar binding arbitration provisions to those in the
Protocol), the U.S. Secretary of the Treasury must provide a report
on the operation and application of the arbitration provisions in
each of the three tax treaties. The second report must include
details on the results of the ten arbitration decisions, the number
of outstanding arbitration cases, and the number of cases that have
otherwise been settled by the applicable competent authorities
through the mutual agreement procedures. The second report must
also be updated on March 1 of each year for five years. These two
conditions allow the U.S. to monitor the procedural effectiveness
of the mandatory arbitration mechanism for the purpose of shaping
the U.S. treaty policy regarding mandatory arbitration in the
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.
The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
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).