Canada: Protocol Amending The Canada-US Tax Treaty Enters Into Force

Last month the Canadian Minister of Finance and the US Treasury Secretary announced the entry into force of the Fifth Protocol to the Canada-United States Income Tax Convention, 1980 (the "Treaty"), which updates and amends the Treaty. Although the Fifth Protocol is generally effective for taxable years that begin after 2008, as noted below, several provisions have special application rules.


The Fifth Protocol introduced the much-anticipated rule to reduce – and eventually eliminate – sourcecountry withholding tax on cross-border payments of interest. Subject to certain exemptions, interest arising in one country and beneficially owned by a resident of the other country will be taxable only in the other country. Certain types of interest will not benefit from the exemption, such as "participating" interest arising in Canada, and interest arising in the US that is contingent interest of a type that does not qualify as portfolio interest under US law.

This elimination of source-country withholding tax is effective retroactive to January 1, 2008 for interest paid to persons who are not "related" to the payor. The rate reductions will be phased-in for interest paid to "related persons": retroactive to January 1, 2008, the withholding rate applicable to such interest is 7%, with a rate of 4% applying to interest paid in 2009. Thereafter, the full exemption will apply. A "related person" includes a person deemed under the Treaty to be related to another person, including a person who participates directly or indirectly in the management or control of the other person. (Note that Canada recently amended its domestic tax rules to eliminate withholding taxes on most types of interest paid by Canadian residents to arm's length persons, so the effect of the Fifth Protocol on Canadian withholding tax on arm's length interest payments will be limited.)


Historically, the Canada Revenue Agency has denied the benefit of the Treaty to LLCs on the basis that an LLC is not a resident of the US for purposes of the Treaty, as it is generally disregarded for US tax purposes. Although the Fifth Protocol falls short of extending the benefits of the Treaty to the LLC itself, the amended Treaty extends Treaty benefits to US residents who derive Canadian-source income, profit or gain through an LLC. For example, Canadian withholding tax on dividends received by an LLC, the members of which are residents of the US for purposes of the Treaty, will be reduced from the statutory rate of 25% to the applicable Treaty rate. This change will be effective for taxable years that begin after 2008. PAGE 2


The Fifth Protocol introduced a rule that will deny Treaty benefits to persons who receive amounts of income, profit or gain from certain hybrid entities, if the tax treatment of such amounts in the jurisdiction of the recipient is not the same as if the hybrid entity had not been used. This rule will apply, for example, to distributions to US residents by unlimited liability companies ("ULCs") formed under certain provincial corporate statutes (such as a Nova Scotia ULC or "NSULC"), where the ULC has "checked the box" so as to be a disregarded entity for US tax purposes. An amount of income, profit or gain (including, for example, interest or dividends) paid by a ULC to a US resident will no longer qualify for a reduced rate of withholding tax under the Treaty. Rather, the statutory withholding rate of 25% will apply to such amounts.

The rule will also affect the use of partnerships formed under Canadian law that have US resident partners and that elect to be treated for US tax purposes as a corporation. Currently, payments (for example, of interest) by a resident of Canada to such a partnership are subject to withholding tax at Treaty-reduced rates. The amended Treaty will deny Treaty benefits to such payments, with the result that the statutory rate of 25% will apply.

These rules, which were intended to target certain financing structures which the Canadian government found offensive, will also impact the tax efficiency of inoffensive, inbound to Canada acquisition or investment structures. These rules will not come into effect until January 1, 2010.


The Fifth Protocol introduced Canada's first reciprocal limitation on benefits ("LOB") provision by amending existing Article XXIX-A of the Treaty. The purpose of this provision is to limit or, in some cases, deny benefits under the Treaty to residents of non-contracting states who form entities in the US or Canada in order to obtain more favourable tax treatment under the Treaty (sometimes referred to as "treaty shopping"). Prior to this amendment, Canada had relied on its domestic anti-avoidance rules to combat perceived abuses of treaty shopping. The LOB provision is generally effective for taxable years that begin after 2008.


The Fifth Protocol contains a number of other amendments to the Treaty. These amendments deal with matters ranging from the taxation of stock options and pensions, effective for taxation years that begin after 2008, to mandatory arbitration of Treaty disputes, generally effective as of December 15, 2008.

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at

Ogilvy Renault is the International Legal Alliance's Canadian Gold Award winner for 2008 in M&A and Corporate Finance.

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 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.