Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Tax, September 2009
The Fifth Protocol (the Protocol) to the Canada–U.S. Income Tax Convention (the Treaty) was signed in 2007 and generally took effect in 2009. The Protocol introduced controversial new "anti-hybrid" rules. These rules changed the treatment of many cross-border payments and, therefore, were introduced on a deferred basis in order to provide taxpayers with time to re-structure arrangements affected by the new rules.
These new anti-hybrid rules will become effective starting January 1, 2010.
One of the anti-hybrid rules affects payments made by Canadian unlimited liability companies (ULCs) which are fiscally transparent for U.S., but not Canadian, tax purposes. Payments made by such ULCs will become ineligible for reduced withholding rates under the Treaty where the treatment of the payments for U.S. tax purposes differs from the hypothetical U.S. tax treatment that would have been obtained had the ULC not been fiscally transparent. All cross-border structures involving ULCs and other hybrid entities should be re-considered and – where appropriate – re-structured before January 1, 2010 to avoid loss of treaty benefits.
The Blakes Tax Group has developed considerable experience in dealing with the anti-hybrid rules, and would be pleased to assist you in evaluating existing structures.
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.