Originally published in Blakes Bulletin on Tax,
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
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.
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