On September 18, 2000, Canada’s federal Finance Minister, Paul Martin, announced that Canada and the United States tax treaty negotiators had agreed in principle to recommend changes to the Canada-United States Income Tax Convention. Reproduced below is the Finance Canada News Release concerning the proposed changes.
Finance Minister Paul Martin today announced that Canadian and United States negotiators have agreed in principle to recommend changes to the Canada-United States Income Tax Convention (the "tax treaty").
"If approved by the legislatures of the two countries, these changes will make the tax system fairer by limiting the potential for double taxation of individuals who move from one country to another, and by clarifying a rule that some have argued allows corporations to avoid paying tax," said the Minister.
Minister Martin added that the announced measures will, if ratified, apply as of today's date. "We expect the current negotiations to produce other important changes to the tax treaty as well," he noted. "But we and the United States have agreed that these particular initiatives are important for international mobility, and should take effect right away."
Individuals -- Preventing Double Taxation
For individuals, the changes will ensure the appropriate tax treatment of an emigrant's gains. Specifically, where one country's tax rules treat an individual as having disposed of a property immediately before the individual emigrates to the other country, the individual will be able to choose to be treated under the other country's rules as also having disposed of and reacquired the property at its fair market value.
In most cases, this will mean that no tax is payable in the destination country on any pre-emigration gain. Where tax is payable in the destination country -- for example, where the property in question is real estate situated in that country -- the new rule will ensure appropriate tax crediting.
Corporations -- Clarifying Residence
For corporations, the proposals will clarify the effects on a company's residence of "continuance" (or "continuation") from one country into the other.
Laws in both countries allow a company incorporated in one jurisdiction to subject itself to another jurisdiction's corporate law system. A company originally formed in a Canadian province, for example, could continue into a U.S. state and be treated for company law purposes as though it had been incorporated there.
The Canada-U.S. tax treaty treats a company that continues from one country into the other as thereafter being resident in its new home country. However, it has come to the attention of the Canadian and U.S. tax authorities that some have asserted inconsistent positions with respect to a U.S. corporation that has continued into Canada while retaining its status as a U.S. corporation under U.S. internal law. The argument put forward is that the corporation would, by virtue of the treaty, be a resident only of Canada but that it would, for certain other U.S. tax purposes, retain its status as a U.S. corporation under U.S. internal law.
The negotiators agree that it was not contemplated that the continuance provision in the current treaty would be used to avoid taxes in this manner. Accordingly, the revised provision will clarify that a company incorporated in one country that continues into the other will still be treated as a resident of the first country unless that country's internal law no longer treats it as such. For example, a U.S. corporation that continues into Canada but retains its status as a U.S. corporation will, under the treaty, become a Canadian resident while remaining a U.S. resident. Such a corporation will not be entitled to any benefits under the Canada-U.S. tax treaty except to the extent agreed upon by the competent authorities of the two countries.
If approved, the rule for individuals will apply to changes in residence that take place on and after today's date. Similarly, the rule for corporations will apply to continuances effected on and after today's date, although no inference is intended regarding the treatment of such a corporation under current law. These modifications will form part of a package of tax treaty changes that negotiators expect to finalize in 2001.
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