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Canada/United States Tax Treaty Protocol - Changes Implemented

The Government of Canada has implemented changes to the Tax Treaty with the United States. Revisions to the tax protocol are significant and should be considered by all entities with cross-border operations between Canada and the United States. Certain of the tax changes have retroactive application while others will be prospective, thus allowing for tax planning opportunities

Changes to interest withholding provisions are significant. Key details and phase-ins for the new 0% interest withholding rule are listed below:

Elimination of Withholding Tax on 3rd Party Interest
Retroactive to January 1, 2008 for arm's length (3rd party) nonparticipating interest paid or credited

Phase-out of Withholding Tax on Related Party Interest
For non-arm's length (related party) interest paid or credited (other than participating interest), withholding rates are:

  • 7% in 2008
  • 4% in 2009
  • 0% in 2010 and subsequent years

The Treaty Protocol introduced many other new provisions:

  • Elimination of Withholding Tax on Guarantee Fees;
  • New Treaty Benefits for US LLCs and other transparent entities (grantor trusts, etc.);
  • New 5% Dividend Withholding Tax on US LLCs' Corporate Shareholders;
  • New 25% Withholding Tax on Dividend & Interest Payments from Canadian ULCs;
  • New Canadian PE Rules for US Service Providers in Canada;
  • New "LOB" Rules providing tighter substance requirements on back-to-back transactions;
  • New Stock Option Income Allocation Rules
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