CANADA-US TREATY PROTOCOL
HOW DO THE NEW MEASURES AFFECT YOUR BUSINESS?

Baker Newman Noyes is a member firm of Baker Tilly International, a network of high quality, independent accounting and business services companies in 104 countries throughout the world. One of the benefits of membership is the sharing of information regarding international tax matters that affect our clients.

On September 21, 2007 the fifth Protocol to the Canada-US Income Tax Convention was signed. This included a number of measures both expected and unexpected. One of our Baker Tilly International affiliates, Meyers Norris Penney, LLP located in Calgary, Alberta, Canada has provided an analysis of the Protocol.

A summary of the measures included in the protocol is presented below. A link to their entire brochure outlining the Protocol is also included.

Highlights of the Canada-US Treaty Protocol

On September 21, 2007 the fifth Protocol to the Canada-US Income Tax Convention (the "Treaty") was signed. While the Protocol includes a number of relieving measures that were expected, a number of unanticipated measures have also been introduced. This Tax Alert summarizes key measures that may affect cross-border activities of businesses and individuals.

The Protocol must now be ratified in the House of Commons (Canada) and the US Senate. The Protocol will enter into force on the later of January 1, 2008 and the date of ratification by both countries.

HIGHLIGHTS OF THE PROTOCOL:

CORPORATE TAX

• Elimination of withholding taxes on cross-border interest payments;
• Extension of treaty benefits to Limited Liability Companies; and
• Denial of treaty benefits to other hybrid entities - Reverse Hybrids and Unlimited Liability Companies ("ULC’s")

PERSONAL TAX

• Mutual tax recognition of pension contributions in cross-border employment situations;
• Clarification on how stock options are taxed in cross-border situations;
• Broadening of the 183 day rule on income from employment for cross-border employees;
• Elimination of double taxation on emigrant gains; and
• Deemed permanent establishment for services business (if threshold test met).

OTHER

• Introduction of a mandatory arbitration process for Canada / US tax authorities to resolve certain issues (transfer pricing, allocation of profits, residency determination and certain royalties);
• Limitation on benefits – abuse and "treaty shopping" provision

 HOW DO THE NEW MEASURES AFFECT YOUR BUSINESS?

• All cross-border structures currently in place that use hybrid entities should be reviewed. While the earliest date for these changes to be effective is January 1, 2010, planning should be done now to mitigate any adverse tax consequences.
• Companies who engage in cross-border transactions may need to assess the impact of the Protocol on their future income tax balances.
• If you have cross-border employees or executives, care must be taken to ensure threshold tests are understood and closely monitored as there are a number of new measures that broaden the taxability of income in the other country.
• If you are a service provider or a consultant who provides services (for one project or connected projects) for more than 183 days in any 12 month period across the border, you may be subject to tax (or additional compliance requirements).
• If you are making payments to Canadian recipients, additional documentation may be required to support the eligibility for treaty benefits to ensure for example, the correct amount of withholding tax has been remitted.

Click the link below to read the entire brochure:

Tax Alert – Treaty Summary

This is presented for informational purposes only and should not be relied upon for financial or legal advice. For more information, please contact a Baker Newman Noyes tax professional at 207.879.2100.