Canada enacts changes to the U.S.-Canada tax treaty

New protocol will provide mutual tax recognition of pension contributions on either side of the border

Changes to the United States-Canada Income Tax Convention have received royal assent. The changes, called the fifth protocol, will come into effect once they have been ratified by the U.S., said Minister of Finance Jim Flaherty.

“Modernizing this long-standing treaty will encourage further trade and investment in Canada and the United States and help us to better compete in the global economy,” said Flaherty.

“I am hopeful that the U.S. will soon ratify the protocol so that individuals and businesses on both sides of the border, including manufacturers, can realize the significant benefits of the updated treaty.”

The agreement to modify the treaty was signed in September by Flaherty and U.S. secretary of the treasury Henry Paulson. The treaty has been updated four times, through agreements known as protocols, since it was first signed in 1980.

Key measures of the fifth protocol include:

• eliminating withholding taxes on cross-border interest payments;

• extending treaty benefits to limited liability companies;

• allowing taxpayers to require that certain key double taxation issues, such as transfer pricing, be settled through arbitration;

• ensuring that there is no double taxation on emigrants’ gains;

• giving mutual tax recognition of pension contributions; and

• clarifying how stock options are taxed.

The full text of the protocol, two diplomatic notes setting out more technical aspects of the agreement and a backgrounder are attached and can also be viewed on the Department of Finance website..

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