On December 15, 2008, Canada’s Department of Finance and the US Treasury Department announced the entry into force of the Fifth Protocol to the Canada- US Income Tax Convention, 1980. The Fifth Protocol was signed by Canada and the US on September 21, 2007, ratified by Canada on December 14, 2007 when Bill S-2 received Royal Assent, and subsequently ratified by the US Senate on September 23, 2008.
Key provisions of the Protocol have the following effective dates:
- The withholding tax exemption for arm’s length interest has retroactive effect to payments made from January 1, 2008.
- The phased-in exemption for related party interest payments also applies as of January 1, 2008. The rate is reduced from 10% to 7% for payments in 2008, to 4% for payments in 2009, and to 0% for payments in 2010 and subsequent years.
- The effective dates of the reciprocal limitation on benefits clause and the look through rule for applying treaty benefits in respect of income derived through fiscally transparent entities vary. In respect of withholding taxes, the rules are effective for amounts paid or credited on or after February 1, 2009. In respect of other taxes, the rules are effective for taxable years that begin after 2008.
- The anti-hybrid rules which will deny treaty benefits with respect to certain common cross-border acquisition and financing arrangements will take effect on January 1, 2010.
- The deemed permanent establishment rule for cross-border service providers will have effect for a service provider’s third taxable year ending after December 15, 2008 (i.e., January 1, 2010 if the service provider has a December 31 year-end), but it will not apply to include any days of presence, services rendered, or gross active business revenues that occur or arise prior to January 1, 2010.
To view the Department of Finance Canada’s announcement, please go to: http://www.fin.gc.ca/news08/08-104e.html.