On December 14, 2007, the legislation to eliminate Canadian withholding tax on interest paid or credited to arm’s length non-resident lenders became law. As a result the effective date for the elimination of Canadian non-resident withholding tax on arm's length payments of interest is January 1, 2008.

The withholding tax changes introduced by Bill C-28 were first announced in the March 19, 2007 Federal Budget and draft legislation dated October 2, 2007. Under the prior announcements, the new withholding tax rules were expected to take effect only upon ratification of the Fifth Protocol to the Canada-United States Income Tax Convention, 1980 (the “Treaty”). No specific time frame for ratification was announced, but it was widely expected that it would not occur until well into the new year. In fact, the Canadian Federal government has now ratified the Fifth Protocol to the Treaty, but the United States has yet to do so.

The elimination of withholding tax marked by the passage of Bill C-28 will substantially improve access of Canadian enterprises to the international debt markets and open the way to an increased volume of international financing transactions, as non-Canadian lenders will no longer be restricted to lending in Canada on the basis of the existing withholding tax exemption – “the 5/25 rule” – whereby the borrower must not be obligated to repay more than 25% of the principal amount of the debt obligation within five years of the date of the advance (subject to certain exceptions). As a result, short-term debt, as well as many structured products, will become available to Canadian enterprises from foreign financing sources.