On September 21, 2007, the Minister of Finance announced the signing of the Fifth Protocol to the Canada-United States Income Tax Convention, 1980 (the “Treaty”), which updates and amends certain provisions of the Treaty.

LIMITED LIABILITY COMPANIES (“LLCs”)

The Protocol extends Treaty benefits to U.S. resident members of fiscally transparent entities, such as U.S. LLCs. Historically, the Canada Revenue Agency (“CRA”) has denied the benefit of the Treaty to LLCs on the basis that an LLC is not a resident of the U.S. for purposes of the Treaty, as it is treated as a flow-through for U.S. tax purposes. Although the Protocol falls short of extending the benefits of the Treaty to the LLC itself, the Protocol extends Treaty benefits to U.S. residents who derive Canadian-source income, profit or gain through an LLC. As a result, Canadian withholding tax on dividends received by an LLC with members resident in the U.S. for purposes of the Treaty will be reduced from the statutory rate of 25% to the applicable Treaty rate. This change will be effective once the Protocol comes into force.

UNLIMITED LIABILITY COMPANIES (“ULCs”)

The Protocol contains a surprising rule that appears to deny the benefit of the Treaty to holders of interests in certain hybrid entities, such as ULCs formed under certain provincial corporate statutes (such as a Nova Scotia ULC or “NSULC”), where the ULC has “checked the box” so as to be a disregarded entity for U.S. tax purposes. An amount of income, profit or gain paid by a ULC (including, for example, interest or dividends) to a U.S. person appears to no longer qualify for a reduced rate of withholding tax under the Treaty. Rather, the statutory withholding rate of 25% would appear to apply to such amounts. The apparent effect of the change will be to materially increase the Canadian tax liability on profits earned through a ULC. Such increase may not be fully recoverable by the U.S. person through the foreign tax credit mechanism. Accordingly, existing structures using a ULC should be reviewed. This rule will not come into effect until the first day of the third calendar year that ends after the Protocol comes into force (January 1, 2010 if the Protocol is ratified in 2008).

CANADIAN PARTNERSHIPS

Another rule in the Protocol will affect the use of partnerships formed under Canadian law that have U.S. resident partners and that elect to be treated for U.S. tax purposes as a corporation. Under the current law and CRA administrative policy, payments (for example, of interest) by a resident of Canada to such a partnership would be subject to withholding tax at Treaty-reduced rates. The Protocol would appear to deny Treaty benefits to such payments, with the result that the statutory rate of 25% would apply. As with the rule regarding ULCs, this change will be effective the first day of the third calendar year that ends after the Protocol comes into force.

It will be important for cross-border structures to be reviewed in light of these new rules.