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Protocol,
signed March 17, 1995, amending the Convention between the United
States of America and Canada with respect to Taxes on Income and
on Capital, signed September 26, 1980 (Third Protocol)
Paragraphs 2 to 4 of Article
II (Taxes Covered) of the Convention shall be deleted and replaced
by the following:
"2. Notwithstanding paragraph 1, the
taxes existing on March 17, 1995 to which the Convention shall
apply are:
(a) In the case of Canada, the taxes imposed
by the Government of Canada under the Income Tax Act; and
(b) In the case of the United States, the
Federal income taxes imposed by the Internal Revenue Code of
1986. However, the Convention shall apply to:
(i) The United States accumulated earnings
tax and personal holding company tax, to the extent, and only
to the extent, necessary to implement the provisions of paragraphs
5 and 8 of Article X (Dividends);
(ii) The United States excise taxes imposed
with respect to private foundations, to the extent, and only
to the extent, necessary to implement the provisions of paragraph
4 of Article XXI (Exempt Organizations);
(iii) The United States social security
taxes, to the extent, and only to the extent, necessary to
implement the provisions of paragraph 2 of Article XXIV (Elimination
of Double Taxation) and paragraph 4 of Article XXIX (Miscellaneous
Rules); and
(iv) The United States estate taxes imposed
by the Internal Revenue Code of 1986, to the extent, and only
to the extent, necessary to implement the provisions of paragraph
3(g) of Article XXVI (Mutual Agreement Procedure) and Article
XXIX B (Taxes Imposed by Reason of Death).
3. The Convention shall apply also to:
(a) Any taxes identical or substantially
similar to those taxes to which the Convention applies under
paragraph 2; and
(b) Taxes on capital;
which are imposed after March 17, 1995 in
addition to, or in place of, the taxes to which the Convention
applies under paragraph 2."
Subparagraphs (c) and (d) of paragraph 1 of
Article III (General Definitions)
of the Convention shall be deleted and replaced by the following:
"(c) The term "Canadian tax"
means the taxes referred to in Article II (Taxes Covered) that
are imposed on income by Canada;
(d) The term "United States tax"
means the taxes referred to in Article II (Taxes Covered), other
than in subparagraph (b)(i) to (iv) of paragraph 2 thereof, that
are imposed on income by the United States;"
1. Paragraph 1 of Article
IV (Residence) of the Convention shall be deleted and replaced
by the following:
"1. For the purposes of this Convention,
the term "resident" of a Contracting State means any
person that, under the laws of that State, is liable to tax therein
by reason of that person's domicile, residence, citizenship, place
of management, place of incorporation or any other criterion of
a similar nature, but in the case of an estate or trust, only
to the extent that income derived by the estate or trust is liable
to tax in that State, either in its hands or in the hands of its
beneficiaries. For the purposes of this paragraph, an individual
who is not a resident of Canada under this paragraph and who is
a United States citizen or an alien admitted to the United States
for permanent residence (a "green card" holder) is a
resident of the United States only if the individual has a substantial
presence, permanent home or habitual abode in the United States,
and that individual's personal and economic relations are closer
to the United States than to any third State. The term "resident"
of a Contracting State is understood to include:
(a) The Government of that State or a political
subdivision or local authority thereof or any agency or instrumentality
of any such government, subdivision or authority, and
(b)
(i) A trust, organization or other arrangement
that is operated exclusively to administer or provide pension,
retirement or employee benefits; and
(ii) A not-for-profit organization
that was constituted in that State and that
is, by reason of its nature as such, generally exempt from income
taxation in that State."
2. A new sentence shall be added at the end
of paragraph 3 of Article IV (Residence)
of the Convention as follows:
"Notwithstanding the preceding sentence,
a company that was created in a Contracting State, that is a resident
of both Contracting States and that is continued at any time in
the other Contracting State in accordance with the corporate law
in that other State shall be deemed while it is so continued to
be a resident of that other State."
Paragraphs 3 and 4 of Article
IX (Related Persons) of the Convention shall be deleted and
replaced by the following:
"3. Where an adjustment is made or to
be made by a Contracting State in accordance with paragraph 1,
the other Contracting State shall (notwithstanding any time or
procedural limitations in the domestic law of that other State)
make a corresponding adjustment to the income, loss or tax of
the related person in that other State if:
(a) It agrees with the first-mentioned adjustment;
and
(b) Within six years from the end of the
taxable year to which the first-mentioned adjustment relates,
the competent authority of the other State has been notified
of the first-mentioned adjustment. The competent authorities,
however, may agree to consider cases where the corresponding
adjustment would not otherwise be barred by any time or procedural
limitations in the other State, even if the notification is
not made within the six-year period.
4. In the event that the notification referred
to in paragraph 3 is not given within the time period referred
to therein, and the competent authorities have not agreed to otherwise
consider the case in accordance with paragraph 3(b), the competent
authority of the Contracting State which has made or is to make
the first-mentioned adjustment may provide relief from double
taxation where appropriate."
1. The references in paragraphs 2(a) and 6 of
Article X (Dividends) of the
Convention to a rate of tax of "10 per cent" shall be
deleted and replaced by references to a rate of tax of "5 per
cent".
2. Paragraph 7 of Article
X (Dividends) of the Convention shall be deleted and replaced
by the following:
"7. Notwithstanding the provisions of
paragraph 2,
(a) Dividends paid by a company that is
a resident of Canada and a non-resident-owned investment corporation
to a company that is a resident of the United States, that owns
at least 10 per cent of the voting stock of the company paying
the dividends and that is the beneficial owner of such dividends,
may be taxed in Canada at a rate not exceeding 10 per cent of
the gross amount of the dividends;
(b) Paragraph 2(b) and not paragraph 2(a)
shall apply in the case of dividends paid by a resident of the
United States that is a Regulated Investment Company; and
(c) Paragraph 2(a) shall not apply to dividends
paid by a resident of the United States that is a Real Estate
Investment Trust, and paragraph 2(b) shall apply only where
such dividends are beneficially owned by an individual holding
an interest of less than 10 per cent in the trust; otherwise
the rate of tax applicable under the domestic law of the United
States shall apply. Where an estate or a testamentary trust
acquired its interest in a Real Estate Investment Trust as a
consequence of an individual's death, for the purposes of the
preceding sentence the estate or trust shall for the five-year
period following the death be deemed with respect to that interest
to be an individual."
1. The reference in paragraph 2 of Article
XI (Interest) of the Convention to "15 per cent" shall
be deleted and replaced by a reference to "10 per cent".
2. Paragraph 3(d) of Article
XI (Interest) of the Convention shall be deleted and replaced
by the following:
"(d) The interest is beneficially owned
by a resident of the other Contracting State and is paid with
respect to indebtedness arising as a consequence of the sale
on credit by a resident of that other State of any equipment,
merchandise or services except where the sale or indebtedness
was between related persons; or"
3. A new paragraph 9 shall be added to Article
XI (Interest) of the Convention as follows:
"9. The provisions of paragraphs 2 and
3 shall not apply to an excess inclusion with respect to a residual
interest in a Real Estate Mortgage Investment Conduit to which
Section 860G of the United States Internal Revenue Code, as it
may be amended from time to time without changing the general
principle thereof, applies."
1. Paragraph 3 of Article
XII (Royalties) of the Convention shall be deleted and replaced
by the following:
"3. Notwithstanding the provisions of
paragraph 2,
(a) Copyright royalties and other like payments
in respect of the production or reproduction of any literary,
dramatic, musical or artistic work (other than payments in respect
of motion pictures and works on film, videotape or other means
of reproduction for use in connection with television);
(b) Payments for the use of, or the right
to use, computer software;
(c) Payments for the use of, or the right
to use, any patent or any information concerning industrial,
commercial or scientific experience (but not including any such
information provided in connection with a rental or franchise
agreement); and
(d) Payments with respect to broadcasting
as may be agreed for the purposes of this paragraph in an exchange
of notes between the Contracting States;
arising in a Contracting State and beneficially
owned by a resident of the other Contracting State shall be taxable
only in that other State."
2. Paragraph 6 of Article
XII (Royalties) of the Convention shall be deleted and replaced
by the following:
"6. For the purposes of this Article,
(a) Royalties shall be deemed to arise in
a Contracting State when the payer is a resident of that State.
Where, however, the person paying the royalties, whether he
is a resident of a Contracting State or not, has in a State
a permanent establishment or a fixed base in connection with
which the obligation to pay the royalties was incurred, and
such royalties are borne by such permanent establishment or
fixed base, then such royalties shall be deemed to arise in
the State in which the permanent establishment or fixed base
is situated and not in any other State of which the payer is
a resident; and
(b) Where subparagraph (a) does not operate
to treat royalties as arising in either Contracting State and
the royalties are for the use of, or the right to use, intangible
property or tangible personal property in a Contracting State,
then such royalties shall be deemed to arise in that State."
Paragraph 8 of Article
XIII (Gains) of the Convention shall be deleted and replaced
by the following:
"8. Where a resident of a Contracting
State alienates property in the course of a corporate or other
organization, reorganization, amalgamation, division or similar
transaction and profit, gain or income with respect to such alienation
is not recognized for the purpose of taxation in that State, if
requested to do so by the person who acquires the property, the
competent authority of the other Contracting State may agree,
in order to avoid double taxation and subject to terms and conditions
satisfactory to such competent authority, to defer the recognition
of the profit, gain or income with respect to such property for
the purpose of taxation in that other State until such time and
in such manner as may be stipulated in the agreement."
1. Paragraph 3 of Article
XVIII (Pensions and Annuities) of the Convention shall be deleted
and replaced by the following:
"3. For the purposes of this Convention,
the term "pensions" includes any payment under a superannuation,
pension or other retirement arrangement, Armed Forces retirement
pay, war veterans pensions and allowances and amounts paid under
a sickness, accident or disability plan, but does not include
payments under an income-averaging annuity contract or any benefit
referred to in paragraph 5."
 Article
2, paragraph 1, of the Fourth Protocol deleted
and replaced the above paragraph 3.
2. Paragraph 5 of Article
XVIII (Pensions and Annuities) of the Convention shall be deleted
and replaced by the following:
"5. Benefits under the social security
legislation in a Contracting State (including tier 1 railroad
benefits but not including unemployment benefits) paid to a resident
of the other Contracting State (and in the case of Canadian benefits,
to a citizen of the United States) shall be taxable only in the
first-mentioned State."
Article 2, paragraph 2, of the
Fourth Protocol deleted
and replaced the above paragraph 5.
3. A new paragraph 7 shall be added to Article
XVIII (Pensions and Annuities) of the Convention as follows:
"7. A natural person who is a citizen
or resident of a Contracting State and a beneficiary of a trust,
company, organization or other arrangement that is a resident
of the other Contracting State, generally exempt from income taxation
in that other State and operated exclusively to provide pension,
retirement or employee benefits may elect to defer taxation in
the first-mentioned State, under rules established by the competent
authority of that State, with respect to any income accrued in
the plan but not distributed by the plan, until such time as and
to the extent that a distribution is made from the plan or any
plan substituted therefor."
1. Paragraphs 2 and 3 of Article
XXI (Exempt organizations) of the Convention shall be deleted
and replaced by the following:
"2. Subject to the provisions of paragraph
3, income referred to in Articles X (Dividends) and XI (Interest)
derived by:
(a) A trust, company, organization or other
arrangement that is a resident of a Contracting State, generally
exempt from income taxation in a taxable year in that State
and operated exclusively to administer or provide pension, retirement
or employee benefits; or
(b) A trust, company, organization or other
arrangement that is a resident of a Contracting State, generally
exempt from income taxation in a taxable year in that State
and operated exclusively to earn income for the benefit of an
organization referred to in subparagraph (a);
shall be exempt from income taxation in that
taxable year in the other Contracting State.
3. The provisions of paragraphs 1 and 2 shall
not apply with respect to the income of a trust, company, organization
or other arrangement from carrying on a trade or business or from
a related person other than a person referred to in paragraph
1 or 2."
2. A new sentence shall be added at the end
of paragraph 5 of Article XXI
(Exempt organizations)of the Convention as follows:
"For the purposes of this paragraph,
a company that is a resident of Canada and that is taxable in
the United States as if it were a resident of the United States
shall be deemed to be a resident of the United States."
3. Paragraph 6 of Article
XXI (Exempt organizations) of the Convention shall be deleted
and replaced by the following:
"6. For the purposes of Canadian taxation,
gifts by a resident of Canada to an organization that is a resident
of the United States, that is generally exempt from United States
tax and that could qualify in Canada as a registered charity if
it were a resident of Canada and created or established in Canada,
shall be treated as gifts to a registered charity; however, no
relief from taxation shall be available in any taxation year with
respect to such gifts (other than such gifts to a college or university
at which the resident or a member of the resident's family is
or was enrolled) to the extent that such relief would exceed the
amount of relief that would be available under the Income Tax
Act if the only income of the resident for that year were the
resident's income arising in the United States. The preceding
sentence shall not be interpreted to allow in any taxation year
relief from taxation for gifts to registered charities in excess
of the amount of relief allowed under the percentage limitations
of the laws of Canada in respect of relief for gifts to registered
charities."
A new paragraph 3 shall be added to Article
XXII (Other Income) of the Convention as follows:
"3. Losses incurred by a resident of
a Contracting State with respect to wagering transactions the
gains on which may be taxed in the other Contracting State shall,
for the purpose of taxation in that other State, be deductible
to the same extent that such losses would be deductible if they
were incurred by a resident of that other State."
1. Paragraphs 2(a) and 2(b) of Article
XXIV (Elimination of Double Taxation) of the Convention shall
be deleted and replaced by the following:
"(a) Subject to the provisions of the
law of Canada regarding the deduction from tax payable in Canada
of tax paid in a territory outside Canada and to any subsequent
modification of those provisions (which shall not affect the
general principle hereof)
(i) Income tax paid or accrued to the
United States on profits, income or gains arising in the United
States, and
(ii) In the case of an individual, any
social security taxes paid to the United States (other than
taxes relating to unemployment insurance benefits) by the
individual on such profits, income or gains
shall be deducted from any Canadian tax
payable in respect of such profits, income or gains;
(b) Subject to the existing provisions of
the law of Canada regarding the taxation of income from a foreign
affiliate and to any subsequent modification of those provisions
-- which shall not affect the general principle hereof -- for
the purpose of computing Canadian tax, a company which is a
resident of Canada shall be allowed to deduct in computing its
taxable income any dividend received by it out of the exempt
surplus of a foreign affiliate which is a resident of the United
States; and"
2. Paragraph 5 of Article
XXIV (Elimination of Double Taxation) of the Convention shall
be deleted and replaced by the following:
"5. Notwithstanding the provisions of
paragraph 4, where a United States citizen is a resident of Canada,
the following rules shall apply in respect of the items of income
referred to in Article X (Dividends), XI (Interest) or XII (Royalties)
that arise (within the meaning of paragraph 3) in the United States
and that would be subject to United States tax if the resident
of Canada were not a citizen of the United States, as long as
the law in force in Canada allows a deduction in computing income
for the portion of any foreign tax paid in respect of such items
which exceeds 15 per cent of the amount thereof:
(a) The deduction so allowed in Canada shall
not be reduced by any credit or deduction for income tax paid
or accrued to Canada allowed in computing the United States
tax on such items;
(b) Canada shall allow a deduction from
Canadian tax on such items in respect of income tax paid or
accrued to the United States on such items, except that such
deduction need not exceed the amount of the tax that would be
paid on such items to the United States if the resident of Canada
were not a United States citizen; and
(c) For the purposes of computing the United
States tax on such items, the United States shall allow as a
credit against United States tax the income tax paid or accrued
to Canada after the deduction referred to in subparagraph (b).
The credit so allowed shall reduce only that portion of the
United States tax on such items which exceeds the amount of
tax that would be paid to the United States on such items if
the resident of Canada were not a United States citizen."
3. Paragraph 7 of Article
XXIV (Elimination of Double Taxation) of the Convention shall
be deleted and replaced by the following:
"7. For the purposes of this Article,
any reference to "income tax paid or accrued" to a Contracting
State shall include Canadian tax and United States tax, as the
case may be, and taxes of general application which are paid or
accrued to a political subdivision or local authority of that
State, which are not imposed by that political subdivision or
local authority in a manner inconsistent with the provisions of
the Convention and which are substantially similar to the Canadian
tax or United States tax, as the case may be."
4. A new paragraph 10 shall be added to Article
XXIV (Elimination of Double Taxation) of the Convention as follows:
"10. Where in accordance with any provision
of the Convention income derived or capital owned by a resident
of a Contracting State is exempt from tax in that State, such
State may nevertheless, in calculating the amount of tax on other
income or capital, take into account the exempted income or capital."
1. Paragraph 3 of Article
XXV (Non-Discrimination) of the Convention shall be deleted
and replaced by the following:
"3. In determining the taxable income
or tax payable of an individual who is a resident of a Contracting
State, there shall be allowed as a deduction in respect of any
other person who is a resident of the other Contracting State
and who is dependent on the individual for support the amount
that would be so allowed if that other person were a resident
of the first- mentioned State."
2. Paragraph 10 of Article
XXV (Non-Discrimination) of the Convention shall be deleted
and replaced by the following:
"10. Notwithstanding the provisions of
Article II (Taxes Covered), this Article shall apply to all taxes
imposed by a Contracting State."
1. Paragraphs 3(f) and (g) of Article
XXVI (Mutual Agreement Procedure) of the Convention shall be
deleted and replaced by the following:
"(f) To the elimination of double taxation
with respect to a partnership;
(g) To provide relief from double taxation
resulting from the application of the estate tax imposed by
the United States or the Canadian tax as a result of a distribution
or disposition of property by a trust that is a qualified domestic
trust within the meaning of section 2056A of the Internal Revenue
Code, or is described in subsection 70(6) of the Income Tax
Act or is treated as such under paragraph 5 of Article XXIX
B (Taxes Imposed by Reason of Death), in cases where no relief
is otherwise available; or
(h) To increases in any dollar amounts referred
to in the Convention to reflect monetary or economic developments."
2. A new paragraph 6 shall be added to Article
XXVI (Mutual Agreement Procedure) of the Convention as follows:
"6. If any difficulty or doubt arising
as to the interpretation or application of the Convention cannot
be resolved by the competent authorities pursuant to the preceding
paragraphs of this Article, the case may, if both competent authorities
and the taxpayer agree, be submitted for arbitration, provided
that the taxpayer agrees in writing to be bound by the decision
of the arbitration board. The decision of the arbitration board
in a particular case shall be binding on both States with respect
to that case. The procedures shall be established in an exchange
of notes between the Contracting States. The provisions of this
paragraph shall have effect after the Contracting States have
so agreed through the exchange of notes."
 A
new Article XXVI A (Assistance
in Collection) shall be added to the Convention
as follows:
"Article XXVI A Assistance in Collection
1. The Contracting States undertake to lend
assistance to each other in the collection of taxes referred to
in paragraph 9, together with interest, costs, additions to such
taxes and civil penalties, referred to in this Article as a "revenue
claim".
2. An application for assistance in the collection
of a revenue claim shall include a certification by the competent
authority of the applicant State that, under the laws of that
State, the revenue claim has been finally determined. For the
purposes of this Article, a revenue claim is finally determined
when the applicant State has the right under its internal law
to collect the revenue claim and all administrative and judicial
rights of the taxpayer to restrain collection in the applicant
State have lapsed or been exhausted.
3. A revenue claim of the applicant State
that has been finally determined may be accepted for collection
by the competent authority of the requested State and, subject
to the provisions of paragraph 7, if accepted shall be collected
by the requested State as though such revenue claim were the requested
State's own revenue claim finally determined in accordance with
the laws applicable to the collection of the requested State's
own taxes.
4. Where an application for collection of
a revenue claim in respect of a taxpayer is accepted
(a) By the United States, the revenue claim
shall be treated by the United States as an assessment under
United States laws against the taxpayer as of the time the application
is received; and
(b) By Canada, the revenue claim shall be
treated by Canada as an amount payable under the Income Tax
Act, the collection of which is not subject to any restriction.
5. Nothing in this Article shall be construed
as creating or providing any rights of administrative or judicial
review of the applicant State's finally determined revenue claim
by the requested State, based on any such rights that may be available
under the laws of either Contracting State. If, at any time pending
execution of a request for assistance under this Article, the
applicant State loses the right under its internal law to collect
the revenue claim, the competent authority of the applicant State
shall promptly withdraw the request for assistance in collection.
6. Subject to this paragraph, amounts collected
by the requested State pursuant to this Article shall be forwarded
to the competent authority of the applicant State. Unless the
competent authorities of the Contracting States otherwise agree,
the ordinary costs incurred in providing collection assistance
shall be borne by the requested State and any extraordinary costs
so incurred shall be borne by the applicant State.
7. A revenue claim of an applicant State accepted
for collection shall not have in the requested State any priority
accorded to the revenue claims of the requested State.
8. No assistance shall be provided under this
Article for a revenue claim in respect of a taxpayer to the extent
that the taxpayer can demonstrate that
(a) Where the taxpayer is an individual,
the revenue claim relates to a taxable period in which the taxpayer
was a citizen of the requested State, and
(b) Where the taxpayer is an entity that
is a company, estate or trust, the revenue claim relates to
a taxable period in which the taxpayer derived its status as
such an entity from the laws in force in the requested State.
9. Notwithstanding the provisions of Article
II (Taxes Covered), the provisions of this Article shall apply
to all categories of taxes collected by or on behalf of the Government
of a Contracting State.
10. Nothing in this Article shall be construed
as:
(a) Limiting the assistance provided for
in paragraph 4 of Article XXVI (Mutual Agreement Procedure);
or
(b) Imposing on either Contracting State
the obligation to carry out administrative measures of a different
nature from those used in the collection of its own taxes or
that would be contrary to its public policy (ordre public).
11. The competent authorities of the Contracting
States shall agree upon the mode of application of this Article,
including agreement to ensure comparable levels of assistance
to each of the Contracting States."
1. Paragraph 1 of Article
XXVII (Exchange of Information) of the Convention shall be deleted
and replaced by the following:
"1. The competent authorities of the
Contracting States shall exchange such information as is relevant
for carrying out the provisions of this Convention or of the domestic
laws of the Contracting States concerning taxes to which the Convention
applies insofar as the taxation thereunder is not contrary to
the Convention. The exchange of information is not restricted
by Article I (Personal Scope). Any information received by a Contracting
State shall be treated as secret in the same manner as information
obtained under the taxation laws of that State and shall be disclosed
only to persons or authorities (including courts and administrative
bodies) involved in the assessment or collection of, the administration
and enforcement in respect of, or the determination of appeals
in relation to the taxes to which the Convention applies or, notwithstanding
paragraph 4, in relation to taxes imposed by a political subdivision
or local authority of a Contracting State that are substantially
similar to the taxes covered by the Convention under Article II
(Taxes Covered). Such persons or authorities shall use the information
only for such purposes. They may disclose the information in public
court proceedings or in judicial decisions. The competent authorities
may release to an arbitration board established pursuant to paragraph
6 of Article XXVI (Mutual Agreement Procedure) such information
as is necessary for carrying out the arbitration procedure; the
members of the arbitration board shall be subject to the limitations
on disclosure described in this Article."
2. Paragraph 4 of Article
XXVII (Exchange of Information) of the Convention shall be deleted
and replaced by the following:
"4. For the purposes of this Article,
the Convention shall apply, notwithstanding the provisions of
Article II (Taxes Covered):
(a) To all taxes imposed by a Contracting
State; and
(b) To other taxes to which any other provision
of the Convention applies, but only to the extent that the information
is relevant for the purposes of the application of that provision."
1. Paragraph 3(a) of Article
XXIX (Miscellaneous Rules) of the Convention shall be deleted
and replaced by the following:
"(a) Under paragraphs 3 and 4 of Article
IX (Related persons), paragraphs 6 and 7 of Article XIII (Gains),
paragraphs 1, 3, 4, 5, 6(b) and 7 of Article XVIII (Pensions
and Annuities), paragraph 5 of Article XXIX (Miscellaneous Rules),
paragraphs 1, 5 and 6 of Article XXIX B (Taxes Imposed by Reason
of Death), paragraphs 2, 3, 4 and 7 of Article XXIX B (Taxes
Imposed by Reason of Death) as applied to the estates of persons
other than former citizens referred to in paragraph 2 of this
Article, paragraphs 3 and 5 of Article XXX (Entry into Force),
and Articles XIX (Government Service), XXI (Exempt Organizations),
XXIV (Elimination of Double Taxation) , XXV (Non-Discrimination)
and XXVI (Mutual Agreement Procedure);"
2. Paragraphs 5 to 7 of Article
XXIX (Miscellaneous Rules) of the Convention shall be deleted
and replaced by the following:
"5. Where a person who is a resident
of Canada and a shareholder of a United States S corporation requests
the competent authority of Canada to do so, the competent authority
may agree, subject to terms and conditions satisfactory to such
competent authority, to apply the following rules for the purposes
of taxation in Canada with respect to the period during which
the agreement is effective:
(a) The corporation shall be deemed to be
a controlled foreign affiliate of the person;
(b) All the income of the corporation shall
be deemed to be foreign accrual property income;
(c) For the purposes of subsection 20(11)
of the Income Tax Act, the amount of the corporation's income
that is included in the person's income shall be deemed not
to be income from a property; and
(d) Each dividend paid to the person on
a share of the capital stock of the corporation shall be excluded
from the person's income and shall be deducted in computing
the adjusted cost base to the person of the share.
6. For purposes of paragraph 3 of Article
XXII (Consultation) of the General Agreement on Trade in Services,
the Contracting States agree that:
(a) A measure falls within the scope of
the Convention only if:
(i) The measure relates to a tax to which
Article XXV (Non-Discrimination) of the Convention applies;
or
(ii) The measure relates to a tax to which
Article XXV (Non-Discrimination) of the Convention does not
apply and to which any other provision of the Convention applies,
but only to the extent that the measure relates to a matter
dealt with in that other provision of the Convention; and
(b) Notwithstanding paragraph 3 of Article
XXII (Consultation) of the General Agreement on Trade in Services,
any doubt as to the interpretation of subparagraph (a) will
be resolved under paragraph 3 of Article XXVI (Mutual Agreement
Procedure) of the Convention or any other procedure agreed to
by both Contracting States.
7. The appropriate authority of a Contracting
State may request consultations with the appropriate authority
of the other Contracting State to determine whether change to
the Convention is appropriate to respond to changes in the law
or policy of that other State. Where domestic legislation enacted
by a Contracting State unilaterally removes or significantly limits
any material benefit otherwise provided by the Convention, the
appropriate authorities shall promptly consult for the purpose
of considering an appropriate change to the Convention."
A
new Article XXIX A (Limitation
on Benefits) shall be added to the Convention
as follows:
"Article XXIX A Limitation on Benefits
1. For the purposes of the application of
this Convention by the United States,
(a) A qualifying person shall be entitled
to all of the benefits of this Convention, and
(b) Except as provided in paragraphs 3,
4 and 6, a person that is not a qualifying person shall not
be entitled to any benefits of the Convention.
2. For the purposes of this Article, a qualifying
person is a resident of Canada that is:
(a) A natural person;
(b) The Government of Canada or a political
subdivision or local authority thereof, or any agency or instrumentality
of any such government, subdivision or authority;
(c) A company or trust in whose principal
class of shares or units there is substantial and regular trading
on a recognized stock exchange;
(d) A company more than 50 per cent of the
vote and value of the shares (other than debt substitute shares)
of which is owned, directly or indirectly, by five or fewer
persons each of which is a company or trust referred to in subparagraph
(c), provided that each company or trust in the chain of ownership
is a qualifying person or a resident or citizen of the United
States;
(e)
(i) A company 50 per cent or more of the
vote and value of the shares (other than debt substitute shares)
of which is not owned, directly or indirectly, by persons
other than qualifying persons or residents or citizens of
the United States, or
(ii) A trust 50 per cent or more of the
beneficial interest in which is not owned, directly or indirectly,
by persons other than qualifying persons or residents or citizens
of the United States,
where the amount of the expenses deductible
from gross income that are paid or payable by the company or
trust, as the case may be, for its preceding fiscal period (or,
in the case of its first fiscal period, that period) to persons
that are not qualifying persons or residents or citizens of
the United States is less than 50 per cent of its gross income
for that period;
(f) An estate;
(g) A not-for-profit organization, provided
that more than half of the beneficiaries, members or participants
of the organization are qualifying persons or residents or citizens
of the United States; or
(h) An organization described in paragraph
2 of Article XXI (Exempt Organizations) and established for
the purpose of providing benefits primarily to individuals who
are qualifying persons, persons who were qualifying persons
within the five preceding years, or residents or citizens of
the United States.
3. Where a person that is a resident of Canada
and is not a qualifying person of Canada, or a person related
thereto, is engaged in the active conduct of a trade or business
in Canada (other than the business of making or managing investments,
unless those activities are carried on with customers in the ordinary
course of business by a bank, an insurance company, a registered
securities dealer or a deposit-taking financial institution),
the benefits of the Convention shall apply to that resident person
with respect to income derived from the United States in connection
with or incidental to that trade or business, including any such
income derived directly or indirectly by that resident person
through one or more other persons that are residents of the United
States. Income shall be deemed to be derived from the United States
in connection with the active conduct of a trade or business in
Canada only if that trade or business is substantial in relation
to the activity carried on in the United States giving rise to
the income in respect of which benefits provided under the Convention
by the United States are claimed.
4. A company that is a resident of Canada
shall also be entitled to the benefits of Articles X (Dividends),
XI (Interest) and XII (Royalties) if
(a) Its shares that represent more than
90 per cent of the aggregate vote and value represented by all
of its shares (other than debt substitute shares) are owned,
directly or indirectly, by persons each of whom is a qualifying
person, a resident or citizen of the United States or a person
who
(i) Is a resident of a country with which
the United States has a comprehensive income tax convention
and is entitled to all of the benefits provided by the United
States under that convention;
(ii) Would qualify for benefits under
paragraphs 2 or 3 if that person were a resident of Canada
(and, for the purposes of paragraph 3, if the business it
carried on in the country of which it is a resident were carried
on by it in Canada); and
(iii) Would be entitled to a rate of United
States tax under the convention between that person's country
of residence and the United States, in respect of the particular
class of income for which benefits are being claimed under
this Convention, that is at least as low as the rate applicable
under this Convention; and
(b) The amount of the expenses deductible
from gross income that are paid or payable by the company for
its preceding fiscal period (or, in the case of its first fiscal
period, that period) to persons that are not qualifying persons
or residents or citizens of the United States is less than 50
per cent of the gross income of the company for that period.
5. For the purposes of this Article,
(a) The term "recognized stock exchange"
means:
(i) The NASDAQ System owned by the National
Association of Securities Dealers, Inc. and any stock exchange
registered with the Securities and Exchange Commission as
a national securities exchange for purposes of the Securities
Exchange Act of 1934;
(ii) Canadian stock exchanges that are
"prescribed stock exchanges" under the Income Tax
Act; and
(iii) Any other stock exchange agreed
upon by the Contracting States in an exchange of notes or
by the competent authorities of the Contracting States;
(b) The term "not-for-profit organization"
of a Contracting State means an entity created or established
in that State and that is, by reason of its not-for-profit status,
generally exempt from income taxation in that State, and includes
a private foundation, charity, trade union, trade association
or similar organization; and
(c) The term "debt substitute share"
means:
(i) A share described in paragraph (e)
of the definition "term preferred share" in the
Income Tax Act, as it may be amended from time to time without
changing the general principle thereof; and
(ii) Such other type of share as may be
agreed upon by the competent authorities of the Contracting
States.
6. Where a person that is a resident of Canada
is not entitled under the preceding provisions of this Article
to the benefits provided under the Convention by the United States,
the competent authority of the United States shall, upon that
person's request, determine on the basis of all factors including
the history, structure, ownership and operations of that person
whether
(a) Its creation and existence did not have
as a principal purpose the obtaining of benefits under the Convention
that would not otherwise be available; or
(b) It would not be appropriate, having
regard to the purpose of this Article, to deny the benefits
of the Convention to that person.
The person shall be granted the benefits of
the Convention by the United States where the competent authority
determines that subparagraph (a) or (b) applies.
7. It is understood that the fact that the
preceding provisions of this Article apply only for the purposes
of the application of the Convention by the United States shall
not be construed as restricting in any manner the right of a Contracting
State to deny benefits under the Convention where it can reasonably
be concluded that to do otherwise would result in an abuse of
the provisions of the Convention."
A
new Article XXIX B (Taxes
Imposed by Reason of Death) shall be added
to the Convention as follows:
"Article XXIX B Taxes Imposed by Reason
of Death
1. Where the property of an individual who
is a resident of a Contracting State passes by reason of the individual's
death to an organization referred to in paragraph 1 of Article
XXI (Exempt Organizations), the tax consequences in a Contracting
State arising out of the passing of the property shall apply as
if the organization were a resident of that State.
2. In determining the estate tax imposed by
the United States, the estate of an individual (other than a citizen
of the United States) who was a resident of Canada at the time
of the individual's death shall be allowed a unified credit equal
to the greater of
(a) The amount that bears the same ratio
to the credit allowed under the law of the United States to
the estate of a citizen of the United States as the value of
the part of the individual's gross estate that at the time of
the individual's death is situated in the United States bears
to the value of the individual's entire gross estate wherever
situated; and
(b) The unified credit allowed to the estate
of a nonresident not a citizen of the United States under the
law of the United States.
The amount of any unified credit otherwise
allowable under this paragraph shall be reduced by the amount
of any credit previously allowed with respect to any gift made
by the individual. A credit otherwise allowable under subparagraph
(a) shall be allowed only if all information necessary for the
verification and computation of the credit is provided.
3. In determining the estate tax imposed by
the United States on an individual's estate with respect to property
that passes to the surviving spouse of the individual (within
the meaning of the law of the United States) and that would qualify
for the estate tax marital deduction under the law of the United
States if the surviving spouse were a citizen of the United States
and all applicable elections were properly made (in this paragraph
and paragraph 4 referred to as "qualifying property"),
a non-refundable credit computed in accordance with the provisions
of paragraph 4 shall be allowed in addition to the unified credit
allowed to the estate under paragraph 2 or under the law of the
United States, provided that
(a) The individual was at the time of death
a citizen of the United States or a resident of either Contracting
State;
(b) The surviving spouse was at the time
of the individual's death a resident of either Contracting State;
(c) If both the individual and the surviving
spouse were residents of the United States at the time of the
individual's death, one or both was a citizen of Canada; and
(d) The executor of the decedent's estate
elects the benefits of this paragraph and waives irrevocably
the benefits of any estate tax marital deduction that would
be allowed under the law of the United States on a United States
Federal estate tax return filed for the individual's estate
by the date on which a qualified domestic trust election could
be made under the law of the United States.
4. The amount of the credit allowed under
paragraph 3 shall equal the lesser of
(a) The unified credit allowed under paragraph
2 or under the law of the United States (determined without
regard to any credit allowed previously with respect to any
gift made by the individual), and
(b) The amount of estate tax that would
otherwise be imposed by the United States on the transfer of
qualifying property.
The amount of estate tax that would otherwise
be imposed by the United States on the transfer of qualifying
property shall equal the amount by which the estate tax (before
allowable credits) that would be imposed by the United States
if the qualifying property were included in computing the taxable
estate exceeds the estate tax (before allowable credits) that
would be so imposed if the qualifying property were not so included.
Solely for purposes of determining other credits allowed under
the law of the United States, the credit provided under paragraph
3 shall be allowed after such other credits.
5. Where an individual was a resident of the
United States immediately before the individual's death, for the
purposes of subsection 70(6) of the Income Tax Act, both the individual
and the individual's spouse shall be deemed to have been resident
in Canada immediately before the individual's death. Where a trust
that would be a trust described in subsection 70(6) of that Act,
if its trustees that were residents or citizens of the United
States or domestic corporations under the law of the United States
were residents of Canada, requests the competent authority of
Canada to do so, the competent authority may agree, subject to
terms and conditions satisfactory to such competent authority,
to treat the trust for the purposes of that Act as being resident
in Canada for such time as may be stipulated in the agreement.
6. In determining the amount of Canadian tax
payable by an individual who immediately before death was a resident
of Canada, or by a trust described in subsection 70(6) of the
Income Tax Act (or a trust which is treated as being resident
in Canada under the provisions of paragraph 5), the amount of
any Federal or state estate or inheritance taxes payable in the
United States (not exceeding, where the individual was a citizen
of the United States or a former citizen referred to in paragraph
2 of Article XXIX (Miscellaneous Rules), the amount of estate
and inheritance taxes that would have been payable if the individual
were not a citizen or former citizen of the United States) in
respect of property situated within the United States shall,
(a) To the extent that such estate or inheritance
taxes are imposed upon the individual's death, be allowed as
a deduction from the amount of any Canadian tax otherwise payable
by the individual for the taxation year in which the individual
died on the total of
(i) Any income, profits or gains of the
individual arising (within the meaning of paragraph 3 of Article
XXIV (Elimination of Double Taxation)) in the United States
in that year, and
(ii) Where the value at the time of the
individual's death of the individual's entire gross estate
wherever situated (determined under the law of the United
States) exceeded 1.2 million U.S. dollars or its equivalent
in Canadian dollars, any income, profits or gains of the individual
for that year from property situated in the United States
at that time, and
(b) To the extent that such estate or inheritance
taxes are imposed upon the death of the individual's surviving
spouse, be allowed as a deduction from the amount of any Canadian
tax otherwise payable by the trust for its taxation year in
which that spouse dies on any income, profits or gains of the
trust for that year arising (within the meaning of paragraph
3 of Article XXIV (Elimination of Double Taxation)) in the United
States or from property situated in the United States at the
time of death of the spouse.
For purposes of this paragraph, property shall
be treated as situated within the United States if it is so treated
for estate tax purposes under the law of the United States as
in effect on March 17, 1995, subject to any subsequent changes
thereof that the competent authorities of the Contracting States
have agreed to apply for the purposes of this paragraph. The deduction
allowed under this paragraph shall take into account the deduction
for any income tax paid or accrued to the United States that is
provided under paragraph 2(a), 4(a) or 5(b) of Article XXIV (Elimination
of Double Taxation).
7. In determining the amount of estate tax
imposed by the United States on the estate of an individual who
was a resident or citizen of the United States at the time of
death, or upon the death of a surviving spouse with respect to
a qualified domestic trust created by such an individual or the
individual's executor or surviving spouse, a credit shall be allowed
against such tax imposed in respect of property situated outside
the United States, for the federal and provincial income taxes
payable in Canada in respect of such property by reason of the
death of the individual or, in the case of a qualified domestic
trust, the individual's surviving spouse. Such credit shall be
computed in accordance with the following rules:
(a) A credit otherwise allowable under this
paragraph shall be allowed regardless of whether the identity
of the taxpayer under the law of Canada corresponds to that
under the law of the United States.
(b) The amount of a credit allowed under
this paragraph shall be computed in accordance with the provisions
and subject to the limitations of the law of the United States
regarding credit for foreign death taxes (as it may be amended
from time to time without changing the general principle hereof),
as though the income tax imposed by Canada were a creditable
tax under that law.
(c) A credit may be claimed under this paragraph
for an amount of federal or provincial income tax payable in
Canada only to the extent that no credit or deduction is claimed
for such amount in determining any other tax imposed by the
United States, other than the estate tax imposed on property
in a qualified domestic trust upon the death of the surviving
spouse.
8. Provided that the value, at the time of
death, of the entire gross estate wherever situated of an individual
who was a resident of Canada (other than a citizen of the United
states) at the time of death does not exceed 1.2 million U.S.
dollars or its equivalent in Canadian dollars, the United States
may impose its estate tax upon property forming part of the estate
of the individual only if any gain derived by the individual from
the alienation of such property would have been subject to income
taxation by the United States in accordance with Article XIII
(Gains)."
1. The appropriate authorities of the Contracting
States shall consult within a three-year period from the date
on which this Protocol enters into force with respect to further
reductions in withholding taxes provided in the Convention, and
with respect to the rules in Article XXIX A (Limitation on Benefits)
of the Convention.
2. The appropriate authorities of the Contracting
States shall consult after a three-year period from the date on
which the Protocol enters into force in order to determine whether
it is appropriate to make the exchange of notes referred to in
Article XXVI (Mutual Agreement Procedure) of the Convention.
1. This Protocol shall be subject to ratification
in accordance with the applicable procedures in Canada and the
United States and instruments of ratification shall be exchanged
as soon as possible.
2. The Protocol shall enter into force upon
the exchange of instruments of ratification, and shall have effect:
(a) For tax withheld at the source on income
referred to in Articles X (Dividends), XI (Interest), XII (Royalties)
and XVIII (Pensions and Annuities) of the Convention, except
on income referred to in paragraph 5 of Article
XVIII of the Convention (as it read before the entry into
force of this Protocol), with respect to amounts paid or credited
on or after the first day of the second month next following
the date on which the Protocol enters into force, except that
the reference in paragraph
2(a) of Article X (Dividends) of the Convention, as amended
by the Protocol, to "5 per cent" shall be read, in
its application to amounts paid or credited on or after that
first day:
(i) Before 1996, as "7 per cent";
and
(ii) After 1995 and before 1997, as "6
per cent"; and
(b) For other taxes, with respect to taxable
years beginning on or after the first day of January next following
the date on which the Protocol enters into force, except that
the reference in paragraph
6 of Article X (Dividends) of the Convention, as amended
by the Protocol, to "5 per cent" shall be read, in
its application to taxable years beginning on or after that
first day and ending before 1997, as "6 per cent".
3. Notwithstanding the provisions of paragraph
2, Article XXVI A (Assistance in Collection)
of the Convention shall have effect for revenue claims finally
determined by a requesting State after the date that is 10 years
before the date on which the Protocol enters into force.
4. Notwithstanding the provisions of paragraph
2, paragraphs 2 through 8 of Article XXIX B (Taxes Imposed by
Reason of Death) of the Convention (and paragraph 2 of Article
II (Taxes covered) and paragraph 3(a) of Article XXIX (Miscellaneous
Rules) of the Convention, as amended by the Protocol, to the extent
necessary to implement paragraphs 2 through 8 of Article XXIX
B (Taxes Imposed by Reason of Death) of the Convention) shall,
notwithstanding any limitation imposed under the law of a Contracting
State on the assessment, reassessment or refund with respect to
a person's return, have effect with respect to deaths occurring
after the date on which the Protocol enters into force and, provided
that any claim for refund by reason of this sentence is filed
within one year of the date on which the Protocol enters into
force or within the otherwise applicable period for filing such
claims under domestic law, with respect to benefits provided under
any of those paragraphs with respect to deaths occurring after
November 10, 1988.
5. Notwithstanding the provisions of paragraph
2, paragraph 2 of Article 3 of the Protocol shall have effect
with respect to taxable years beginning on or after the first
day of January next following the date on which the Protocol enters
into force.
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