Canadian Bankers Applaud US Tax Treaty Amendment

by Mike Godfrey, Tax-News.com, Washington

26 September 2007

The Canadian banking industry has applauded the governments of Canada and the United States for eliminating withholding tax on interest payments in their revision of the tax treaty between the two countries.

"This tax was a barrier to the free flow of capital between the two countries and impeded the efficient functioning of capital markets," explained Nancy Hughes Anthony, President and CEO of the Canadian Bankers Association. "The elimination of this tax will result in increased investment and a reduced cost of capital."

Canadian Finance Minister Jim Flaherty and US Treasury Secretary Henry Paulson, signed the update to the Canada-US Tax Treaty on Friday morning, following a meeting in Chelsea, Quebec.

In addition to eliminating withholding taxes on cross-border interest payments, the fifth update of the Canada-US Tax Treaty also: extends treaty benefits to limited liability companies; allows taxpayers to require that certain key double tax issues, such as transfer pricing, be settled through arbitration; ensures that there is no double taxation on emigrants’ gains; gives mutual tax recognition of pension contributions; and clarifies how stock options are taxed.

"The banking industry has been advocating for years for these changes," Hughes Anthony continued. "This is a very positive step in the government's efforts to simplify the Canadian tax system and give Canada a more competitive tax environment."

With substantial amounts of investment flowing between Canada and the US, the treaty revision has also been welcomed by representatives of the general business community at large.

“After nearly 10 years of negotiations, we are delighted that the government has signed an updated Canada-US Tax Treaty,” stated Perrin Beatty, President and Chief Executive Officer of the Canadian Chamber of Commerce. “The economic benefits to Canada stemming from the elimination of the withholding tax on interest paid are tremendous and will result in a substantial increase in capital and foreign direct investments in Canada.”

According to Paulson, 11% of US direct investment abroad is invested in Canada. In turn, Canada is a dominant investor in the United States, representing 9% of total foreign direct investment in the US.

The updated tax treaty must be ratified by the United States Senate and the Canadian House of Commons before it can enter into effect.

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