Paulson To Sign Updated US-Canada Tax Treaty

by Mike Godfrey, Tax-News.com, Washington

21 September 2007

US Treasury Secretary Henry Paulson and Canadian Finance Minister Jim Flaherty are scheduled to meet in Quebec on Friday September 21 to sign a protocol that would improve the US-Canada income tax treaty for cross-border financing.

The amendment will eliminate the 10% withholding tax on interest payments paid by borrowers in one country to lenders in the other in arm's length arrangements. The new protocol will also phase out withholding tax on interest payments in non-arm's-length arrangements, or company subsidiaries, over three years.

Economist believe that removing withholding tax on interest will increase capital investment in Canada by as much as C$18 billion, (US$17.9 billion).

It is estimated by the Canadian government that the measure would cost C$250 million in the two fiscal years following the change.

In addition, it was reported by Canadian Press that the amendment also aims to extend treaty benefits to limited liability companies commonly used by US venture capital firms, further harmonize the tax treatment of pension contributions in the two countries, and draft new rules to clarify the treatment of stock options.

The move has been welcomed by business representatives in Canada, with Michael Murphy, Executive Vice President of Policy for the Canadian Chamber of Commerce, noting in an Associated Press report that: "This is something we've been advocating for a number of years, so it will be well supported by the business community."

"It gets an important impediment to foreign investment out of the way, so it's worth a lot," Murphy added.

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