[Senate Treaty Document 104-4]
[From the U.S. Government Publishing Office]



   104th Congress 1st            SENATE              Treaty Doc.
         Session
                                                        104-4
_______________________________________________________________________



                                     

 
    A REVISED PROTOCOL AMENDING THE 1980 TAX CONVENTION WITH CANADA

                               __________

                                MESSAGE

                                  from

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

 A REVISED PROTOCOL AMENDING THE CONVENTION BETWEEN THE UNITED STATES 
  AND CANADA WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL SIGNED AT 
WASHINGTON ON SEPTEMBER 26, 1980, AS AMENDED BY THE PROTOCOLS SIGNED ON 
                    JUNE 14, 1983 AND MARCH 28, 1984




 April 24, 1995.--Protocol was read the first time and, together with 
the accompanying papers, referred to the Committee on Foreign Relations 
          and ordered to be printed for the use of the Senate
  

                         LETTER OF TRANSMITTAL

                              ----------                              

                                   The White House, April 24, 1995.
To the Senate of the United States:
    I transmit herewith for Senate advice and consent to 
ratification, a revised Protocol Amending the Convention 
Between the United States of America and Canada with Respect to 
Taxes on Income and on Capital Signed at Washington on 
September 26, 1980, as Amended by the Protocols Signed on June 
14, 1983, and March 28, 1984. This revised Protocol was signed 
at Washington on March 17, 1995. Also transmitted for the 
information of the Senate is the report of the Department of 
State with respect to the revised Protocol. The principal 
provisions of the Protocol, as well as the reasons for the 
technical amendments made in the revised Protocol, are 
explained in that document.
    It is my desire that revised Protocol transmitted herewith 
be considered in place of the Protocol to the Income Tax 
Convention with Canada signed at Washington on August 31, 1994, 
which was transmitted to the Senate with my message dated 
September 14, 1994, and which is now pending in the Committee 
on Foreign Relations. I desire, therefore, to withdraw from the 
Senate the Protocol signed in August 1994.
    I recommend that the Senate give early and favorable 
consideration to the revised Protocol and give its advice and 
consent to ratification.
                                                William J. Clinton.
  

                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                        Washington, April 12, 1995.
The President,
The White House.
    The President: I have the honor to submit to you, with a 
view to its transmission to the Senate for advice and consent 
to ratification, a revised Protocol Amending the Convention 
between the United States and Canada with Respect to Taxes on 
Income and on Capital signed at Washington on September 26, 
1980, as amended by the Protocols signed on June 14, 1983 and 
March 28, 1984. The revised Protocol would replace the Protocol 
to the Convention between the United States and Canada signed 
at Washington on August 31, 1994, which was transmitted to the 
Senate with a message from the President dated September 14, 
1994, and which is now pending in the Committee on Foreign 
Relations. The Protocol makes a number of amendments to the 
Convention. The most significant amendments are described 
below, in the order in which they appear in the Protocol. The 
revised Protocol makes technical changes intended to clarify 
the operation of some of the death tax provisions and to ensure 
that certain rules for entry into force operate properly.
    The Convention currently provides for adjustments to 
related party transactions to reflect the amounts of income and 
expense that would have been reported in unrelated party 
transactions. It also provides for the other Contracting State 
to make correlative adjustments. However, unlike most of the 
United States tax treaties, the present Convention requires the 
State making the first adjustment to withdraw it if the initial 
adjustment has not been reported to the other Contracting State 
within six years of the year to which the first adjustment 
relates. This has created a potential for abuse. The Protocol 
will remove the obligation of the first-mentioned State to 
withdraw its adjustment in those circumstances.
    The Protocol also reduces the withholding rates charged by 
one country on payments of certain classes of dividends, 
interest and royalties to residents of the other country. The 
withholding rate on dividends is reduced from 10 to 5 percent, 
phased in over two years, for a corporate shareholder that owns 
at least 10 percent of the voting stock of the paying company 
and is the beneficial owner of the dividends. The Protocol 
adds, in what has become established U.S. tax treaty policy, a 
rule to ensure that dividends paid by non-taxable ``conduit'' 
entities, such as U.S.-regulated investment companies (RICs) 
and real estate investment trusts (REITs), will not receive 
unjustified treaty benefits. In addition, the small individual 
shareholder benefits for REITs will be allowed to the estate of 
such an individual for up to five years.
    The general withholding rate on interest will be reduced 
from 15 to 10 percent. The exemption in the present treaty for 
interest on trade credits will be broadened to include not only 
interest received by the seller but also interest received by 
other holders of trade credits. Real estate mortgage investment 
conduit (REMIC) excess inclusions will be taxable by the United 
States at full statutory rates. Most classes of royalties, 
including software royalties, will be exempt from withholding 
by the country in which the royalty arises.
    Social security benefits, under the Protocol, are subject 
to tax only in the country making the payment. This change 
reflects U.S. tax treaty policy.
    The scope of the non-discrimination article is broadened to 
include all national-level taxes in both Contracting States. 
Under the present Convention, the non-discrimination provisions 
are limited, with respect to taxes imposed by Canada, to taxes 
imposed under the Canadian Income Tax Act.
    The Protocol strengthens levels of cooperation between the 
tax authorities of the Contracting States. It provides that the 
Contracting States may, by mutual agreement, implement an 
arbitration procedure for the resolution of disputes under the 
Convention. The Protocol also adds a detailed set of rules 
under which each State will assist the other in the collection 
of its taxes.
    The information exchange provision is also broadened to 
include all national taxes. With respect to Canadian taxes, the 
present Convention covers only taxes imposed under the Income 
Tax Act and any national taxes on estates and gifts. The 
Protocol also provides for consultation and, if appropriate, 
renegotiation (subject to the usual ratification procedures) 
where future domestic legislation materially conflicts with 
treaty provisions.
    The present Convention has no general anti-treaty-shopping 
rules. The comprehensive ``limitations on benefits'' provisions 
add to the treaty by the Protocol are, at Canada's request, 
primarily unilateral. These provisions protect the United 
States against use of the treaty by ``treaty shoppers'' seeking 
to gain unintended U.S. treaty benefits through Canada.
    The Protocol adds rules to the Convention concerning 
taxation at death. The United States and Canada have different 
methods for imposing taxation at death. The United States 
imposes an estate tax, while Canada imposes an income tax on 
certain gains deemed realized at death. The Protocol contains 
many provisions which reduce the impact of taxes imposed at 
death by one Contracting State on residents of the other. 
First, the Protocol provides a limited U.S. estate tax waiver 
for small estates of Canadian resident decedents. Second, it 
provides a pro rata unified credit by the United States for 
estates of Canadian resident decedents. Third, it allows a 
limited U.S. ``marital credit'' for estates of Canadian 
resident decedents and of Canadian-citizen decedents resident 
in the United States. Fourth, the Protocol allows a credit 
against U.S. estate tax for Canadian income tax on certain 
income, profits, and gains realized in the year of death and on 
certain gains deemed realized at death by Canadian residents, 
and vice versa. Fifth, certain U.S. ``qualified domestic 
trusts'' would be allowed to qualify as Canadian spousal trusts 
for purposes of Canadian law. Finally, relief would be provided 
for certain cross-border charitable bequests. The revised 
Protocol clarifies certain aspects of the computation and 
coordination of these provisions concerning taxation at death.
    The Protocol requires the appropriate authorities of the 
Contracting States to consult within three years of its entry 
into force regarding further reductions in withholding rates 
and the application of the anti-treaty-shopping rules. The 
appropriate authorities are instructed to consult after three 
years regarding implementation of the arbitration procedure. 
The Protocol enters into force upon the exchange of instruments 
of ratification.
    A technical memorandum explaining in detail the provisions 
of the revised Protocol will be prepared by the Department of 
the Treasury and will be submitted separately to the Senate 
Committee on Foreign Relations.
    The Department of the Treasury and the Department of State 
cooperated in the negotiation of the revised Protocol. It has 
the full approval of both Departments.
            Respectfully submitted,
                                                     Peter Tarnoff.