[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.