[Senate Treaty Document 105-29]
[From the U.S. Government Publishing Office]
105th Congress Treaty Doc.
SENATE
1st Session 105-29
_______________________________________________________________________
PROTOCOL AMENDING TAX CONVENTION
WITH CANADA
__________
MESSAGE
from
THE PRESIDENT OF THE UNITED STATES
transmitting
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, MARCH 28, 1984, AND MARCH 17, 1995, SIGNED AT OTTAWA ON
JULY 29, 1997
September 23, 1997.--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.
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U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1997
LETTER OF TRANSMITTAL
----------
The White House, September 23, 1997.
To the Senate of the United States:
I transmit herewith for Senate advice and consent to
ratification the 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, March
28, 1984 and March 17, 1995, signed at Ottawa on July 29, 1997.
This Protocol modified the taxation of social security benefits
and the taxation of gains from the sale of shares of foreign
real-property holding companies.
I recommend that the Senate give early and favorable
consideration to this Protocol and give its advice and consent
to ratification.
William J. Clinton.
LETTER OF SUBMITTAL
----------
Department of State,
Washington, August 12, 1997.
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, the 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, March
28, 1984 and March 17, 1995, signed at Ottawa on July 29, 1997
(``the proposed Protocol''). The proposed Protocol to the
Convention addresses two issues: the taxation of gains from the
sale of shares of foreign real-property holding companies and
the taxation of social security benefits.
Article 1 of the proposed Protocol deletes and replaces
paragraphs 3(a) and 3(b)(ii) of Article XIII of the Convention,
which addresses the taxation of capital gains. The revised
provisions would define real property situated in the United
States and real property situated in Canada in such a way as to
deny each country the right under this Convention to tax
foreign persons on their income from the sale of the stock of
foreign corporations whose assets consist primarily of domestic
real estate. Both the United States and Canada currently tax
foreign persons on the proceeds from the sale of both
domesticreal estate and the stock of domestic corporations whose assets
consist primarily of domestic real estate. The current Convention also
permits the taxation of income from the sale of stock of foreign
companies whose assets consist primarily of domestic real estate. The
new limitation on each country's right to tax gains from the sale of
shares of real-property holding companies would be retroactively
effective to April 26, 1995.
Article 2 addresses taxation of social security benefits.
The treatment of social security benefits by the United States
and Canada was last modified by the 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, signed at Washington, March
17, 1995 (``the 1995 Protocol''), which applies to social
security benefits paid on or after January 1, 1996. The 1995
Protocol amended the Convention to move from residence-based
taxation to a system under which social security benefits are
taxed by the country paying the benefits (``the source
country'')--at a statutory rate of 25.5 percent by the United
States and 25.0 percent by Canada. In addition, Canada permits
U.S. recipients of Canadian benefits to file a Canadian tax
return and pay tax at lower graduated rates on net income,
enabling low-income U.S. recipients of Canadian social security
to pay little or no tax on their benefits. However, the United
States taxes at the 25.5 percent rate permitted by the 1995
Protocol. Thus, many Canadian recipients of U.S. benefits found
their benefits reduced by 25.5 percent after January 1, 1966.
Article 2 of the proposed Protocol returns to the system of
residence-based taxation in place before the1995 Protocol.
Social security benefits will be taxable in only the country in which
the recipient lives (``the country of residence''). This, under the
proposed Protocol, U.S. social security benefits paid to a resident of
Canada would be taxed only by Canada, and, a benefit paid by Canada
under its social security legislation to a U.S. resident would be taxed
only by the United States. Benefits would be taxed on a net basis at
graduated rates, and low-income recipients would not pay any tax.
Furthermore, the taxation of benefits by the country of residence takes
into account the way the benefits would have been taxed in the source
country. For example, since the United States includes only 85 percent
of U.S. social security benefits in taxable income, only 85 percent of
the U.S. benefits received by Canadians would be subject to Canadian
tax.
Article 2 of the proposed Protocol will apply to amounts
paid on or after January 1, 1996, the date the current rule
took effect. Thus, social security recipients may receive a
refund of taxes previously paid although some high-income
recipients may be required to pay additional taxes to their
country of residence. If, however, as a result of the change,
the tax of the country of residence exceeds the amount of the
refund there will be neither a refund of source-country tax nor
additional tax by the country of residence. Consequently, no
one will be subject to a higher rate of tax for the retroactive
period. (Nonetheless, in the future, some high-income
recipients of benefits will be subject to a higher rate of tax
if their average tax rate on these benefits in their country of
residence is higher than the current rate of source-country
withholding tax.) The proposed Protocol also outlines the rules
that the United States and Canada will follow in giving effect
to the retroactive application of the changes to the taxation
of social security benefits.
The Department of the Treasury and the Department of State
cooperated in the negotiation of the proposed Protocol. It has
the full approval of both Departments.
Respectfully submitted,
Madeleine Albright.