[Senate Treaty Document 110-15]
[From the U.S. Government Publishing Office]



110th Congress                                              Treaty Doc.
 2d Session                      SENATE                          110-15
                                                                 

                                     

_______________________________________________________________________

                                     
 
           PROTOCOL AMENDING 1980 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 DONE AT 
 WASHINGTON ON SEPTEMBER 26, 1980, AS AMENDED BY THE PROTOCOLS DONE ON 
   JUNE 14, 1983, MARCH 28, 1984, MARCH 17, 1995, AND JULY 29, 1997, 
  SIGNED ON SEPTEMBER 21, 2007, AT CHELSEA (THE ``PROPOSED PROTOCOL'')

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March 13, 2008.--Treaty 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, March 13, 2008
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 done at Washington on September 26, 1980, 
as Amended by the Protocols done on June 14, 1983, March 28, 
1984, March 17, 1995, and July 29, 1997, signed on September 
21, 2007, at Chelsea (the ``proposed Protocol''). The proposed 
Protocol would amend the existing income tax Convention between 
the United States and Canada that was concluded in 1980, as 
amended by prior protocols (the ``existing Treaty''). Also 
transmitted for the information of the Senate is the report of 
the Department of State with respect to the proposed Protocol.
    The proposed Protocol would eliminate withholding taxes on 
cross-border interest payments. In addition, the proposed 
Protocol would coordinate the tax treatment of contributions 
to, and other benefits of, pension funds for cross-border 
workers. The proposed Protocol also includes provisions related 
to the taxation of permanent establishments, so-called dual-
resident corporations, income derived through certain entities 
that are considered fiscally transparent, and former U.S. 
citizens and long-term residents. The proposed Protocol further 
strengthens the existing Treaty's provisions that prevent the 
Treaty's inappropriate use by third-country residents. The 
proposed Protocol also provides for mandatory resolution of 
certain cases before the competent authorities.
    I recommend that the Senate give early and favorable 
consideration to the proposed Protocol and give its advice and 
consent to ratification.

                                                     George W. Bush
                          LETTER OF SUBMITTAL

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                                       Department of State,
                                  Washington, DC February 29, 2008.
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, the Protocol Amending the Convention Between 
the United States of America and Canada with Respect to Taxes 
on Income and on Capital Done at Washington on 26 September 
1980, as Amended by the Protocols Done on 14 June 1983, 28 
March 1984, 17 March 1995, and 29 July 1997, signed on 
September 21, 2007, at Chelsea (the ``proposed Protocol'') and 
related exchanges of notes. The proposed Protocol would amend 
the existing income tax Convention between the United States 
and Canada which was concluded in 1980, as amended by prior 
protocols (the ``existing Treaty'').
    The proposed Protocol would eliminate withholding taxes on 
cross-border interest payments. In addition, the proposed 
Protocol would coordinate the tax treatment of contributions 
to, and other benefits of, pension funds for cross-border 
workers. The proposed Protocol also includes provisions related 
to the taxation of permanent establishments, so-called dual-
resident corporations, income derived through certain entities 
that are considered fiscally transparent, and former U.S. 
citizens and long-term residents. The proposed Protocol further 
strengthens the existing Treaty's provisions that prevent the 
treaty's inappropriate use by third-country residents. The 
proposed Protocol also provides for mandatory resolution of 
certain cases before the competent authorities.
    The exchanges of notes confirm certain understandings with 
respect to application of the Protocol.
    The proposed Protocol was concluded in recognition of the 
importance of the United States' economic relations with 
Canada. The Department of the Treasury and the Department of 
State cooperated in the negotiation of the proposed Protocol. 
The Protocol and the related exchanges of notes have the full 
approval of both Departments.
    Respectfully submitted.
                                                  Condoleezza Rice.
    Enclosure: Key Provisions of the U.S.-Canada Protocol.

               KEY PROVISIONS OF THE U.S.-CANADA PROTOCOL

    The attached Protocol with Canada (the ``proposed 
Protocol'') is the fifth protocol to the income tax Convention 
signed in 1980 and amended by prior protocols in 1983, 1984, 
1995, and 1997 (``existing Treaty''). It was negotiated to 
address specific issues that have arisen in our tax treaty 
relations and changes in each country's domestic law and tax 
treaty policy, and to further reduce barriers to cross-border 
investment between our two countries. The exchanges of notes 
confirm certain understandings with respect to application of 
the Protocol. The proposed Protocol would incorporate 
provisions that are generally consistent with the U.S. Model 
tax treaty. However, there are several provisions of the 
proposed Protocol that deviate from the U.S. Model tax treaty 
to reflect the close economic and political relationship the 
United States shares with Canada.
    One of the most important aspects of the proposed Protocol 
relates to the taxation of cross-border interest payments. The 
proposed Protocol provides for the elimination of withholding 
taxes on cross-border interest payments. This provision would 
be effective for interest paid to unrelated parties on the 
first day of January of the year in which the proposed Protocol 
enters into force, and it would be phased in for interest paid 
to related persons over a three-year period. Eliminating 
withholding taxes on cross-border interest payments is 
consistent with an overall view that investment income should 
be taxed by the country of residence, not the country of 
source.
    The proposed Protocol also addresses the issue of so-called 
``dual-resident corporations.'' In addition to revising a 
provision of the existing Treaty relating to the residence of 
such companies, the proposed Protocol generally provides that 
the competent authorities of the United States and Canada shall 
endeavor to reach agreement on the treatment of such companies 
for purposes of the treaty.
    The proposed Protocol also contains a provision that 
assures that a U.S. person generally may obtain the benefits of 
the treaty when that person derives income through an entity 
that is considered by the United States to be fiscally 
transparent (i.e., able to pass through the tax consequences of 
its activities to its owners) unless the entity is a Canadian 
entity and is not treated by Canada as fiscally transparent.
    The existing Treaty generally follows the standard rules 
for taxation by the source country of the business profits of a 
resident of the other country. The source country's right to 
tax such profits is generally limited to cases in which the 
profits are attributable to a permanent establishment located 
in that country. The proposed Protocol would add two provisions 
related to the taxation of permanent establishments. First, the 
proposed Protocol, consistent with the U.S. Model tax treaty, 
contains provisions that recognize the ``authorized OECD 
approach'' to attributing profits to a permanent establishment. 
Second, the proposed Protocol includes a special rule for 
certain permanent services not otherwise considered to be 
provided through a permanent establishment.
    Further, the proposed Protocol would update the existing 
Treaty to reflect current U.S. treaty policy with respect to 
several items, including (i) reduced withholding taxes on 
dividends paid from a real estate investment trust, (ii) the 
U.S. taxation of former citizens and long-term residents, and 
(iii) the coordination of the tax treatment of contributions to 
and accretions of income to pension funds for cross-border 
workers. The proposed Protocol also would update the existing 
Treaty's provisions preventing so-called treaty shopping, which 
is the inappropriate use of a tax treaty by third-country 
residents.
    The proposed Protocol would update the provisions of the 
existing Treaty with respect to the mutual agreement procedure 
by incorporating mandatory resolution of certain cases that the 
competent authorities of the United States and Canada are 
unable to resolve within a specified period of time.
    The Parties shall notify each other in writing, through 
diplomatic channels, when their respective applicable 
procedures for ratification have been satisfied. The proposed 
Protocol will enter into force upon the date of the later of 
the notifications or January l, 2008, whichever is later. It 
will generally have effect, with respect to taxes withheld at 
source, for amounts paid or credited on or after the first day 
of the second month that begins after the date the proposed 
Protocol enters into force. With respect to other taxes, it 
will generally have effect for taxable years that begin after 
the calendar year in which the proposed Protocol enters into 
force. Certain provisions will be phased in or have a delayed 
effective date, and certain provisions will apply 
retroactively, consistent with prior Treasury Department public 
statements regarding specific issues.

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