[Senate Executive Report 105-12]
[From the U.S. Government Publishing Office]



105th Congress                                              Exec. Rept.
                                 SENATE

 1st Session                                                     105-12
_______________________________________________________________________


 
              PROTOCOL AMENDING TAX CONVENTION WITH CANADA

                                _______
                                

                October 30, 1997.--Ordered to be printed

          Mr. Helms, from the Committee on Foreign Relations,

                        submitted the following

                              R E P O R T

                   [To accompany Treaty Doc. 105-29]

    The Committee on Foreign Relations, to which was referred 
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, having 
considered the same, reports favorably thereon, with one 
declaration and one proviso, and recommends that the Senate 
give its advice and consent to ratification thereof, as set 
forth in this report and the accompanying resolution of 
ratification.

                               I. Purpose

    The principal purposes of the existing treaty between the 
United States and Canada are to reduce or eliminate double 
taxation of income earned by residents of either country from 
sources within the other country and to prevent avoidance or 
evasion of the income taxes of the two countries. The purpose 
of the proposed protocol is to modify the provisions of the 
existing treaty regarding source-country taxation of social 
security benefits and situs-country taxation of gains on stock 
of certain real property holding companies.

                             II. Background

    The proposed protocol was signed on July 29, 1997. The 
proposed protocol would amend the tax treaty between the United 
States and Canada signed on September 26, 1980, as amended by 
the protocols signed on June 14, 1983, March 28, 1984, and 
March 17, 1995 (the ``existing treaty'').
    The proposed protocol was transmitted to the Senate for 
advice and consent to its ratification on September 23, 1997 
(see Treaty Doc. 105-29). The Senate Committee on Foreign 
Relations held a public hearing on the proposed protocol on 
October 7, 1997.

                              III. Summary

    The proposed treaty makes two modifications to the existing 
treaty. First, the proposed protocol modifies the provision in 
the existing treaty that allows a country to tax the gains of a 
resident of the other country from the sale of stock of a real 
property holding company to limit the reach of that provision 
only to stock of companies that are resident in the first 
country. Second, the proposed protocol replaces the provision 
in the existing treaty that allows social security benefits to 
be taxed only by the source country with a provision that 
allows such benefits to be taxed only by the recipient's 
country of residence.

                  IV. Entry Into Force and Termination

                          A. Entry into Force

    The proposed protocol is subject to ratification in 
accordance with the applicable procedures in each country, and 
instruments of ratification are to be exchanged as soon as 
possible. The proposed protocol will enter into force upon the 
exchange of instruments of ratification.
    The provision of the proposed protocol regarding taxation 
of gains on stock of certain real property holding companies 
will be effective as of April 26, 1995. The provision of the 
proposed protocol regarding taxation of social security 
benefits generally will be effective for amounts paid or 
credited after 1995. However, the effect of the proposed 
protocol with respect to amounts paid or credited after 1995 
and before the calendar year in which the protocol enters into 
force (or, if it enters into force after August 31 of the year, 
before the end of the calendar year in which it enters into 
force) is limited to specified refund procedures.

                             B. Termination

    The existing treaty, as amended by the proposed protocol, 
will remain in force until terminated by either country. The 
treaty provides that either country may terminate the treaty at 
any time after five years from the date of its entry into force 
by giving at least six months prior notice through diplomatic 
channels. If a country considers that a significant change in 
the tax laws of the other country should be accommodated by a 
modification of the treaty, the two countries are to consult 
with a view to resolving the matter; if the matter cannot 
satisfactorily be resolved, the first country may terminate the 
treaty without regard to the five-year limitation. With respect 
to taxes withheld at source on dividends, interest, royalties, 
pensions and annuities, and certain other income, a termination 
will be effective for amounts paid or credited on or after the 
first of January following the expiration of the six-month 
period. With respect to other taxes, a termination will be 
effective for taxable years beginning on or after the first of 
January following the expiration of the six-month period.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed protocol amending the tax treaty with Canada 
(Treaty Doc. 105-29), as well as on other proposed tax treaties 
and protocols, on October 7, 1997. The hearing was chaired by 
Senator Hagel. The Committee considered these proposed treaties 
and protocols on October 8, 1997, and ordered the proposed 
protocol amending the tax treaty with Canada favorably reported 
by voice vote, with the recommendation that the Senate give its 
advice and consent to ratification of the proposed protocol, 
subject to a declaration and a proviso.

                         VI. Committee Comments

    The Committee believes that the proposed protocol amending 
the tax treaty with Canada is in the interest of the United 
States and urges that the Senate act promptly to give advice 
and consent to ratification. However, the Committee has taken 
note of certain issues raised by the proposed treaty and 
believes that the following comments may be useful to Treasury 
Department officials in providing guidance on these matters 
should they arise in the course of future treaty negotiations.
    Under the existing treaty, the right of the situs country 
to tax residents of the other country on gains with respect to 
real property in the first country extends to gains with 
respect to stock of certain corporations if a sufficient 
portion of the assets of such a corporation consist of real 
property in the first country. Presently, the domestic laws of 
both countries with respect to the taxation of nonresidents' 
gains from domestic real property apply to gains from the stock 
of domestic corporations that hold sufficient domestic real 
property. Presently, the domestic laws of neither the United 
States nor Canada apply to gains from the stock of foreign 
corporations that hold real property. However, legislation was 
introduced in Canada that would tax nonresidents on gains from 
the stock of foreign corporations that hold sufficient Canadian 
real property. The effective date of this legislation, which 
has not been enacted to date, was April 26, 1995. Under such 
legislation, for example, a U.S. resident could be subject to 
Canadian tax on gains from the stock of a U.S. corporation that 
holds sufficient Canadian real property. The proposed protocol 
prevents the imposition on U.S. residents of tax on gains from 
the stock of non-Canadian corporations pursuant to the 
legislation. The Committee believes that this result is 
appropriate. In this regard, the Committee notes that many of 
the income tax treaties between Canada and other countries 
similarly prevent the imposition of such tax on residents of 
those countries.
    Prior to its amendment by the 1995 protocol, the existing 
treaty provided for exclusive residence country taxation of 
social security benefits. Following the 1995 protocol, the 
existing treaty provided for exclusive source country taxation 
of social security benefits. Under the provision in the 
existing treaty, U.S. social security benefits paid to Canadian 
residents are subject to U.S. tax; the United States imposes a 
30-percent withholding tax on 85 percent of the amount of 
social security benefits paid to nonresident alien individuals, 
for an effective tax rate of 25.5 percent. Similarly, under 
this provision, Canadian social security benefits paid to U.S. 
residents are subject to Canadian tax; Canada imposes a 
withholding tax of 25 percent on social security benefits of 
nonresident alien individuals, unless the individual elects to 
file a Canadian tax return and pay tax at regular graduated 
rates.
    The source country tax rules provided with the 1995 
protocol have been criticized by residents of both Canada and 
the United States. The 25.5 percent U.S. withholding tax on 
U.S. social security benefits paid to Canadian residents under 
the existing treaty may be significantly higher than the 
Canadian tax that would be imposed on such amounts, 
particularly in the case of lower-income individuals. On the 
other hand, while the Canadian tax on Canadian social security 
benefits paid to U.S. residents under the existing treaty may 
be reduced from the 25 percent withholding tax, U.S. residents 
can obtain such reductions only by filing a Canadian income tax 
return. The Committee believes that the proposed protocol 
appropriately addresses these concerns by providing for 
exclusive residence country taxation of social security 
benefits.

                           VII. Budget Impact

    The Committee has been informed by the staff of the Joint 
Committee on Taxation that the proposed protocol is estimated 
to cause a negligible change in fiscal year Federal budget 
receipts during the 1998-2007 period.

                 VIII. Explanation of Proposed Protocol

    A detailed, article-by-article explanation of the proposed 
protocol to the income tax treaty between the United States and 
Canada is set forth below.
Article 1
    The proposed protocol amends Article XIII (Gains) of the 
existing treaty. Under the existing treaty, gains derived by a 
resident of one country from the alienation of real property 
situated in the other country may be taxed in the other 
country. For this purpose, real property situated in the United 
States includes a U.S. real property interest. ``U.S. real 
property interests'' include interests in U.S. corporations 
that hold or held U.S. real property, provided that at least 50 
percent of the fair market value of such corporation is (or 
was) attributable to U.S. real property interests. Real 
property situated in Canada includes stock of a company, 
provided that the value of the company's stock is derived 
principally from real property situated in Canada.
    The proposed protocol provides that real property situated 
in the United States does not include stock of company that is 
not a resident of the United States. Similarly, the proposed 
protocol provides that real property situated in Canada 
includes stock of a company that is resident in Canada  
provided that the value of the company's stock is derived 
principally from real property situated in Canada.
Article 2
    The proposed protocol amends Article XVIII (Pensions and 
Annuities) of the existing treaty.
    The existing treaty defines the term ``pensions'' to 
include any payment under a pension or other retirement 
arrangement. The proposed protocol clarifies that the term 
``pensions'' generally does not include any benefits under the 
social security legislation in either country paid with respect 
to government service.
    The existing treaty provides that benefits under the social 
security legislation in one of the countries paid to a resident 
of the other country are taxable only in the source country. 
The proposed protocol provides that benefits under the social 
security legislation in one of the countries that are paid to a 
resident of the other country are taxable only in the 
recipient's country of residence. In this regard, U.S. social 
security benefits paid to a Canadian resident are taxable in 
Canada as though they were benefits under the Canada Pension 
Plan, except that 15 percent of such benefits is exempt from 
Canadian tax. Similarly, Canadian social security benefits paid 
to a U.S. resident are taxable in the U.S. as though they were 
a payment under the U.S. Social Security Act, except that a 
type of benefit that is not subject to Canadian tax when paid 
to Canadian residents is exempt from U.S. tax.
Article 3
    The proposed protocol will enter into force upon the 
exchange of instruments of ratification. Article 1 of the 
proposed protocol, relating to the taxation of certain real 
property gains, will have effect as of April 26, 1995. Article 
2 of the proposed protocol, relating to the taxation of social 
security benefits, generally will have effect with respect to 
amounts paid or credited after 1995. However, the effect of the 
proposed protocol with respect to amounts paid or credited 
after 1995 and before the calendar year in which the protocol 
enters into force (or, if it enters into force after August 31 
of the year, before the end of the calendar year in which it 
enters into force) is limited.
    The proposed protocol provides that, with respect to 
benefits paid or accrued during such period, the protocol will 
apply if the resident has applied to the competent authority of 
the source country for a refund of the tax on the benefits. In 
the case of benefits paid during such period by the United 
States to a Canadian resident, the Canadian competent authority 
will apply for and receive these refunds on behalf of the 
resident and remit to the resident the amount of such refund 
minus any additional tax imposed in Canada on the benefits. In 
this regard, the Canadian competent authority will apply for 
such refunds only if the additional Canadian tax imposed on the 
benefits is less than the tax imposed in the United States on 
the benefits.
    The proposed protocol provides that all taxes refunded 
because of the protocol are refunded without interest and that 
any additional taxes imposed as a result of the protocol are 
computed as if those taxes become payable no earlier than 
December 31 of the year following the year the proposed 
protocol enters into force.
    Finally, the proposed protocol provides that the competent 
authorities will establish procedures with respect to the 
refund application and will agree on additional procedures as 
are necessary to ensure the appropriate implementation of the 
protocol.

               IX. Text of the Resolution of Ratification

    Resolved, (two-thirds of the Senators present concurring 
therein), That the Senate advise and consent to the 
ratification of 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 
(Treaty Doc. 105-29), subject to the declaration of subsection 
(a), and the proviso of subsection (b).
    (a) DECLARATION.--The Senate's advice and consent is 
subject to the following declaration, which shall be binding on 
the President:
          (1) TREATY INTERPRETATION.--The Senate affirms the 
        applicability to all treaties of the constitutionally 
        based principles of treaty interpretation set forth in 
        Condition (1) of the resolution of ratification of the 
        INF Treaty, approved by the Senate on May 27, 1988, and 
        Condition (8) of the resolution of ratification of the 
        Document Agreed Among the States Parties to the Treaty 
        on Conventional Armed Forces in Europe, approved by the 
        Senate on May 14, 1997.
    (b) PROVISO.--The resolution of ratification is subject to 
the following proviso, which shall be binding on the President:
          (1) SUPREMACY OF THE CONSTITUTION.--Nothing in the 
        Treaty requires or authorizes legislation or other 
        action by the United States of America that is 
        prohibited by the Constitution of the United States as 
        interpreted by the United States.
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