U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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39–112

" ! SENATE 105TH CONGRESS

1st Session

TREATY DOC.

1997

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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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.

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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 domestic real 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, ena-
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bling 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 the 1995 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.
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