Note No. JLAB-0111 

Excellency, 

I have the honor to refer to the Protocol (the “Protocol”) done today between 

Canada and the United States of America amending the Convention 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 (the “Convention”), and to propose on behalf of the Government of Canada 

the following: 

In respect of any case where the competent authorities have endeavored but are unable to 

reach a complete agreement under Article XXVI (Mutual Agreement Procedure) of the 

Convention regarding the application of one or more of the following Articles of the 

Convention: IV (Residence) (but only insofar as it relates to the residence of a natural 

person), V (Permanent Establishment), VII (Business Profits), IX (Related Persons), and 

XII (Royalties) (but only (i) insofar as Article XII might apply in transactions involving 

related persons to whom Article IX might apply, or (ii) to an allocation of amounts 

between royalties that are taxable under paragraph 2 thereof and royalties that are exempt 

under paragraph 3 thereof), binding arbitration shall be used to determine such 

application, unless the competent authorities agree that the particular case is not suitable 

for determination by arbitration. In addition, the competent authorities may, on an ad hoc 

basis, agree that binding arbitration shall be used in respect of any other matter to which 

Article XXVI applies. If an arbitration proceeding (the “Proceeding”) under paragraph 6 

of Article XXVI commences, the following rules and procedures shall apply: 

1. The Proceeding shall be conducted in the manner prescribed by, and subject to the 

requirements of, paragraphs 6 and 7 of Article XXVI and these rules and 

procedures, as modified or supplemented by any other rules and procedures 

agreed upon by the competent authorities pursuant to paragraph 17 below. 

2. The determination reached by an arbitration board in the Proceeding shall be 

limited to a determination regarding the amount of income, expense or tax 

reportable to the Contracting States. 

3. Notwithstanding the initiation of the Proceeding, the competent authorities may 

reach a mutual agreement to resolve a case and terminate the Proceeding. 

Correspondingly, a concerned person may withdraw a request for the competent 

authorities to engage in the Mutual Agreement Procedure (and thereby terminate 

the Proceeding) at any time. 

4. The requirements of subparagraph 7(d) of Article XXVI shall be met when the 

competent authorities have each received from each concerned person a notarized 

statement agreeing that the concerned person and each person acting on the 

concerned person’s behalf, shall not disclose to any other person any information 
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received during the course of the Proceeding from either Contracting State or the 

arbitration board, other than the determination of the Proceeding. A concerned 

person that has the legal authority to bind any other concerned person(s) on this 

matter may do so in a comprehensive notarized statement. 

5. Each Contracting State shall have 60 days from the date on which the Proceeding 

begins to send a written communication to the other Contracting State appointing 

one member of the arbitration board. Within 60 days of the date on which the 

second such communication is sent, the two members appointed by the 

Contracting States shall appoint a third member, who shall serve as chair of the 

board. If either Contracting State fails to appoint a member, or if the members 

appointed by the Contracting States fail to agree upon the third member in the 

manner prescribed by this paragraph, a Contracting State shall ask the highest 

ranking member of the Secretariat at the Centre for Tax Policy and 

Administration of the Organisation for Economic Co-operation and Development 

(OECD) who is not a citizen of either Contracting State, to appoint the remaining 

member(s) by written notice to both Contracting States within 60 days of the date 

of such failure. The competent authorities shall develop a non-exclusive list of 

individuals with familiarity in international tax matters who may potentially serve 

as the chair of the board. 

6. The arbitration board may adopt any procedures necessary for the conduct of its 

business, provided that the procedures are not inconsistent with any provision of 

Article XXVI or this note. 

7. Each of the Contracting States shall be permitted to submit, within 60 days of the 

appointment of the chair of the arbitration board, a proposed resolution describing 

the proposed disposition of the specific monetary amounts of income, expense or 

taxation at issue in the case, and a supporting position paper, for consideration by 

the arbitration board. Copies of the proposed resolution and supporting position 

paper shall be provided by the board to the other Contracting State on the date on 

which the later of the submissions is submitted to the board. In the event that only 

one Contracting State submits a proposed resolution within the allotted time, then 

that proposed resolution shall be deemed to be the determination of the board in 

that case and the Proceeding shall be terminated. Each of the Contracting States 

may, if it so desires, submit a reply submission to the board within 120 days of the 

appointment of its chair, to address any points raised by the proposed resolution 

or position paper submitted by the other Contracting State. Additional 

information may be submitted to the arbitration board only at its request, and 

copies of the board’s request and the Contracting State’s response shall be 

provided to the other Contracting State on the date on which the request or the 

response is submitted. Except for logistical matters such as those identified in 

paragraphs 12, 14 and 15 below, all communications from the Contracting States 

to the arbitration board, and vice versa, shall take place only through written 

communications between the designated competent authorities and the chair of 

the board. 
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8. The arbitration board shall deliver a determination in writing to the Contracting 

States within six months of the appointment of its chair. The board shall adopt as 

its determination one of the proposed resolutions submitted by the Contracting 

States. 

9. In making its determination, the arbitration board shall apply, as necessary: (1) 

the provisions of the Convention as amended; (2) any agreed commentaries or 

explanations of the Contracting States concerning the Convention as amended; (3) 

the laws of the Contracting States to the extent they are not inconsistent with each 

other; and (4) any OECD Commentary, Guidelines or Reports regarding relevant 

analogous portions of the OECD Model Tax Convention. 

10. The determination of the arbitration board in a particular case shall be binding on 

the Contracting States. The determination of the board shall not state a rationale. 

It shall have no precedential value. 

11. As provided in subparagraph 7(e) of Article XXVI, the determination of an 

arbitration board shall constitute a resolution by mutual agreement under this 

Article. Each concerned person must, within 30 days of receiving the 

determination of the board from the competent authority to which the case was 

first presented, advise that competent authority whether that concerned person 

accepts the determination of the board. If any concerned person fails to so advise 

the relevant competent authority within this time frame, the determination of the 

board shall be considered not to have been accepted in that case. Where the 

determination of the board is not accepted, the case may not subsequently be the 

subject of a Proceeding. 

12. Any meeting(s) of the arbitration board shall be in facilities provided by the 

Contracting State whose competent authority initiated the mutual agreement 

proceedings in the case. 

13. The treatment of any associated interest or penalties shall be determined by 

applicable domestic law of the Contracting State(s) concerned. 

14. No information relating to the Proceeding (including the board’s determination) 

may be disclosed by the members of the arbitration board or their staffs or by 

either competent authority, except as permitted by the Convention and the 

domestic laws of the Contracting States. In addition, all material prepared in the 

course of, or relating to, the Proceeding shall be considered to be information 

exchanged between the Contracting States. The Contracting States shall ensure 

that all members of the arbitration board and their staffs sign and send to each 

Contracting State notarized statements, prior to their acting in the arbitration 

proceeding, in which they agree to abide by and be subject to the confidentiality 

and nondisclosure provisions of Articles XXVI and XXVII of the Convention and 

the applicable domestic laws of the Contracting States. In the event those 

provisions conflict, the most restrictive condition shall apply. 

15. The fees and expenses of members of the arbitration board shall be set in 

accordance with the International Centre for Settlement of Investment Disputes 

(ICSID) Schedule of Fees for arbitrators, as in effect on the date on which the 
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arbitration proceedings begin, and shall be borne equally by the Contracting 

States. Any fees for language translation shall also be borne equally by the 

Contracting States. Meeting facilities, related resources, financial management, 

other logistical support, and general administrative coordination of the Proceeding 

shall be provided, at its own cost, by the Contracting State whose competent 

authority initiated the mutual agreement proceedings in the case. Any other costs 

shall be borne by the Contracting State that incurs them. 

16. For purposes of paragraphs 6 and 7 of Article XXVI and this note, each 

competent authority shall confirm in writing to the other competent authority and 

to the concerned person(s) the date of its receipt of the information necessary to 

undertake substantive consideration for a mutual agreement. Such information 

shall be: 

a) in the United States, the information required to be submitted to the U.S. 

competent authority under Revenue Procedure 2006-54, section 4.05 (or any 

applicable analogous provisions) and, for cases initially submitted as a request 

for an Advance Pricing Agreement, the information required to be submitted 

to the Internal Revenue Service under Revenue Procedure 2006-9, section 4 

(or any applicable analogous provisions), and 

b) in Canada, the information required to be submitted to Canadian competent 

authority under Information Circular 71-17 (or any applicable successor 

publication). 

However, this information shall not be considered received until both competent 

authorities have received copies of all materials submitted to either Contracting 

State by the concerned person(s) in connection with the mutual agreement 

procedure. 

17. The competent authorities of the Contracting States may modify or supplement 

the above rules and procedures as necessary to more effectively implement the 

intent of paragraph 6 of Article XXVI to eliminate double taxation. 

 If the above proposal is acceptable to your Government, I further propose that this 

Note, which is authentic in English and in French, and your reply Note reflecting such 

acceptance shall constitute an agreement between our two Governments which shall enter 

into force on the date of entry into force of the Protocol and shall be annexed to the 

Convention as Annex A thereto and shall therefore be an integral part of the Convention. 

 Please accept, Excellency, the assurance of my highest consideration. 

 Maxime Bernier 

 Minister of Foreign Affairs 
Excellency, 

I have the honour to acknowledge receipt of your Note No. JLAB-0111 dated September 

21, 2007, which states in its entirety as follows: 

Excellency, 

 I have the honor to refer to the Protocol (the “Protocol”) done today 

between Canada and the United States of America amending the Convention 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 (the “Convention”), and to propose on behalf of 

the Government of Canada the following: 

In respect of any case where the competent authorities have endeavored but are 

unable to reach a complete agreement under Article XXVI (Mutual Agreement 

Procedure) of the Convention regarding the application of one or more of the 

following Articles of the Convention: IV (Residence) (but only insofar as it 

relates to the residence of a natural person), V (Permanent Establishment), VII 

(Business Profits), IX (Related Persons), and XII (Royalties) (but only (i) insofar 

as Article XII might apply in transactions involving related persons to whom 

Article IX might apply, or (ii) to an allocation of amounts between royalties that 

are taxable under paragraph 2 thereof and royalties that are exempt under 

paragraph 3 thereof), binding arbitration shall be used to determine such 

application, unless the competent authorities agree that the particular case is not 

suitable for determination by arbitration. In addition, the competent authorities 

may, on an ad hoc basis, agree that binding arbitration shall be used in respect of 

any other matter to which Article XXVI applies. If an arbitration proceeding (the 

“Proceeding”) under paragraph 6 of Article XXVI commences, the following 

rules and procedures shall apply: 

1. The Proceeding shall be conducted in the manner prescribed by, and 

subject to the requirements of, paragraphs 6 and 7 of Article XXVI and 

these rules and procedures, as modified or supplemented by any other 

rules and procedures agreed upon by the competent authorities pursuant to 

paragraph 17 below. 

2. The determination reached by an arbitration board in the Proceeding shall 

be limited to a determination regarding the amount of income, expense or 

tax reportable to the Contracting States. 

3. Notwithstanding the initiation of the Proceeding, the competent authorities 

may reach a mutual agreement to resolve a case and terminate the 

Proceeding. Correspondingly, a concerned person may withdraw a 

request for the competent authorities to engage in the Mutual Agreement 

Procedure (and thereby terminate the Proceeding) at any time. 

4. The requirements of subparagraph 7(d) of Article XXVI shall be met 

when the competent authorities have each received from each concerned 

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person a notarized statement agreeing that the concerned person and each 

person acting on the concerned person’s behalf, shall not disclose to any 

other person any information received during the course of the Proceeding 

from either Contracting State or the arbitration board, other than the 

determination of the Proceeding. A concerned person that has the legal 

authority to bind any other concerned person(s) on this matter may do so 

in a comprehensive notarized statement. 

5. Each Contracting State shall have 60 days from the date on which the 

Proceeding begins to send a written communication to the other 

Contracting State appointing one member of the arbitration board. Within 

60 days of the date on which the second such communication is sent, the 

two members appointed by the Contracting States shall appoint a third 

member, who shall serve as chair of the board. If either Contracting State 

fails to appoint a member, or if the members appointed by the Contracting 

States fail to agree upon the third member in the manner prescribed by this 

paragraph, a Contracting State shall ask the highest ranking member of the 

Secretariat at the Centre for Tax Policy and Administration of the 

Organisation for Economic Co-operation and Development (OECD) who 

is not a citizen of either Contracting State, to appoint the remaining 

member(s) by written notice to both Contracting States within 60 days of 

the date of such failure. The competent authorities shall develop a nonexclusive list of individuals with familiarity in international tax matters 

who may potentially serve as the chair of the board. 

6. The arbitration board may adopt any procedures necessary for the conduct 

of its business, provided that the procedures are not inconsistent with any 

provision of Article XXVI or this note. 

7. Each of the Contracting States shall be permitted to submit, within 60 days 

of the appointment of the chair of the arbitration board, a proposed 

resolution describing the proposed disposition of the specific monetary 

amounts of income, expense or taxation at issue in the case, and a 

supporting position paper, for consideration by the arbitration board. 

Copies of the proposed resolution and supporting position paper shall be 

provided by the board to the other Contracting State on the date on which 

the later of the submissions is submitted to the board. In the event that 

only one Contracting State submits a proposed resolution within the 

allotted time, then that proposed resolution shall be deemed to be the 

determination of the board in that case and the Proceeding shall be 

terminated. Each of the Contracting States may, if it so desires, submit a 

reply submission to the board within 120 days of the appointment of its 

chair, to address any points raised by the proposed resolution or position 

paper submitted by the other Contracting State. Additional information 

may be submitted to the arbitration board only at its request, and copies of 

the board’s request and the Contracting State’s response shall be provided 

to the other Contracting State on the date on which the request or the 

response is submitted. Except for logistical matters such as those 

- 2 -
identified in paragraphs 12, 14 and 15 below, all communications from the 

Contracting States to the arbitration board, and vice versa, shall take place 

only through written communications between the designated competent 

authorities and the chair of the board. 

8. The arbitration board shall deliver a determination in writing to the 

Contracting States within six months of the appointment of its chair. The 

board shall adopt as its determination one of the proposed resolutions 

submitted by the Contracting States. 

9. In making its determination, the arbitration board shall apply, as 

necessary: (1) the provisions of the Convention as amended; (2) any 

agreed commentaries or explanations of the Contracting States concerning 

the Convention as amended; (3) the laws of the Contracting States to the 

extent they are not inconsistent with each other; and (4) any OECD 

Commentary, Guidelines or Reports regarding relevant analogous portions 

of the OECD Model Tax Convention. 

10. The determination of the arbitration board in a particular case shall be 

binding on the Contracting States. The determination of the board shall 

not state a rationale. It shall have no precedential value. 

11. As provided in subparagraph 7(e) of Article XXVI, the determination of 

an arbitration board shall constitute a resolution by mutual agreement 

under this Article. Each concerned person must, within 30 days of 

receiving the determination of the board from the competent authority to 

which the case was first presented, advise that competent authority 

whether that concerned person accepts the determination of the board. If 

any concerned person fails to so advise the relevant competent authority 

within this time frame, the determination of the board shall be considered 

not to have been accepted in that case. Where the determination of the 

board is not accepted, the case may not subsequently be the subject of a 

Proceeding. 

12. Any meeting(s) of the arbitration board shall be in facilities provided by 

the Contracting State whose competent authority initiated the mutual 

agreement proceedings in the case. 

13. The treatment of any associated interest or penalties shall be determined 

by applicable domestic law of the Contracting State(s) concerned. 

14. No information relating to the Proceeding (including the board’s 

determination) may be disclosed by the members of the arbitration board 

or their staffs or by either competent authority, except as permitted by the 

Convention and the domestic laws of the Contracting States. In addition, 

all material prepared in the course of, or relating to, the Proceeding shall 

be considered to be information exchanged between the Contracting 

States. The Contracting States shall ensure that all members of the 

arbitration board and their staffs sign and send to each Contracting State 

notarized statements, prior to their acting in the arbitration proceeding, in 

- 3 -
which they agree to abide by and be subject to the confidentiality and 

nondisclosure provisions of Articles XXVI and XXVII of the Convention 

and the applicable domestic laws of the Contracting States. In the event 

those provisions conflict, the most restrictive condition shall apply. 

15. The fees and expenses of members of the arbitration board shall be set in 

accordance with the International Centre for Settlement of Investment 

Disputes (ICSID) Schedule of Fees for arbitrators, as in effect on the date 

on which the arbitration proceedings begin, and shall be borne equally by 

the Contracting States. Any fees for language translation shall also be 

borne equally by the Contracting States. Meeting facilities, related 

resources, financial management, other logistical support, and general 

administrative coordination of the Proceeding shall be provided, at its own 

cost, by the Contracting State whose competent authority initiated the 

mutual agreement proceedings in the case. Any other costs shall be borne 

by the Contracting State that incurs them. 

16. For purposes of paragraphs 6 and 7 of Article XXVI and this note, each 

competent authority shall confirm in writing to the other competent 

authority and to the concerned person(s) the date of its receipt of the 

information necessary to undertake substantive consideration for a mutual 

agreement. Such information shall be: 

a) in the United States, the information required to be submitted to the 

U.S. competent authority under Revenue Procedure 2006-54, section 

4.05 (or any applicable analogous provisions) and, for cases initially 

submitted as a request for an Advance Pricing Agreement, the 

information required to be submitted to the Internal Revenue Service 

under Revenue Procedure 2006-9, section 4 (or any applicable 

analogous provisions), and 

b) in Canada, the information required to be submitted to Canadian 

competent authority under Information Circular 71-17 (or any 

applicable successor publication). 

However, this information shall not be considered received until both 

competent authorities have received copies of all materials submitted to 

either Contracting State by the concerned person(s) in connection with the 

mutual agreement procedure. 

17. The competent authorities of the Contracting States may modify or 

supplement the above rules and procedures as necessary to more 

effectively implement the intent of paragraph 6 of Article XXVI to 

eliminate double taxation. 

 If the above proposal is acceptable to your Government, I further propose 

that this Note, which is authentic in English and in French, and your reply Note 

reflecting such acceptance shall constitute an agreement between our two 

Governments which shall enter into force on the date of entry into force of the 

- 4 -
Protocol and shall be annexed to the Convention as Annex A thereto and shall 

therefore be an integral part of the Convention. 

 Please accept, Excellency, the assurance of my highest consideration. 

I am pleased to inform you that the Government of the United States of America accepts 

the proposal set forth in your Note. The Government of the United States of America 

further agrees that your Note, which is authentic in English and in French, together with 

this reply, shall constitute an Agreement between the United States of America and 

Canada, which shall enter into force on the date of entry into force of 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 (the “Convention”), and shall be annexed to the Convention as Annex A 

thereto, and shall therefore be an integral part of the Convention. 

Accept, Excellency, the renewed assurances of my highest consideration. 

- 5 -
Note No. JLAB-0112 

Excellency, 

I have the honor to refer to the Protocol (the “Protocol”) done today between 

Canada and the United States of America amending the Convention 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 (the “Convention”). 

In the course of the negotiations leading to the conclusion of the Protocol done 

today, the negotiators developed and agreed upon a common understanding and 

interpretation of certain provisions of the Convention. These understandings and 

interpretations are intended to give guidance both to the taxpayers and to the tax 

authorities of our two countries in interpreting various provisions contained in the 

Convention. 

I, therefore, have the further honor to propose on behalf of the Government of 

Canada the following understandings and interpretations: 

1. Meaning of undefined terms 

For purposes of paragraph 2 of Article III (General Definitions) of the Convention, it is 

understood that, as regards the application at any time of the Convention, and any 

protocols thereto by a Contracting State, any term not defined therein shall, unless the 

context otherwise requires or the competent authorities otherwise agree to a common 

meaning pursuant to Article XXVI (Mutual Agreement Procedure), have the meaning 

which it has at that time under the law of that State for the purposes of the taxes to which 

the Convention, and any protocols thereto apply, any meaning under the applicable tax 

laws of that State prevailing over a meaning given to the term under other laws of that 

State. 

2. Meaning of connected projects 

For the purposes of applying subparagraph (b) of paragraph 9 of Article V (Permanent 

Establishment) of the Convention, it is understood that projects shall be considered to be 

connected if they constitute a coherent whole, commercially and geographically. 

3. Definition of the term “dividends” 

It is understood that distributions from Canadian income trusts and royalty trusts that are 

treated as dividends under the taxation laws of Canada shall be considered dividends for 

the purposes of Article X (Dividends) of the Convention. 
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4. Deletion of Article XIV (Independent Personal Services) 

It is understood that the deletion of Article XIV (Independent Personal Services) of the 

Convention confirms the negotiators’ shared understanding that no practical distinction 

can be made between a “fixed base” and a “permanent establishment”, and that 

independent personal services of a resident of a Contracting State, to the extent that such 

resident is found to have a permanent establishment in the other Contracting State with 

respect to those services, shall be subject to the provisions of Article VII (Business 

Profits). 

5. Former permanent establishments and fixed bases 

It is understood that the modifications of paragraph 2 of Article VII (Business Profits), 

paragraph 4 of Article X (Dividends), paragraph 3 of Article XI (Interest) and paragraph 

5 of Article XII (Royalties) of the Convention to refer to business having formerly been 

carried on through a permanent establishment confirm the negotiators’ shared 

understanding of the meaning of the existing provisions, and thus are clarifying only. 

6. Stock options 

For purposes of applying Article XV (Income from Employment) and Article XXIV 

(Elimination of Double Taxation) of the Convention to income of an individual in 

connection with the exercise or other disposal (including a deemed exercise or disposal) 

of an option that was granted to the individual as an employee of a corporation or mutual 

fund trust to acquire shares or units (“securities”) of the employer (which is considered, 

for the purposes of this Note, to include any related entity) in respect of services rendered 

or to be rendered by such individual, or in connection with the disposal (including a 

deemed disposal) of a security acquired under such an option, the following principles 

shall apply: 

(a) Subject to subparagraph 6(b) of this Note, the individual shall be deemed 

to have derived, in respect of employment exercised in a Contracting State, the 

same proportion of such income that the number of days in the period that begins 

on the day the option was granted, and that ends on the day the option was 

exercised or disposed of, on which the individual’s principal place of employment 

for the employer was situated in that Contracting State is of the total number of 

days in the period on which the individual was employed by the employer; and 

(b) Notwithstanding subparagraph 6(a) of this Note, if the competent 

authorities of both Contracting States agree that the terms of the option were such 

that the grant of the option will be appropriately treated as transfer of ownership 

of the securities (e.g., because the options were in-the-money or not subject to a 

substantial vesting period), then they may agree to attribute income accordingly. 

7. Taxes imposed by reason of death 

It is understood that, 

(a) Where a share or option in respect of a share is property situated in the 

United States for the purposes of Article XXIX B (Taxes Imposed by Reason of 
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Death) of the Convention, any employment income in respect of the share or 

option shall be, for the purpose of clause 6(a)(ii) of that Article, income from 

property situated in the United States; 

(b) Where property situated in the United States for the purposes of Article 

XXIX B (Taxes Imposed by Reason of Death) of the Convention is held by an 

entity that is a resident of Canada and that is described in subparagraph 1(b) of 

Article IV (Residence) of the Convention, any income out of or under the entity in 

respect of the property shall be, for the purpose of subparagraph 6(a)(ii) of Article 

XXIX B (Taxes Imposed by Reason of Death), income from property situated in 

the United States; and 

(c) Where a tax is imposed in Canada by reason of death in respect of an 

entity that is a resident of Canada and that is described in subparagraph 1(b) of 

Article IV (Residence) of the Convention, that tax shall be, for the purpose of 

paragraph 7 of Article XXIX B (Taxes Imposed by Reason of Death) of the 

Convention, imposed in respect of property situated in Canada. 

8. Royalties – information in connection with franchise agreement 

It is understood that the reference in subparagraph 3(c) of Article XII (Royalties) of the 

Convention to information provided in connection with a franchise agreement shall 

generally refer only to information that governs or otherwise deals with the operation 

(whether by the payer or by another person) of the franchise, and not to other information 

concerning industrial, commercial or scientific experience that is held for resale or 

license. 

9. With reference to Article VII (Business Profits) 

It is understood that the business profits to be attributed to a permanent establishment 

shall include only the profits derived from the assets used, risks assumed and activities 

performed by the permanent establishment. The principles of the OECD Transfer Pricing 

Guidelines shall apply for purposes of determining the profits attributable to a permanent 

establishment, taking into account the different economic and legal circumstances of a 

single entity. Accordingly, any of the methods described therein as acceptable methods 

for determining an arm’s length result may be used to determine the income of a 

permanent establishment so long as those methods are applied in accordance with the 

Guidelines. In particular, in determining the amount of attributable profits, the 

permanent establishment shall be treated as having the same amount of capital that it 

would need to support its activities if it were a distinct and separate enterprise engaged in 

the same or similar activities. With respect to financial institutions other than insurance 

companies, a Contracting State may determine the amount of capital to be attributed to a 

permanent establishment by allocating the institution’s total equity between its various 

offices on the basis of the proportion of the financial institution’s risk-weighted assets 

attributable to each of them. In the case of an insurance company, there shall be 

attributed to a permanent establishment not only premiums earned through the permanent 

establishment, but that portion of the insurance company's overall investment income 

from reserves and surplus that supports the risks assumed by the permanent 

establishment. 
- 4 -

10. Qualifying retirement plans 

For purposes of paragraph 15 of Article XVIII (Pensions and Annuities) of the 

Convention, it is understood that 

(a) In the case of Canada, the term “qualifying retirement plan” shall include 

the following and any identical or substantially similar plan that is established 

pursuant to legislation introduced after the date of signature of the Protocol: 

registered pension plans under section 147.1 of the Income Tax Act, registered 

retirement savings plans under section 146 that are part of a group arrangement 

described in subsection 204.2(1.32), deferred profit sharing plans under section 147, 

and any registered retirement savings plan under section 146 or registered 

retirement income fund under section 146.3 that is funded exclusively by rollover 

contributions from one or more of the preceding plans; and 

(b) In the case of the United States, the term “qualifying retirement plan” shall 

include the following and any identical or substantially similar plan that is 

established pursuant to legislation introduced after the date of signature of the 

Protocol: qualified plans under section 401(a) of the Internal Revenue Code 

(including section 401(k) arrangements), individual retirement plans that are part of 

a simplified employee pension plan that satisfies section 408(k), section 408(p) 

simple retirement accounts, section 403(a) qualified annuity plans, section 403(b) 

plans, section 457(g) trusts providing benefits under section 457(b) plans, the Thrift 

Savings Fund (section 7701(j)), and any individual retirement account under section 

408(a) that is funded exclusively by rollover contributions from one or more of the 

preceding plans. 

11. Former long-term residents 

The term “long-term resident” shall mean any individual who is a lawful permanent 

resident of the United States in eight or more taxable years during the preceding 15 

taxable years. In determining whether the threshold in the preceding sentence is met, 

there shall not count any year in which the individual is treated as a resident of Canada 

under the Convention, or as a resident of any country other than the United States under 

the provisions of any other U.S. tax treaty, and, in either case, the individual does not 

waive the benefits of such treaty applicable to residents of the other country. 

12. Special source rules relating to former citizens and long-term residents 

For purposes of subparagraph 2 (b) of Article XXIX (Miscellaneous Rules) of the 

Convention, “income deemed under the domestic law of the United States to arise from 

such sources” shall consist of gains from the sale or exchange of stock of a U.S. company 

or debt obligations of a U.S. person, the United States, a State, or a political subdivision 

thereof, or the District of Columbia, gains from property (other than stock or debt 

obligations) located in the United States, and, in certain cases, income or gain derived 

from the sale of stock of a non-U.S. company or a disposition of property contributed to 

such non-U.S. company where such company would be a controlled foreign corporation 

with respect to the person if such person had continued to be a U.S. person. In addition, 

an individual who exchanges property that gives rise or would give rise to U.S.-source 

income for property that gives rise to foreign-source income shall be treated as if he or 
- 5 -

she had sold the property that would give rise to U.S. source income for its fair market 

value, and any consequent gain shall be deemed to be income from sources within the 

United States. 

13. Exchange of Information 

It is understood that the standards and practices described in Article XXVII (Exchange of 

Information) of the Convention are to be in no respect less effective than those described 

in the Model Agreement on Exchange of Information on Tax Matters developed by the 

OECD Global Forum Working Group on Effective Exchange of Information. 

14. Limitation on Benefits

The United States and Canada are part of the same regional free trade area and, as a 

result, the Convention reflects the fact that publicly traded companies resident in one 

country may be traded on a stock exchange of the other country. Nevertheless, the 

Contracting States agree that in making future amendments to the Convention, they shall 

consult on possible modifications to subparagraph 2(c) of Article XXIX A (Limitation on 

Benefits) of the Convention (including, modifications necessary to discourage corporate 

inversion transactions). 

If the above proposal is acceptable to your Government, I further propose that this 

Note, which is authentic in English and in French, and your reply Note reflecting such 

acceptance shall constitute an agreement between our two Governments which shall enter 

into force on the date of entry into force of the Protocol and shall be annexed to the 

Convention as Annex B thereto and shall therefore be an integral part of the Convention. 

Please accept, Excellency, the assurance of my highest consideration. 

 Maxime Bernier 

 Minister of Foreign Affairs 
Excellency, 

I have the honour to acknowledge receipt of your Note No. JLAB-0112 dated September 

21, 2007, which states in its entirety as follows: 

Excellency, 

 I have the honor to refer to the Protocol (the “Protocol”) done today 

between Canada and the United States of America amending the Convention 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 (the “Convention”). 

 In the course of the negotiations leading to the conclusion of the Protocol 

done today, the negotiators developed and agreed upon a common understanding 

and interpretation of certain provisions of the Convention. These understandings 

and interpretations are intended to give guidance both to the taxpayers and to the 

tax authorities of our two countries in interpreting various provisions contained in 

the Convention. 

 I, therefore, have the further honor to propose on behalf of the 

Government of Canada the following understandings and interpretations: 

1. Meaning of undefined terms 

For purposes of paragraph 2 of Article III (General Definitions) of the 

Convention, it is understood that, as regards the application at any time of the 

Convention, and any protocols thereto by a Contracting State, any term not 

defined therein shall, unless the context otherwise requires or the competent 

authorities otherwise agree to a common meaning pursuant to Article XXVI 

(Mutual Agreement Procedure), have the meaning which it has at that time under 

the law of that State for the purposes of the taxes to which the Convention, and 

any protocols thereto apply, any meaning under the applicable tax laws of that 

State prevailing over a meaning given to the term under other laws of that State. 

2. Meaning of connected projects 

For the purposes of applying subparagraph (b) of paragraph 9 of Article V 

(Permanent Establishment) of the Convention, it is understood that projects shall 

be considered to be connected if they constitute a coherent whole, commercially 

and geographically. 

3. Definition of the term “dividends” 

It is understood that distributions from Canadian income trusts and royalty trusts 

that are treated as dividends under the taxation laws of Canada shall be considered 

dividends for the purposes of Article X (Dividends) of the Convention. 

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4. Deletion of Article XIV (Independent Personal Services) 

It is understood that the deletion of Article XIV (Independent Personal Services) 

of the Convention confirms the negotiators’ shared understanding that no practical 

distinction can be made between a “fixed base” and a “permanent establishment”, 

and that independent personal services of a resident of a Contracting State, to the 

extent that such resident is found to have a permanent establishment in the other 

Contracting State with respect to those services, shall be subject to the provisions 

of Article VII (Business Profits). 

5. Former permanent establishments and fixed bases 

It is understood that the modifications of paragraph 2 of Article VII (Business 

Profits), paragraph 4 of Article X (Dividends), paragraph 3 of Article XI (Interest) 

and paragraph 5 of Article XII (Royalties) of the Convention to refer to business 

having formerly been carried on through a permanent establishment confirm the 

negotiators’ shared understanding of the meaning of the existing provisions, and 

thus are clarifying only. 

6. Stock options 

For purposes of applying Article XV (Income from Employment) and Article 

XXIV (Elimination of Double Taxation) of the Convention to income of an 

individual in connection with the exercise or other disposal (including a deemed 

exercise or disposal) of an option that was granted to the individual as an 

employee of a corporation or mutual fund trust to acquire shares or units 

(“securities”) of the employer (which is considered, for the purposes of this Note, 

to include any related entity) in respect of services rendered or to be rendered by 

such individual, or in connection with the disposal (including a deemed disposal) 

of a security acquired under such an option, the following principles shall apply: 

(a) Subject to subparagraph 6(b) of this Note, the individual shall be 

deemed to have derived, in respect of employment exercised in a 

Contracting State, the same proportion of such income that the number of 

days in the period that begins on the day the option was granted, and that 

ends on the day the option was exercised or disposed of, on which the 

individual’s principal place of employment for the employer was situated 

in that Contracting State is of the total number of days in the period on 

which the individual was employed by the employer; and 

(b) Notwithstanding subparagraph 6(a) of this Note, if the competent 

authorities of both Contracting States agree that the terms of the option 

were such that the grant of the option will be appropriately treated as 

transfer of ownership of the securities (e.g., because the options were inthe-money or not subject to a substantial vesting period), then they may 

agree to attribute income accordingly. 

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7. Taxes imposed by reason of death 

It is understood that, 

(a) Where a share or option in respect of a share is property situated in 

the United States for the purposes of Article XXIX B (Taxes Imposed by 

Reason of Death) of the Convention, any employment income in respect 

of the share or option shall be, for the purpose of clause 6(a)(ii) of that 

Article, income from property situated in the United States; 

(b) Where property situated in the United States for the purposes of 

Article XXIX B (Taxes Imposed by Reason of Death) of the Convention is 

held by an entity that is a resident of Canada and that is described in 

subparagraph 1(b) of Article IV (Residence) of the Convention, any 

income out of or under the entity in respect of the property shall be, for the 

purpose of subparagraph 6(a)(ii) of Article XXIX B (Taxes Imposed by 

Reason of Death), income from property situated in the United States; and 

(c) Where a tax is imposed in Canada by reason of death in respect of 

an entity that is a resident of Canada and that is described in subparagraph 

1(b) of Article IV (Residence) of the Convention, that tax shall be, for the 

purpose of paragraph 7 of Article XXIX B (Taxes Imposed by Reason of 

Death) of the Convention, imposed in respect of property situated in 

Canada. 

8. Royalties – information in connection with franchise agreement 

It is understood that the reference in subparagraph 3(c) of Article XII (Royalties) 

of the Convention to information provided in connection with a franchise 

agreement shall generally refer only to information that governs or otherwise 

deals with the operation (whether by the payer or by another person) of the 

franchise, and not to other information concerning industrial, commercial or 

scientific experience that is held for resale or license. 

9. With reference to Article VII (Business Profits) 

It is understood that the business profits to be attributed to a permanent 

establishment shall include only the profits derived from the assets used, risks 

assumed and activities performed by the permanent establishment. The principles 

of the OECD Transfer Pricing Guidelines shall apply for purposes of determining 

the profits attributable to a permanent establishment, taking into account the 

different economic and legal circumstances of a single entity. Accordingly, any 

of the methods described therein as acceptable methods for determining an arm’s 

length result may be used to determine the income of a permanent establishment 

so long as those methods are applied in accordance with the Guidelines. In 

particular, in determining the amount of attributable profits, the permanent 

establishment shall be treated as having the same amount of capital that it would 

need to support its activities if it were a distinct and separate enterprise engaged in 

the same or similar activities. With respect to financial institutions other than 

insurance companies, a Contracting State may determine the amount of capital to 

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be attributed to a permanent establishment by allocating the institution’s total 

equity between its various offices on the basis of the proportion of the financial 

institution’s risk-weighted assets attributable to each of them. In the case of an 

insurance company, there shall be attributed to a permanent establishment not 

only premiums earned through the permanent establishment, but that portion of 

the insurance company's overall investment income from reserves and surplus that 

supports the risks assumed by the permanent establishment. 

10. Qualifying retirement plans 

For purposes of paragraph 15 of Article XVIII (Pensions and Annuities) of the 

Convention, it is understood that 

(a) In the case of Canada, the term “qualifying retirement plan” shall 

include the following and any identical or substantially similar plan that is 

established pursuant to legislation introduced after the date of signature of 

the Protocol: registered pension plans under section 147.1 of the Income 

Tax Act, registered retirement savings plans under section 146 that are 

part of a group arrangement described in subsection 204.2(1.32), deferred 

profit sharing plans under section 147, and any registered retirement 

savings plan under section 146 or registered retirement income fund under 

section 146.3 that is funded exclusively by rollover contributions from one 

or more of the preceding plans; and 

(b) In the case of the United States, the term “qualifying retirement 

plan” shall include the following and any identical or substantially similar 

plan that is established pursuant to legislation introduced after the date of 

signature of the Protocol: qualified plans under section 401(a) of the 

Internal Revenue Code (including section 401(k) arrangements), 

individual retirement plans that are part of a simplified employee pension 

plan that satisfies section 408(k), section 408(p) simple retirement 

accounts, section 403(a) qualified annuity plans, section 403(b) plans, 

section 457(g) trusts providing benefits under section 457(b) plans, the 

Thrift Savings Fund (section 7701(j)), and any individual retirement 

account under section 408(a) that is funded exclusively by rollover 

contributions from one or more of the preceding plans. 

11. Former long-term residents 

The term “long-term resident” shall mean any individual who is a lawful 

permanent resident of the United States in eight or more taxable years during the 

preceding 15 taxable years. In determining whether the threshold in the preceding 

sentence is met, there shall not count any year in which the individual is treated as 

a resident of Canada under the Convention, or as a resident of any country other 

than the United States under the provisions of any other U.S. tax treaty, and, in 

either case, the individual does not waive the benefits of such treaty applicable to 

residents of the other country. 

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12. Special source rules relating to former citizens and long-term residents 

For purposes of subparagraph 2 (b) of Article XXIX (Miscellaneous Rules) of the 

Convention, “income deemed under the domestic law of the United States to arise 

from such sources” shall consist of gains from the sale or exchange of stock of a 

U.S. company or debt obligations of a U.S. person, the United States, a State, or a 

political subdivision thereof, or the District of Columbia, gains from property 

(other than stock or debt obligations) located in the United States, and, in certain 

cases, income or gain derived from the sale of stock of a non-U.S. company or a 

disposition of property contributed to such non-U.S. company where such 

company would be a controlled foreign corporation with respect to the person if 

such person had continued to be a U.S. person. In addition, an individual who 

exchanges property that gives rise or would give rise to U.S.-source income for 

property that gives rise to foreign-source income shall be treated as if he or she 

had sold the property that would give rise to U.S. source income for its fair 

market value, and any consequent gain shall be deemed to be income from 

sources within the United States. 

13. Exchange of Information 

It is understood that the standards and practices described in Article XXVII 

(Exchange of Information) of the Convention are to be in no respect less effective 

than those described in the Model Agreement on Exchange of Information on Tax 

Matters developed by the OECD Global Forum Working Group on Effective 

Exchange of Information. 

14. Limitation on Benefits

The United States and Canada are part of the same regional free trade area and, as 

a result, the Convention reflects the fact that publicly traded companies resident in 

one country may be traded on a stock exchange of the other country. 

Nevertheless, the Contracting States agree that in making future amendments to 

the Convention, they shall consult on possible modifications to subparagraph 2(c) 

of Article XXIX A (Limitation on Benefits) of the Convention (including, 

modifications necessary to discourage corporate inversion transactions). 

 If the above proposal is acceptable to your Government, I further propose 

that this Note, which is authentic in English and in French, and your reply Note 

reflecting such acceptance shall constitute an agreement between our two 

Governments which shall enter into force on the date of entry into force of the 

Protocol and shall be annexed to the Convention as Annex B thereto, and shall 

therefore be an integral part of the Convention. 

 Please accept, Excellency, the assurance of my highest consideration. 

I am pleased to inform you that the Government of the United States of America accepts 

the proposal set forth in your Note. The Government of the United States of America 

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further agrees that your Note, which is authentic in English and in French, together with 

this reply, shall constitute an Agreement between the United States of America and 

Canada, which shall enter into force on the date of entry into force of 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 (the “Convention”), and shall be annexed to the Convention as Annex B 

thereto, and shall therefore be an integral part of the Convention. 

Accept, Excellency, the renewed assurances of my highest consideration. 

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