DEPARTMENT OF THE TREASURY 

TECHNICAL EXPLANATION OF 

THE PROTOCOL DONE AT CHELSEA ON SEPTEMBER 21, 2007 

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, 1994, MARCH 17, 1995, AND JULY 29, 1997 

INTRODUCTION 

This is a Technical Explanation of the Protocol signed at Chelsea on September 

21, 2007 (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, 1994, March 17, 1995, and July 29, 1997 (the “existing Convention”). The 

existing Convention as modified by the Protocol shall be referred to as the “Convention.” 

Negotiation of the Protocol took into account the U.S. Treasury Department’s 

current tax treaty policy and the Treasury Department’s Model Income Tax Convention, 

published on November 15, 2006 (the “U.S. Model”). Negotiations also took into

account the Model Tax Convention on Income and on Capital, published by the 

Organisation for Economic Cooperation and Development (the “OECD Model”), and 

recent tax treaties concluded by both countries. 

The Technical Explanation is an official United States guide to the Protocol. The 

Government of Canada has reviewed this document and subscribes to its contents. In the 

view of both governments, this document accurately reflects the policies behind 

particular Protocol provisions, as well as understandings reached with respect to the 

application and interpretation of the Protocol and the Convention. 

References made to the “existing Convention” are intended to put various 

provisions of the Protocol into context. The Technical Explanation does not, however,

provide a complete comparison between the provisions of the existing Convention and 

the amendments made by the Protocol. The Technical Explanation is not intended to 

provide a complete guide to the existing Convention as amended by the Protocol. To the 

extent that the existing Convention has not been amended by the Protocol, the prior 

technical explanations of the Convention remain the official explanations. References in 

this Technical Explanation to "he"' or "his" should be read to mean "he or she" or "his or 

her." References to the “Code” are to the Internal Revenue Code. 

On the date of signing of the Protocol, the United States and Canada exchanged 

two sets of diplomatic notes. Each of these notes sets forth provisions and 

understandings related to the Protocol and the Convention, and comprises an integral part 

of the overall agreement between the United States and Canada. The first note, the 
“Arbitration Note,” relates to the implementation of new paragraphs 6 and 7 of Article 

XXVI (Mutual Agreement Procedure), which provide for binding arbitration of certain 

disputes between the competent authorities. The second note, the “General Note,” relates 

more generally to issues of interpretation or application of various provisions of the 

Protocol. 

Article 1 

Article 1 of the Protocol adds subparagraph 1(k) to Article III (General 

Definitions) to address the definition of “national” of a Contracting State as used in the 

Convention. The Contracting States recognize that Canadian tax law does not draw 

distinctions based on nationality as such. Nevertheless, at the request of the United

States, the definition was added and contains references to both citizenship and 

nationality. The definition includes any individual possessing the citizenship or 

nationality of a Contracting State and any legal person, partnership or association whose 

status is determined by reference to the laws in force in a Contracting State. The existing

Convention contains one reference to the term “national” in paragraph 1 of Article XXVI 

(Mutual Agreement Procedure). The Protocol adds another reference in paragraph 1 of

Article XXV (Non-Discrimination) to ensure that nationals of the United States are 

covered by the non-discrimination provisions of the Convention. The definition added by 

the Protocol is consistent with the definition provided in other U.S. tax treaties. 

The General Note provides that for purposes of paragraph 2 of Article III, as 

regards the application at any time of the Convention, any term not defined in the 

Convention 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 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. 

Article 2 

Article 2 of the Protocol replaces paragraph 3 of Article IV (Residence) of the 

existing Convention to address the treatment of so-called dual resident companies. 

Article 2 of the Protocol also adds new paragraphs 6 and 7 to Article IV to determine 

whether income is considered to be derived by a resident of a Contracting State when 

such income is derived through a fiscally transparent entity. 

Paragraph 3 of Article IV – Dual resident companies 

Paragraph 3, which addresses companies that are otherwise considered resident in 

each of the Contracting States, is replaced. The provisions of paragraph 3, and the date 

upon which these provisions are effective, are consistent with an understanding reached 

between the United States and Canada on September 18, 2000, to clarify the residence of 

a company under the Convention when the company has engaged in a so-called corporate 

“continuance” transaction. The paragraph applies only where, by reason of the rules set 

forth in paragraph 1 of Article IV (Residence), a company is a resident of both 

Contracting States. 

Subparagraph 3(a) provides a rule to address the situation when a company is a 

resident of both Contracting States but is created under the laws in force in only one of 

the Contracting States. In such a case, the rule provides that the company is a resident 

only of the Contracting State under which it is created. For example, if a company is 

incorporated in the United States but the company is also otherwise considered a resident 

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of Canada because the company is managed in Canada, subparagraph 3(a) provides that 

the company shall be considered a resident only of the United States for purposes of the 

Convention. Subparagraph 3(a) is intended to operate in a manner similar to the first 

sentence of former paragraph 3. However, subparagraph 3(a) clarifies that such a 

company must be considered created in only one of the Contracting States to fall within 

the scope of subparagraph 3(a). In some cases, a company may engage in a corporate 

continuance transaction and retain its charter in the Contracting State from which it 

continued, while also being considered as created in the State to which the company 

continued. In such cases, the provisions of subparagraph 3(a) shall not apply because the 

company would be considered created in both of the Contracting States. 

Subparagraph 3(b) addresses all cases involving a dual resident company that are 

not addressed in subparagraph 3(a). Thus, subparagraph 3(b) applies to continuance 

transactions occurring between the Contracting States if, as a result, a company otherwise 

would be considered created under the laws of each Contracting State, e.g., because the 

corporation retained its charter in the first State. Subparagraph 3(b) would also address 

so-called serial continuance transactions where, for example, a company continues from

one of the Contracting States to a third country and then continues into the other 

Contracting State without having ceased to be treated as resident in the first Contracting 

State. 

Subparagraph 3(b) provides that if a company is considered to be a resident of 

both Contracting States, and the residence of such company is not resolved by 

subparagraph 3(a), then the competent authorities of the Contracting States shall 

endeavor to settle the question of residency by a mutual agreement procedure and 

determine the mode of application of the Convention to such company. Subparagraph

3(b) also provides that in the absence of such agreement, the company shall not be 

considered a resident of either Contracting State for purposes of claiming any benefits 

under the Convention. 

Paragraphs 6 and 7 of Article IV – income, profit, or gain derived through fiscally 

transparent entities 

New paragraphs 6 and 7 are added to Article IV to provide specific rules for the 

treatment of amounts of income, profit or gain derived through or paid by fiscally 

transparent entities such as partnerships and certain trusts. Fiscally transparent entities, 

as explained more fully below, are in general entities the income of which is taxed at the 

beneficiary, member, or participant level. Entities that are subject to tax, but with respect 

to which tax may be relieved under an integrated system, are not considered fiscally 

transparent entities. Entities that are fiscally transparent for U.S. tax purposes include 

partnerships, common investment trusts under section 584, grantor trusts, and business 

entities such as a limited liability company (“LLC”) that is treated as a partnership or is 

disregarded as an entity separate from its owner for U.S. tax purposes. Entities falling 

within this description in Canada are (except to the extent the law provides otherwise) 

partnerships and what are known as “bare” trusts. 

United States tax law also considers a corporation that has made a valid election 

to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code (an “S 

corporation”) to be fiscally transparent within the meaning explained below. Thus, if a 

U.S. resident derives income from Canada through an S corporation, the U.S. resident 

will under new paragraph 6 be considered for purposes of the Convention as the person

who derived the income. Exceptionally, because Canada will ordinarily accept that an S 

corporation is itself resident in the United States for purposes of the Convention, Canada 

will allow benefits under the Convention to the S corporation in its own right. In a 

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reverse case, however – that is, where the S corporation is owned by a resident of Canada 

and has U.S.-source income, profits or gains – the Canadian resident will not be 

considered as deriving the income by virtue of subparagraph 7 (a) as Canada does not see 

the S corporation as fiscally transparent. 

Under both paragraph 6 and paragraph 7, it is relevant whether the treatment of an 

amount of income, profit or gain derived by a person through an entity under the tax law 

of the residence State is “the same as its treatment would be if that amount had been 

derived directly.” For purposes of paragraphs 6 and 7, whether the treatment of an 

amount derived by a person through an entity under the tax law of the residence State is 

the same as its treatment would be if that amount had been derived directly by that person 

shall be determined in accordance with the principles set forth in Code section 894 and 

the regulations under that section concerning whether an entity will be treated as fiscally 

transparent with respect to an item of income received by the entity. Treas. Reg. section

1.894-1(d)(3)(iii) provides that an entity will be fiscally transparent under the laws of an 

interest holder’s jurisdiction with respect to an item of income to the extent that the laws 

of that jurisdiction require the interest holder resident in that jurisdiction to separately 

take into account on a current basis the interest holder’s respective share of the item of 

income paid to the entity, whether or not distributed to the interest holder, and the 

character and source of the item in the hands of the interest holder are determined as if 

such item were realized directly from the source from which realized by the entity. 

Although Canada does not have analogous provisions in its domestic law, it is anticipated 

that principles comparable to those described above will apply. 

Paragraph 6 

Under paragraph 6, an amount of income, profit or gain is considered to be 

derived by a resident of a Contracting State (residence State) if 1) the amount is derived 

by that person through an entity (other than an entity that is a resident of the other 

Contracting State (source State), and 2) by reason of that entity being considered fiscally 

transparent under the laws of the residence State, the treatment of the amount under the 

tax law of the residence State is the same as its treatment would be if that amount had 

been derived directly by that person. These two requirements are set forth in 

subparagraphs 6(a) and 6(b), respectively. 

For example, if a U.S. resident owns a French entity that earns Canadian-source 

dividends and the entity is considered fiscally transparent under U.S. tax law, the U.S. 

resident is considered to derive the Canadian-source dividends for purposes of Article IV 

(and thus, the dividends are considered as being “paid to” the resident) because the U.S. 

resident is considered under the tax law of the United States to have derived the dividend 

through the French entity and, because the entity is treated as fiscally transparent under 

U.S. tax law, the treatment of the income under U.S. tax law is the same as its treatment 

would be if that amount had been derived directly by the U.S. resident. This result 

obtains even if the French entity is viewed differently under the tax laws of Canada or of 

France (i.e., the French entity is treated under Canadian law or under French tax law as 

not fiscally transparent). 

Similarly, if a Canadian resident derives U.S.-source income, profit or gain 

through an entity created under Canadian law that is considered a partnership for 

Canadian tax purposes but a corporation for U.S. tax purposes, U.S.-source income, profit 

or gain derived through such entity by the Canadian resident will be considered to be

derived by the Canadian resident in considering the application of the Convention. 

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Application of paragraph 6 and related treaty provisions by Canada 

In determining the entitlement of a resident of the United States to the benefits of 

the Convention, Canada shall apply the Convention within its own legal framework. 

For example, assume that from the perspective of Canadian law an amount of 

income is seen as being paid from a source in Canada to USLLC, an entity that is entirely 

owned by U.S. persons and is fiscally transparent for U.S. tax purposes, but that Canada 

considers a corporation and, thus, under Canadian law, a taxpayer in its own right. Since 

USLLC is not itself taxable in the United States, it is not considered to be a U.S. resident 

under the Convention; but for new paragraph 6 Canada would not apply the Convention 

in taxing the income. 

If new paragraph 6 applies in respect of an amount of income, profit or gain, such 

amount is considered as having been derived by one or more U.S. resident shareholders 

of USLLC, and Canada shall grant benefits of the Convention to the payment to USLLC 

and eliminate or reduce Canadian tax as provided in the Convention. The effect of the 

rule is to suppress Canadian taxation of USLLC to give effect to the benefits available 

under the Convention to the U.S. residents in respect of the particular amount of income, 

profit or gain. 

However, for Canadian tax purposes, USLLC remains the only “visible” taxpayer 

in relation to this amount. In other words, the Canadian tax treatment of this taxpayer 

(USLLC) is modified because of the entitlement of its U.S. resident shareholders to 

benefits under the Convention, but this does not alter USLLC’s status under Canadian 

law. Canada does not, for example, treat USLLC as though it did not exist, substituting 

the shareholders for it in the role of taxpayer under Canada’s system. 

Some of the implications of this are as follows. First, Canada will not require the 

shareholders of USLLC to file Canadian tax returns in respect of income that benefits 

from new paragraph 6. Instead, USLLC itself will file a Canadian tax return in which it 

will claim the benefit of the paragraph and supply any documentation required to support 

the claim. (The Canada Revenue Agency will supply additional practical guidance in this 

regard, including instructions for seeking to establish entitlement to Convention benefits 

in advance of payment.) Second, as is explained in greater detail below, if the income in 

question is business profits, it will be necessary to determine whether the income was 

earned through a permanent establishment in Canada. This determination will be based 

on the presence and activities in Canada of USLLC itself, not of its shareholders acting in 

their own right. 

Determination of the existence of a permanent establishment from the business activities 

of a fiscally transparent entity 

New paragraph 6 applies not only in respect of amounts of dividends, interest and 

royalties, but also profit (business income), gains and other income. It may thus be 

relevant in cases where a resident of one Contracting State carries on business in the 

other State through an entity that has a different characterization in each of the two 

Contracting States. 

Application of new paragraph 6 and the provisions of Article V (Permanent 

Establishment) by Canada 

Assume, for instance, that a resident of the United States is part owner of a U.S. 

limited liability company (USLLC) that is treated in the United States as a fiscally 

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transparent entity, but in Canada as a corporation. Assume one of the other two 

shareholders of USLLC is resident in a country that does not have a tax treaty with 

Canada and that the remaining shareholder is resident in a country with which Canada 

does have a tax treaty, but that the treaty does not include a provision analogous to 

paragraph 6. 

Assume further that USLLC carries on business in Canada, but does not do so 

through a permanent establishment there. (Note that from the Canadian perspective, the 

presence or absence of a permanent establishment is evaluated with respect to USLLC 

only, which Canada sees as a potentially taxable entity in its own right.) Regarding

Canada’s application of the provisions of the Convention, the portion of USLLC’s profits 

that belongs to the U.S. resident shareholder will not be taxable in Canada, provided that 

the U.S. resident meets the Convention’s limitation on benefits provisions. Under 

paragraph 6, that portion is seen as having been derived by the U.S. resident shareholder, 

who is entitled to rely on Article VII (Business Profits). The balance of USLLC’s profits

will, however, remain taxable in Canada. Since USLLC is not itself resident in the 

United States for purposes of the Convention, in respect of that portion of its profits that 

is not considered to have been derived by a U.S. resident (or a resident of another country 

whose treaty with Canada includes a rule comparable to paragraph 6) it is not relevant 

whether or not it has a permanent establishment in Canada. 

Another example would be the situation where a USLLC that is wholly owned by 

a resident of the U.S. carries on business in Canada through a permanent establishment. 

If the USLLC is fiscally transparent for U.S. tax purposes (and therefore, the conditions 

for the application of paragraph 6 are satisfied) then the USLLC’s profits will be treated 

as having been derived by its U.S. resident owner inclusive of all attributes of that 

income (e.g., such as having been earned through a permanent establishment). However, 

since the USLLC remains the only “visible” taxpayer for Canadian tax purposes, it is the 

USLLC, and not the U.S. shareholder, that is subject to tax on the profits that are 

attributable to the permanent establishment. 

Application of new paragraph 6 and the provisions of Article V (Permanent 

Establishment) by the United States 

It should be noted that in the situation where a person is considered to derive 

income through an entity, the United States looks in addition to such person’s activities in 

order to determine whether he has a permanent establishment. Assume that a Canadian 

resident and a resident in a country that does not have a tax treaty with the United States 

are owners of CanLP. Assume further that Can LP is an entity that is considered fiscally 

transparent for Canadian tax purposes but is not considered fiscally transparent for U.S. 

tax purposes, and that CanLP carries on business in the United States. If CanLP carries 

on the business through a permanent establishment, that permanent establishment may be 

attributed to the partners. Moreover, in determining whether there is a permanent 

establishment, the activities of both the entity and its partners will be considered. If 

CanLP does not carry on the business through a permanent establishment, the Canadian 

resident, who derives income through the partnership, may claim the benefits of Article 

VII (Business Profits) of the Convention with respect to such income, assuming that the 

income is not otherwise attributable to a permanent establishment of the partner. In any

case, the third country partner cannot claim the benefits of Article VII of the Convention 

between the United States and Canada. 

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Paragraph 7 

Paragraph 7 addresses situations where an item of income, profit or gain is 

considered not to be paid to or derived by a person who is a resident of a Contracting 

State. The paragraph is divided into two subparagraphs. 

Under subparagraph 7(a), an amount of income, profit or gain is considered not to 

be paid to or derived by a person who is a resident of a Contracting State (the residence 

State) if (1) the other Contracting State (the source State) views the person as deriving the 

amount through an entity that is not a resident of the residence State, and (2) by reason of 

the entity not being treated as fiscally transparent under the laws of the residence State, 

the treatment of the amount under the tax law of the residence State is not the same as its 

treatment would be if that amount had been derived directly by the person. 

For example, assume USCo, a company resident in the United States, is a part 

owner of CanLP, an entity that is considered fiscally transparent for Canadian tax 

purposes, but is not considered fiscally transparent for U.S. tax purposes. CanLP 

receives a dividend from a Canadian company in which it owns stock. Under Canadian 

tax law USCo is viewed as deriving a Canadian-source dividend through CanLP. For 

U.S. tax purposes, CanLP, and not USCo, is viewed as deriving the dividend. Because 

the treatment of the dividend under U.S. tax law in this case is not the same as the 

treatment under U.S. law if USCo derived the dividend directly, subparagraph 7(a) 

provides that USCo will not be considered as having derived the dividend. The result 

would be the same if CanLP were a third-country entity that was viewed by the United 

States as not fiscally transparent, but was viewed by Canada as fiscally transparent. 

Similarly, income from U.S. sources received by an entity organized under the laws of 

the United States that is treated for Canadian tax purposes as a corporation and is owned 

by shareholders who are residents of Canada is not considered derived by the 

shareholders of that U.S. entity even if, under U.S. tax law, the entity is treated as fiscally 

transparent. 

Subparagraph 7(b) provides that an amount of income, profit or gain is not 

considered to be paid to or derived by a person who is a resident of a Contracting State 

(the residence State) where the person is considered under the tax law of the other 

Contracting State (the source State) to have received the amount from an entity that is a 

resident of that other State (the source State), but by reason of the entity being treated as 

fiscally transparent under the laws of the Contracting State of which the person is resident 

(the residence State), the treatment of such amount under the tax law of that State (the 

residence State) is not the same as the treatment would be if that entity were not treated 

as fiscally transparent under the laws of that State (the residence State). 

That is, under subparagraph 7(b), an amount of income, profit or gain is not 

considered to be paid to or derived by a resident of a Contracting State (the residence 

State) if: (1) the other Contracting State (the source State) views such person as receiving 

the amount from an entity resident in the source State; (2) the entity is viewed as fiscally 

transparent under the laws of the residence State; and (3) by reason of the entity being 

treated as fiscally transparent under the laws of the residence State, the treatment of the 

amount received by that person under the tax law of the residence State is not the same as 

its treatment would be if the entity were not treated as fiscally transparent under the laws 

of the residence State. 

For example, assume that USCo, a company resident in the United States is the 

sole owner of CanCo, an entity that is considered under Canadian tax law to be a 

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corporation that is resident in Canada but is considered under U.S. tax law to be 

disregarded as an entity separate from its owner. Assume further that USCo is 

considered under Canadian tax law to have received a dividend from CanCo. 

In such a case, Canada, the source State, views USCo as receiving income (i.e., a 

dividend) from a corporation that is a resident of Canada (CanCo), CanCo is viewed as 

fiscally transparent under the laws of the United States, the residence State, and by reason 

of CanCo being disregarded under U.S. tax law, the treatment under U.S. tax law of the 

payment is not the same as its treatment would be if the entity were regarded as a 

corporation under U.S. tax law. That is, the payment is disregarded for U.S. tax 

purposes, whereas if U.S. tax law regarded CanCo as a corporation, the payment would 

be treated as a dividend. Therefore, subparagraph 7(b) would apply to provide that the 

income is not considered to be paid to or derived by USCo. 

The same result obtains if, in the above example, USCo is considered under 

Canadian tax law to have received an interest or royalty payment (instead of a dividend) 

from CanCo. Under U.S. law, because CanCo is disregarded as an entity separate from

its owner, the payment is disregarded, whereas if CanCo were treated as not fiscally 

transparent, the payment would be treated as interest or a royalty, as the case may be. 

Therefore, subparagraph 7(b) would apply to provide that such amount is not considered 

to be paid to or derived by USCo. 

The application of subparagraph 7(b) differs if, in the above example, USCo (as 

well as other persons) are owners of CanCo, a Canadian entity that is considered under 

Canadian tax law to be a corporation that is resident in Canada but is considered under 

U.S. tax law to be a partnership (as opposed to being disregarded). Assume that USCo is 

considered under Canadian tax law to have received a dividend from CanCo. Such 

payment is viewed under Canadian tax law as a dividend, but under U.S. tax law is 

viewed as a partnership distribution. In such a case, Canada views USCo as receiving

income (i.e., a dividend) from an entity that is a resident of Canada (CanCo), CanCo is 

viewed as fiscally transparent under the laws of the United States, the residence State, 

and by reason of CanCo being treated as a partnership under U.S. tax law, the treatment 

under U.S. tax law of the payment (as a partnership distribution) is not the same as the 

treatment would be if CanCo were not fiscally transparent under U.S. tax law (as a 

dividend). As a result, subparagraph 7(b) would apply to provide that such amount is not 

considered paid to or derived by the U.S. resident. 

As another example, assume that CanCo, a company resident in Canada, is the 

owner of USLP, an entity that is considered under U.S. tax law (by virtue of an election) 

to be a corporation resident in the United States, but that is considered under Canadian 

tax law to be a branch of CanCo. Assume further that CanCo is considered under U.S. 

tax law to have received a dividend from USLP. In this case, the United States views 

CanCo as receiving income (i.e., a dividend) from an entity that is resident in the United 

States (USLP), but by reason of USLP being a branch under Canadian tax law, the 

treatment under Canadian tax law of the payment is not the same as its treatment would 

be if USLP were a company under Canadian tax law. That is, the payment is treated as a 

branch remittance for Canadian tax purposes, whereas if Canadian tax law regarded 

USLP as a corporation, the payment would be treated as a dividend. Therefore, 

subparagraph 7(b) would apply to provide that the income is not considered to be paid to 

or derived by CanCo. The same result would obtain in the case of interest or royalties 

paid by USLP to CanCo. 

Paragraphs 6 and 7 apply to determine whether an amount is considered to be 

derived by (or paid to) a person who is a resident of Canada or the United States. If, as a 

8
 
 

result of paragraph 7, a person is not considered to have derived or received an amount of 

income, profit or gain, that person shall not be entitled to the benefits of the Convention 

with respect to such amount. Additionally, for purposes of application of the Convention 

by the United States, the treatment of such payments under Code section 894(c) and the 

regulations thereunder would not be relevant. 

New paragraphs 6 and 7 are not an exception to the saving clause of paragraph 2 

of Article XXIX (Miscellaneous Rules). Accordingly, subparagraph 7(b) does not

prevent a Contracting State from taxing an entity that is treated as a resident of that State 

under its tax law. For example, if a U.S. partnership with members who are residents of 

Canada elects to be taxed as a corporation for U.S. tax purposes, the United States will 

tax that partnership on its worldwide income on a net basis, even if Canada views the 

partnership as fiscally transparent. 

Interaction of paragraphs 6 and 7 with the determination of “beneficial ownership” 

With respect to payments of income, profits or gain arising in a Contracting State 

and derived directly by a resident of the other Contracting State (and not through a 

fiscally transparent entity), the term “beneficial owner” is defined under the internal law 

of the country imposing tax (i.e., the source State). Thus, if the payment arising in a 

Contracting State is derived by a resident of the other State who under the laws of the 

first-mentioned State is determined to be a nominee or agent acting on behalf of a person 

that is not a resident of that other State, the payment will not be entitled to the benefits of 

the Convention. However, payments arising in a Contracting State and derived by a 

nominee on behalf of a resident of that other State would be entitled to benefits. These 

limitations are confirmed by paragraph 12 of the Commentary to Article 10 of the OECD 

Model. 

Special rules apply in the case of income, profits or gains derived through a 

fiscally transparent entity, as described in new paragraph 6 of Article IV. Residence 

State principles determine who derives the income, profits or gains, to assure that the 

income, profits or gains for which the source State grants benefits of the Convention will 

be taken into account for tax purposes by a resident of the residence State. Source 

country principles of beneficial ownership apply to determine whether the person who 

derives the income, profits or gains, or another resident of the other Contracting State, is 

the beneficial owner of the income, profits or gains. The source State may conclude that 

the person who derives the income, profits or gains in the residence State is a mere 

nominee, agent, conduit, etc., for a third country resident and deny benefits of the 

Convention. If the person who derives the income, profits or gains under paragraph 6 of 

Article IV would not be treated under the source State’s principles for determining 

beneficial ownership as a nominee, agent, custodian, conduit, etc., that person will be 

treated as the beneficial owner of the income, profits or gains for purposes of the 

Convention. 

Assume, for instance, that interest arising in the United States is paid to CanLP, 

an entity established in Canada which is treated as fiscally transparent for Canadian tax 

purposes but is treated as a company for U.S. tax purposes. CanCo, a company 

incorporated in Canada, is the sole interest holder in CanLP. Paragraph 6 of Article IV

provides that CanCo derives the interest. However, if under the laws of the United States 

regarding payments to nominees, agents, custodians and conduits, CanCo is found be a 

nominee, agent, custodian or conduit for a person who is not a resident of Canada, CanCo 

will not be considered the beneficial owner of the interest and will not be entitled to the 

benefits of Article XI with respect to such interest. The payment may be entitled to 

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benefits, however, if CanCo is found to be a nominee, agent, custodian or conduit for a 

person who is a resident of Canada. 

With respect to Canadian-source income, profit or gains, beneficial ownership is 

to be determined under Canadian law. For example, assume that LLC, an entity that is 

treated as fiscally transparent for U.S. tax purposes, but as a corporation for Canadian tax 

purposes, is owned by USCo, a U.S. resident company. LLC receives Canadian-source 

income. The question of the beneficial ownership of the income received by LLC is 

determined under Canadian law. If LLC is considered the beneficial owner of the income 

under Canadian law, paragraph 6 shall apply to extend benefits of the Convention to the 

income received by LLC to the extent that the Canadian-source income is derived by U.S. 

resident members of LLC. 

Article 3 

Article 3 of the Protocol amends Article V (Permanent Establishment) of the 

Convention. Paragraph 1 of Article 3 of the Protocol adds a reference in Paragraph 6 of 

Article IV to new paragraph 9 of Article V. Paragraph 2 of Article 3 of the Protocol sets

forth new paragraphs 9 and 10 of Article V. 

Paragraph 9 of Article V 

New paragraph 9 provides a special rule (subject to the provisions of paragraph 3) 

for an enterprise of a Contracting State that provides services in the other Contracting 

State, but that does not have a permanent establishment by virtue of the preceding 

paragraphs of the Article. If (and only if) such an enterprise meets either of two tests as 

provided in subparagraphs 9(a) and 9(b), the enterprise will be deemed to provide those 

services through a permanent establishment in the other State. 

The first test as provided in subparagraph 9(a) has two parts. First, the services 

must be performed in the other State by an individual who is present in that other State 

for a period or periods aggregating 183 days or more in any twelve-month period. 

Second, during that period or periods, more than 50 percent of the gross active business 

revenues of the enterprise (including revenue from active business activities unrelated to 

the provision of services) must consist of income derived from the services performed in 

that State by that individual. If the enterprise meets both of these tests, the enterprise will 

be deemed to provide the services through a permanent establishment. This test is 

employed to determine whether an enterprise is deemed to have a permanent 

establishment by virtue of the presence of a single individual (i.e., a natural person). 

For the purposes of subparagraph 9(a), the term “gross active business revenues” 

shall mean the gross revenues attributable to active business activities that the enterprise 

has charged or should charge for its active business activities, regardless of when the 

actual billing will occur or of domestic law rules concerning when such revenues should 

be taken into account for tax purposes. Such active business activities are not restricted 

to the activities related to the provision of services. However, the term does not include 

income from passive investment activities. 

As an example of the application of subparagraph 9(a), assume that Mr. X, an 

individual resident in the United States, is one of the two shareholders and employees of 

USCo, a company resident in the United States that provides engineering services. 

During the 12-month period beginning December 20 of Year 1 and ending December 19 

of Year 2, Mr. X is present in Canada for periods totaling 190 days, and during those 

10
 
 

periods, 70 percent of all of the gross active business revenues of USCo attributable to 

business activities are derived from the services that Mr. X performs in Canada. Because 

both of the criteria of subparagraph 9(a) are satisfied, USCo will be deemed to have a 

permanent establishment in Canada by virtue of that subparagraph. 

The second test as provided in subparagraph 9(b) provides that an enterprise will 

have a permanent establishment if the services are provided in the other State for an 

aggregate of 183 days or more in any twelve-month period with respect to the same or 

connected projects for customers who either are residents of the other State or maintain a 

permanent establishment in the other State with respect to which the services are 

provided. The various conditions that have to be satisfied in order for subparagraph 9(b) 

to have application are described in detail below. 

In addition to meeting the 183-day threshold, the services must be provided for 

customers who either are residents of the other State or maintain a permanent 

establishment in that State. The intent of this requirement is to reinforce the concept that 

unless there is a customer in the other State, such enterprise will not be deemed as 

participating sufficiently in the economic life of that other State to warrant being deemed 

to have a permanent establishment. 

Assume for example, that CanCo, a Canadian company, wishes to acquire USCo, 

a company in the United States. In preparation for the acquisition, CanCo hires Canlaw, 

a Canadian law firm, to conduct a due diligence evaluation of USCo’s legal and financial 

standing in the United States. Canlaw sends a staff attorney to the United States to 

perform the due diligence analysis of USCo. That attorney is present and working in the

United States for greater than 183 days. If the remuneration paid to Canlaw for the 

attorney’s services does not constitute more than 50 percent of Canlaw’s gross active 

business revenues for the period during which the attorney is present in the United States, 

Canlaw will not be deemed to provide the services through a permanent establishment in 

the United States by virtue of subparagraph 9(a). Additionally, because the services are

being provided for a customer (CanCo) who neither is a resident of the United States nor 

maintains a permanent establishment in the United States to which the services are 

provided, Canlaw will also not have a permanent establishment in the United States by

virtue of subparagraph 9(b). 

Paragraph 9 applies only to the provision of services, and only to services 

provided by an enterprise to third parties. Thus, the provision does not have the effect of 

deeming an enterprise to have a permanent establishment merely because services are 

provided to that enterprise. Paragraph 9 only applies to services that are performed or 

provided by an enterprise of a Contracting State within the other Contracting State. It is 

therefore not sufficient that the relevant services be merely furnished to a resident of the 

other Contracting State. Where, for example, an enterprise provides customer support or 

other services by telephone or computer to customers located in the other State, those 

would not be covered by paragraph 9 because they are not performed or provided by that 

enterprise within the other State. Another example would be that of an architect who is 

hired to design blueprints for the construction of a building in the other State. As part of

completing the project, the architect must make site visits to that other State, and his days 

of presence there would be counted for purposes of determining whether the 183-day 

threshold is satisfied. However, the days that the architect spends working on the 

blueprint in his home office shall not count for purposes of the 183-day threshold, 

because the architect is not performing or providing those services within the other State. 

For purposes of determining whether the time threshold has been met, 

subparagraph 9(b) permits the aggregation of services that are provided with respect to 

11
 
connected projects. Paragraph 2 of the General Note provides that for purposes of 

subparagraph 9(b), projects shall be considered to be connected if they constitute a 

coherent whole, commercially and geographically. The determination of whether 

projects are connected should be determined from the point of view of the enterprise (not 

that of the customer), and will depend on the facts and circumstances of each case. In 

determining the existence of commercial coherence, factors that would be relevant 

include: 1) whether the projects would, in the absence of tax planning considerations, 

have been concluded pursuant to a single contract; 2) whether the nature of the work 

involved under different projects is the same; and 3) whether the same individuals are 

providing the services under the different projects. Whether the work provided is 

covered by one or multiple contracts may be relevant, but not determinative, in finding

that projects are commercially coherent. 

The aggregation rule addresses, for example, potentially abusive situations in 

which work has been artificially divided into separate components in order to avoid 

meeting the 183-day threshold. Assume for example, that a technology consultant has 

been hired to install a new computer system for a company in the other country. The 

work will take ten months to complete. However, the consultant purports to divide the 

work into two five-month projects with the intention of circumventing the rule in 

subparagraph 9(b). In such case, even if the two projects were considered separate, they 

will be considered to be commercially coherent. Accordingly, subject to the additional 

requirement of geographic coherence, the two projects could be considered to be 

connected, and could therefore be aggregated for purposes of subparagraph 9(b). In 

contrast, assume that the technology consultant is contracted to install a particular 

computer system for a company, and is also hired by that same company, pursuant to a 

separate contract, to train its employees on the use of another computer software that is 

unrelated to the first system. In this second case, even though the contracts are both 

concluded between the same two parties, there is no commercial coherence to the two 

projects, and the time spent fulfilling the two contracts may not be aggregated for 

purposes of subparagraph 9(b). Another example of projects that do not have commercial 

coherence would be the case of a law firm which, as one project provides tax advice to a 

customer from one portion of its staff, and as another project provides trade advice from

another portion of its staff, both to the same customer. 

Additionally, projects, in order to be considered connected, must also constitute a 

geographic whole. An example of projects that lack geographic coherence would be a 

case in which a consultant is hired to execute separate auditing projects at different 

branches of a bank located in different cities pursuant to a single contract. In such an 

example, while the consultant’s projects are commercially coherent, they are not 

geographically coherent and accordingly the services provided in the various branches 

shall not be aggregated for purposes of applying subparagraph 9(b). The services 

provided in each branch should be considered separately for purposes of subparagraph

9(b). 

The method of counting days for purposes of subparagraph 9(a) differs slightly 

from the method for subparagraph 9(b). Subparagraph 9(a) refers to days in which an 

individual is present in the other country. Accordingly, physical presence during a day is 

sufficient. In contrast, subparagraph 9(b) refers to days during which services are 

provided by the enterprise in the other country. Accordingly, non-working days such as 

weekends or holidays would not count for purposes of subparagraph 9(b), as long as no 

services are actually being provided while in the other country on those days. For the 

purposes of both subparagraphs, even if the enterprise sends many individuals 

simultaneously to the other country to provide services, their collective presence during 

one calendar day will count for only one day of the enterprise’s presence in the other 

12
 
 

country. For instance, if an enterprise sends 20 employees to the other country to provide 

services to a client in the other country for 10 days, the enterprise will be considered 

present in the other country only for 10 days, not 200 days (20 employees x 10 days). 

By deeming the enterprise to provide services through a permanent establishment 

in the other Contracting State, paragraph 9 allows the application of Article VII (Business 

Profits), and accordingly, the taxation of the services shall be on a net-basis. Such 

taxation is also limited to the profits attributable to the activities carried on in performing 

the relevant services. It will be important to ensure that only the profits properly 

attributable to the functions performed and risks assumed by provision of the services 

will be attributed to the deemed permanent establishment. 

In addition to new paragraph 9, Article 3 of the Protocol amends paragraph 6 of 

Article V of the Convention to include a reference to paragraph 9. Therefore, in no case 

will paragraph 9 apply to deem services to be provided through a permanent 

establishment if the services are limited to those mentioned in paragraph 6 which, if 

performed through a fixed place of business, would not make the fixed place of business 

a permanent establishment under the provisions of that paragraph. 

The competent authorities are encouraged to consider adopting rules to reduce the 

potential for excess withholding or estimated tax payments with respect to employee 

wages that may result from the application of this paragraph. Further, because paragraph 

6 of Article V applies notwithstanding paragraph 9, days spent on preparatory or 

auxiliary activities shall not be taken into account for purposes of applying subparagraph 

9(b). 

Paragraph 10 of Article V 

Paragraph 2 of Article 3 of the Protocol also sets forth new paragraph 10 of 

Article V. The provisions of new paragraph 10 are identical to paragraph 9 of Article V 

as it existed prior to the Protocol. New paragraph 10 provides that the provisions of 

Article V shall be applied in determining whether any person has a permanent 

establishment in any State. 

Article 4 

Article 4 of the Protocol replaces paragraph 2 of Article VII (Business Profits). 

New paragraph 2 provides that where a resident of either Canada or the United 

States carries on (or has carried on) business in the other Contracting State through a 

permanent establishment in that other State, both Canada and the United States shall 

attribute to permanent establishments in their respective states those business profits 

which the permanent establishment might be expected to make if it were a distinct and 

separate person engaged in the same or similar activities under the same or similar 

conditions and dealing wholly independently with the resident and with any other person 

related to the resident. The term “related to the resident” is to be interpreted in 

accordance with paragraph 2 of Article IX (Related Persons). The reference to other 

related persons is intended to make clear that the test of paragraph 2 is not restricted to 

independence between a permanent establishment and a home office. 

New paragraph 2 is substantially similar to paragraph 2 as it existed before the 

Protocol. However, in addition to the reference to a resident of a Contracting State who 

“carries on” business in the other Contracting State, the Protocol incorporates into the 

Convention the rule of Code section 864(c)(6) by adding “or has carried on” to address 

13
 
circumstances where, as a result of timing, income may be attributable to a permanent 

establishment that no longer exists in one of the Contracting States. In such cases, the 

income is properly within the scope of Article VII. Conforming changes are also made in 

the Protocol to Articles X (Dividends), XI (Interest), and XII (Royalties) of the 

Convention where Article VII would apply. As is explained in paragraph 5 of the 

General Note, these revisions to the Convention are only intended to clarify the 

application of the existing provisions of the Convention. 

The following example illustrates the application of paragraph 2. Assume a 

company that is a resident of Canada and that maintains a permanent establishment in the 

United States winds up the permanent establishment's business and sells the permanent 

establishment’s inventory and assets to a U.S. buyer at the end of year 1 in exchange for 

an installment obligation payable in full at the end of year 3. Despite the fact that the 

company has no permanent establishment in the United States in year 3, the United States 

may tax the deferred income payment recognized by the company in year 3. 

The “attributable to” concept of paragraph 2 provides an alternative to the 

analogous but somewhat different “effectively connected” concept in Code section 

864(c). Depending on the circumstances, the amount of income “attributable to” a 

permanent establishment under Article VII may be greater or less than the amount of 

income that would be treated as “effectively connected” to a U.S. trade or business under 

Code section 864. In particular, in the case of financial institutions, the use of internal 

dealings to allocate income within an enterprise may produce results under Article VII 

that are significantly different than the results under the effectively connected income

rules. For example, income from interbranch notional principal contracts may be taken 

into account under Article VII, notwithstanding that such transactions may be ignored for 

purposes of U.S. domestic law. A taxpayer may use the treaty to reduce its taxable 

income, but may not use both treaty and Code rules where doing so would thwart the 

intent of either set of rules. See Rev. Rul. 84-17, 1984-1 C.B. 308. 

The profits attributable to a permanent establishment may be from sources within 

or without a Contracting State. However, as stated in the General Note, the business 

profits attributable to a permanent establishment include only those profits derived from 

the assets used, risks assumed, and activities performed by the permanent establishment. 

The language of paragraph 2, when combined with paragraph 3 dealing with the 

allowance of deductions for expenses incurred for the purposes of earning the profits, 

incorporates the arm's length standard for purposes of determining the profits attributable 

to a permanent establishment. The United States and Canada generally interpret the 

arm’s length standard in a manner consistent with the OECD Transfer Pricing Guidelines. 

Paragraph 9 of the General Note confirms that the arm’s length method of 

paragraphs 2 and 3 consists of applying the OECD Transfer Pricing Guidelines, but 

taking into account the different economic and legal circumstances of a single legal entity 

(as opposed to separate but associated enterprises). Thus, any of the methods used in the 

Transfer Pricing Guidelines, including profits methods, may be used as appropriate and in 

accordance with the Transfer Pricing Guidelines. However, the use of the Transfer 

Pricing Guidelines applies only for purposes of attributing profits within the legal entity. 

It does not create legal obligations or other tax consequences that would result from

transactions having independent legal significance. Thus, the Contracting States agree 

that the notional payments used to compute the profits that are attributable to a permanent 

establishment will not be taxed as if they were actual payments for purposes of other 

taxing provisions of the Convention, for example, for purposes of taxing a notional 

royalty under Article XII (Royalties). 

14
 
 

One example of the different circumstances of a single legal entity is that an entity 

that operates through branches rather than separate subsidiaries generally will have lower 

capital requirements because all of the assets of the entity are available to support all of 

the entity’s liabilities (with some exceptions attributable to local regulatory restrictions). 

This is the reason that most commercial banks and some insurance companies operate 

through branches rather than subsidiaries. The benefit that comes from such lower 

capital costs must be allocated among the branches in an appropriate manner. This issue 

does not arise in the case of an enterprise that operates through separate entities, since

each entity will have to be separately capitalized or will have to compensate another 

entity for providing capital (usually through a guarantee). 

Under U.S. domestic regulations, internal “transactions” generally are not 

recognized because they do not have legal significance. In contrast, the rule provided by 

the General Note is that such internal dealings may be used to attribute income to a 

permanent establishment in cases where the dealings accurately reflect the allocation of

risk within the enterprise. One example is that of global trading in securities. In many 

cases, banks use internal swap transactions to transfer risk from one branch to a central 

location where traders have the expertise to manage that particular type of risk. Under 

paragraph 2 as set forth in the Protocol, such a bank may also use such swap transactions 

as a means of attributing income between the branches, if use of that method is the “best 

method” within the meaning of regulation section 1.482-1(c). The books of a branch will 

not be respected, however, when the results are inconsistent with a functional analysis. 

So, for example, income from a transaction that is booked in a particular branch (or home

office) will not be treated as attributable to that location if the sales and risk management 

functions that generate the income are performed in another location. 

The understanding in the General Note also affects the interpretation of paragraph 

3 of Article VII. Paragraph 3 provides that in determining the business profits of a 

permanent establishment, deductions shall be allowed for the expenses incurred for the 

purposes of the permanent establishment, ensuring that business profits will be taxed on a 

net basis. This rule is not limited to expenses incurred exclusively for the purposes of the 

permanent establishment, but includes expenses incurred for the purposes of the 

enterprise as a whole, or that part of the enterprise that includes the permanent 

establishment. Deductions are to be allowed regardless of which accounting unit of the 

enterprise books the expenses, so long as they are incurred for the purposes of the

permanent establishment. For example, a portion of the interest expense recorded on the 

books of the home office in one State may be deducted by a permanent establishment in 

the other. The amount of the expense that must be allowed as a deduction is determined 

by applying the arm’s length principle. 

As noted above, paragraph 9 of the General Note provides that the OECD 

Transfer Pricing Guidelines apply, by analogy, in determining the profits attributable to a 

permanent establishment. Accordingly, a permanent establishment may deduct payments 

made to its head office or another branch in compensation for services performed for the 

benefit of the branch. The method to be used in calculating that amount will depend on 

the terms of the arrangements between the branches and head office. For example, the 

enterprise could have a policy, expressed in writing, under which each business unit 

could use the services of lawyers employed by the head office. At the end of each year, 

the costs of employing the lawyers would be charged to each business unit according to 

the amount of services used by that business unit during the year. Since this has the 

characteristics of a cost-sharing arrangement and the allocation of costs is based on the 

benefits received by each business unit, such a cost allocation would be an acceptable 

15
 
means of determining a permanent establishment's deduction for legal expenses. 

Alternatively, the head office could agree to employ lawyers at its own risk, and to 

charge an arm's length price for legal services performed for a particular business unit. If 

the lawyers were under-utilized, and the “fees” received from the business units were less 

than the cost of employing the lawyers, then the head office would bear the excess cost. If 

the "fees" exceeded the cost of employing the lawyers, then the head office would keep 

the excess to compensate it for assuming the risk of employing the lawyers. If the 

enterprise acted in accordance with this agreement, this method would be an acceptable 

alternative method for calculating a permanent establishment's deduction for legal 

expenses. 

The General Note also makes clear that a permanent establishment cannot be 

funded entirely with debt, but must have sufficient capital to carry on its activities as if it 

were a distinct and separate enterprise. To the extent that the permanent establishment 

has not been attributed capital for profit attribution purposes, a Contracting State may 

attribute such capital to the permanent establishment, in accordance with the arm’s length 

principle, and deny an interest deduction to the extent necessary to reflect that capital 

attribution. The method prescribed by U.S. domestic law for making this attribution is 

found in Treas. Reg. section 1.882-5. Both section 1.882-5 and the method prescribed in 

the General Note start from the premise that all of the capital of the enterprise supports all 

of the assets and risks of the enterprise, and therefore the entire capital of the enterprise

must be allocated to its various businesses and offices. 

However, section 1.882-5 does not take into account the fact that some assets 

create more risk for the enterprise than do other assets. An independent enterprise would

need less capital to support a perfectly-hedged U.S. Treasury security than it would need 

to support an equity security or other asset with significant market and/or credit risk. 

Accordingly, in some cases section 1.882-5 would require a taxpayer to allocate more 

capital to the United States, and therefore would reduce the taxpayer’s interest deduction 

more, than is appropriate. To address these cases, the General Note allows a taxpayer to 

apply a more flexible approach that takes into account the relative risk of its assets in the 

various jurisdictions in which it does business. In particular, in the case of financial 

institutions other than insurance companies, the amount of capital attributable to a 

permanent establishment is determined by allocating the institution’s total equity between 

its various offices on the basis of the proportion of the financial institution’s riskweighted assets attributable to each of them. This recognizes the fact that financial

institutions are in many cases required to risk-weight their assets for regulatory purposes 

and, in other cases, will do so for business reasons even if not required to do so by 

regulators. However, risk-weighting is more complicated than the method prescribed by 

section 1.882-5. Accordingly, to ease this administrative burden, taxpayers may choose 

to apply the principles of Treas. Reg. section 1.882-5(c) to determine the amount of 

capital allocable to its U.S. permanent establishment, in lieu of determining its allocable 

capital under the risk-weighted capital allocation method provided by the General Note, 

even if it has otherwise chosen the principles of Article VII rather than the effectively

connected income rules of U.S. domestic law. It is understood that this election is not 

binding for purposes of Canadian taxation unless the result is in accordance with the 

arm’s length principle. 

As noted in the Convention, nothing in paragraph 3 requires a Contracting State to 

allow the deduction of any expenditure which, by reason of its nature, is not generally 

allowed as a deduction under the tax laws in that State. 

16
 
Article 5 

Article 5 makes a number of amendments to Article X (Dividends) of the existing 

Convention. As with other benefits of the Convention, the benefits of Article X are 

available to a resident of a Contracting State only if that resident is entitled to those 

benefits under the provisions of Article XXIX A (Limitation on Benefits). 

See the Technical Explanation for new paragraphs 6 and 7 of Article IV

(Residence) for discussion regarding the interaction between domestic law concepts of 

beneficial ownership and the treaty rules to determine when a person is considered to 

derive an item of income for purposes of obtaining benefits of the Convention such as 

withholding rate reductions. 

Paragraph 1 

Paragraph 1 of Article 5 of the Protocol replaces subparagraph 2(a) of Article X 

of the Convention. In general, paragraph 2 limits the amount of tax that may be imposed 

on dividends by the Contracting State in which the company paying the dividends is 

resident if the beneficial owner of the dividends is a resident of the other Contracting 

State. Subparagraph 2(a) limits the rate to 5 percent of the gross amount of the dividends 

if the beneficial owner is a company that owns 10 percent or more of the voting stock of 

the company paying the dividends. 

The Protocol adds a parenthetical to address the determination of the requisite 

ownership set forth in subparagraph 2(a) when the beneficial owner of dividends receives 

the dividends through an entity that is considered fiscally transparent in the beneficial 

owner’s Contracting State. The added parenthetical stipulates that voting stock in a 

company paying the dividends that is indirectly held through an entity that is considered 

fiscally transparent in the beneficial owner’s Contracting State is taken into account, 

provided the entity is not a resident of the other Contracting State. The United States 

views the new parenthetical as merely a clarification. 

For example, assume USCo, a U.S. corporation, directly owns 2 percent of the 

voting stock of CanCo, a Canadian company that is considered a corporation in the 

United States and Canada. Further, assume that USCo owns 18 percent of the interests in 

LLC, an entity that in turn owns 50 percent of the voting stock of CanCo. CanCo pays a

dividend to each of its shareholders. Provided that LLC is fiscally transparent in the 

United States and not considered a resident of Canada, USCo’s 9 percent ownership in 

CanCo through LLC (50 percent x 18 percent) is taken into account in determining 

whether USCo meets the 10 percent ownership threshold set forth in subparagraph 2(a). 

In this example, USCo may aggregate its voting stock interests in CanCo that it owns 

directly and through LLC to determine if it satisfies the ownership requirement of 

subparagraph 2(a). Accordingly, USCo will be entitled to the 5 percent rate of 

withholding on dividends paid with respect to both its voting stock held through LLC and 

its voting stock held directly. Alternatively, if, for example, all of the shareholders of 

LLC were natural persons, the 5 percent rate would not apply. 

Paragraph 2 

Paragraph 2 of Article 5 of the Protocol replaces the definition of the term 

“dividends” provided in paragraph 3 of Article X of the Convention. The new definition 

conforms to the U.S. Model formulation. Paragraph 3 defines the term dividends broadly 

and flexibly. The definition is intended to cover all arrangements that yield a return on 

17
 
an equity investment in a corporation as determined under the tax law of the source State, 

as well as arrangements that might be developed in the future. 

The term dividends includes income from shares, or other corporate rights that are 

not treated as debt under the law of the source State, that participate in the profits of the 

company. The term also includes income that is subjected to the same tax treatment as 

income from shares by the law of the source State. Thus, for example, a constructive 

dividend that results from a non-arm's length transaction between a corporation and a 

related party is a dividend. In the case of the United States the term “dividend” includes 

amounts treated as a dividend under U.S. law upon the sale or redemption of shares or 

upon a transfer of shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-2 C.B. 69 

(sale of foreign subsidiary's stock to U.S. sister company is a deemed dividend to extent 

of the subsidiary's and sister company's earnings and profits). Further, a distribution from 

a U.S. publicly traded limited partnership that is taxed as a corporation under U.S. law is 

a dividend for purposes of Article X. However, a distribution by a limited liability 

company is not considered by the United States to be a dividend for purposes of Article 

X, provided the limited liability company is not characterized as an association taxable as 

a corporation under U.S. law. 

Paragraph 3 of the General Note states that distributions from Canadian income

trusts and royalty trusts that are treated as dividends as a result of changes to Canada’s 

taxation of income and royalty trusts enacted in 2007 (S.C. 2007, c. 29) shall be treated as 

dividends for the purposes of Article X. 

Additionally, a payment denominated as interest that is made by a thinly 

capitalized corporation may be treated as a dividend to the extent that the debt is 

recharacterized as equity under the laws of the source State. At the time the Protocol was 

signed, interest payments subject to Canada’s thin-capitalization rules were not 

recharacterized as dividends. 

Paragraph 3 

Paragraph 3 of Article 5 of the Protocol replaces paragraph 4 of Article X. New 

paragraph 4 is substantially similar to paragraph 4 as it existed prior to the Protocol. New 

paragraph 4, however, adds clarifying language consistent with the changes made in 

Articles 4, 6, and 7 of the Protocol with respect to income attributable to a permanent 

establishment that has ceased to exist. Paragraph 4 provides that the limitations of 

paragraph 2 do not apply if the beneficial owner of the dividends carries on or has carried 

on business in the State in which the company paying the dividends is a resident through 

a permanent establishment situated there, and the stockholding in respect of which the 

dividends are paid is effectively connected to such permanent establishment. In such a 

case, the dividends are taxable pursuant to the provisions of Article VII (Business 

Profits). Thus, dividends paid in respect of holdings forming part of the assets of a 

permanent establishment or which are otherwise effectively connected to such permanent 

establishment will be taxed on a net basis using the rates and rules of taxation generally 

applicable to residents of the State in which the permanent establishment is situated. 

To conform with Article 9 of the Protocol, which deletes Article XIV 

(Independent Personal Services) of the Convention, paragraph 4 of Article 5 of the 

Protocol also amends paragraph 5 of Article X by omitting the reference to a “fixed 

base.” 

18
 
Paragraph 4 

To conform with Article 9 of the Protocol, which deletes Article XIV 

(Independent Personal Services) of the Convention, paragraph 4 of Article 5 of the 

Protocol amends paragraph 5 of Article X by omitting the reference to a “fixed base.” 

Paragraph 5 

Paragraph 5 of Article 5 of the Protocol replaces subparagraph 7(c) of Article X 

of the existing Convention. Consistent with current U.S. tax treaty policy, new 

subparagraph 7(c) provides rules that expand the application of subparagraph 2(b) for the 

treatment of dividends paid by a Real Estate Investment Trust (REIT). New 

subparagraph 7(c) maintains the rule of the existing Convention that dividends paid by a 

REIT are not eligible for the 5 percent maximum rate of withholding tax of subparagraph 

2(a), and provides that the 15 percent maximum rate of withholding tax of subparagraph 

2(b) applies to dividends paid by REITs only if one of three conditions is met. 

First, the dividend will qualify for the 15 percent maximum rate if the beneficial 

owner of the dividend is an individual holding an interest of not more than 10 percent in 

the REIT. For this purpose, subparagraph 7(c) also provides that where an estate or 

testamentary trust acquired its interest in a REIT as a consequence of the death of an 

individual, the estate or trust will be treated as an individual for the five-year period 

following the death. Thus, dividends paid to an estate or testamentary trust in respect of a 

holding of less than a 10 percent interest in the REIT also will be entitled to the 15 

percent rate of withholding, but only for up to five years after the death. 

Second, the dividend will qualify for the 15 percent maximum rate if it is paid 

with respect to a class of stock that is publicly traded and the beneficial owner of the 

dividend is a person holding an interest of not more than 5 percent of any class of the 

REIT's stock. 

Third, the dividend will qualify for the 15 percent maximum rate if the beneficial 

owner of the dividend holds an interest in the REIT of 10 percent or less and the REIT is 

"diversified." A REIT is diversified if the gross value of no single interest in real 

property held by the REIT exceeds 10 percent of the gross value of the REIT's total 

interest in real property. For purposes of this diversification test, foreclosure property is 

not considered an interest in real property, and a REIT holding a partnership interest is 

treated as owning its proportionate share of any interest in real property held by the 

partnership. 

A resident of Canada directly holding U.S. real property would pay U.S. tax either 

at a 30 percent rate of withholding tax on the gross income or at graduated rates on the 

net income. By placing the real property in a REIT, the investor absent a special rule 

could transform real estate income into dividend income, taxable at the rates provided in 

Article X, significantly reducing the U.S. tax that otherwise would be imposed. 

Subparagraph 7(c) prevents this result and thereby avoids a disparity between the taxation 

of direct real estate investments and real estate investments made through REIT conduits. 

In the cases in which subparagraph 7(c) allows a dividend from a REIT to be eligible for 

the 15 percent maximum rate of withholding tax, the holding in the REIT is not 

considered the equivalent of a direct holding in the underlying real property. 

19
 
 

Article 6 

Article 6 of the Protocol replaces Article XI (Interest) of the existing Convention. 

Article XI specifies the taxing jurisdictions over interest income of the States of source 

and residence and defines the terms necessary to apply Article XI. As with other benefits 

of the Convention, the benefits of Article XI are available to a resident of a Contracting 

State only if that resident is entitled to those benefits under the provisions of Article 

XXIX A (Limitation on Benefits). 

Paragraph 1 of Article XI 

New paragraph 1 generally grants to the residence State the exclusive right to tax 

interest beneficially owned by its residents and arising in the other Contracting State. See 

the Technical Explanation for new paragraphs 6 and 7 of Article IV (Residence) for 

discussion regarding the interaction between domestic law concepts of beneficial 

ownership and the treaty rules to determine when a person is considered to derive an item

of income for purposes of obtaining benefits under the Convention such as withholding 

rate reductions. 

Subparagraph 3(d) of Article 27 of the Protocol provides an additional rule 

regarding the application of paragraph 1 during the first two years that end after the 

Protocol’s entry into force. This rule is described in detail in the Technical Explanation 

to Article 27. 

Paragraph 2 of Article XI 

Paragraph 2 of new Article XI is substantially identical to paragraph 4 of Article 

XI of the existing Convention. 

Paragraph 2 defines the term "interest" as used in Article XI to include, inter alia, 

income from debt claims of every kind, whether or not secured by a mortgage. Interest 

that is paid or accrued subject to a contingency is within the ambit of Article XI. This 

includes income from a debt obligation carrying the right to participate in profits. The 

term does not, however, include amounts that are treated as dividends under Article X 

(Dividends). 

The term “interest” also includes amounts subject to the same tax treatment as 

income from money lent under the law of the State in which the income arises. Thus, for 

purposes of the Convention, amounts that the United States will treat as interest include 

(i) the difference between the issue price and the stated redemption price at maturity of a 

debt instrument (i.e., original issue discount (OID)), which may be wholly or partially 

realized on the disposition of a debt instrument (section 1273), (ii) amounts that are 

imputed interest on a deferred sales contract (section 483), (iii) amounts treated as 

interest or OID under the stripped bond rules (section 1286), (iv) amounts treated as 

original issue discount under the below-market interest rate rules (section 7872), (v) a 

partner's distributive share of a partnership's interest income (section 702), (vi) the 

interest portion of periodic payments made under a "finance lease" or similar contractual 

arrangement that in substance is a borrowing by the nominal lessee to finance the 

acquisition of property, (vii) amounts included in the income of a holder of a residual 

interest in a real estate mortgage investment conduit (REMIC) (section 860E), because 

these amounts generally are subject to the same taxation treatment as interest under U.S. 

tax law, and (viii) interest with respect to notional principal contracts that are recharacterized as loans because of a “substantial non-periodic payment.” 

20
 
Paragraph 3 of Article XI 

Paragraph 3 is in all material respects the same as paragraph 5 of Article XI of the 

existing Convention. New paragraph 3 adds clarifying language consistent with the 

changes made in Articles 4, 5, and 7 of the Protocol with respect to income attributable to 

a permanent establishment that has ceased to exist. Also, consistent with the changes 

described in Article 9 of the Protocol, discussed below, paragraph 3 does not contain 

references to the performance of independent personal services through a fixed base. 

Paragraph 3 provides an exception to the exclusive residence taxation rule of 

paragraph 1 in cases where the beneficial owner of the interest carries on business 

through a permanent establishment in the State of source and the interest is effectively 

connected to that permanent establishment. In such cases the provisions of Article VII

(Business Profits) will apply and the source State will retain the right to impose tax on 

such interest income. 

Paragraph 4 of Article XI 

Paragraph 4 is in all material respects the same as paragraph 6 of Article XI of the 

existing Convention. The only difference is that, consistent with the changes described 

below with respect to Article 9 of the Protocol, paragraph 4 does not contain references to 

a fixed base. 

Paragraph 4 establishes the source of interest for purposes of Article XI. Interest 

is considered to arise in a Contracting State if the payer is that State, or a political

subdivision, local authority, or resident of that State. However, in cases where the person 

paying the interest, whether a resident of a Contracting State or of a third State, has in a 

State other than that of which he is a resident a permanent establishment in connection 

with which the indebtedness on which the interest was paid was incurred, and such 

interest is borne by the permanent establishment, then such interest is deemed to arise in 

the State in which the permanent establishment is situated and not in the State of the 

payer's residence. Furthermore, pursuant to paragraphs 1 and 4, and Article XXII (Other 

Income), Canadian tax will not be imposed on interest paid to a U.S. resident by a 

company resident in Canada if the indebtedness is incurred in connection with, and the 

interest is borne by, a permanent establishment of the company situated in a third State. 

For the purposes of this Article, "borne by" means allowable as a deduction in computing 

taxable income. 

Paragraph 5 of Article XI 

Paragraph 5 is identical to paragraph 7 of Article XI of the existing Convention. 

Paragraph 5 provides that in cases involving special relationships between the 

payer and the beneficial owner of interest income or between both of them and some

other person, Article XI applies only to that portion of the total interest payments that 

would have been made absent such special relationships (i.e., an arm's-length interest 

payment). Any excess amount of interest paid remains taxable according to the laws of 

the United States and Canada, respectively, with due regard to the other provisions of the 

Convention. 

21
 
 

 

 

Paragraph 6 of Article XI 

New paragraph 6 provides anti-abuse exceptions to exclusive residence State 

taxation in paragraph 1 for two classes of interest payments. 

The first class of interest, dealt with in subparagraphs 6(a) and 6(b), is so-called 

"contingent interest." With respect to interest arising in the United States, subparagraph 

6(a) refers to contingent interest of a type that does not qualify as portfolio interest under 

U.S. domestic law. The cross-reference to the U.S. definition of contingent interest, 

which is found in Code section 871(h)(4), is intended to ensure that the exceptions of 

Code section 871(h)(4)(C) will apply. With respect to Canada, such interest is defined in 

subparagraph 6(b) as any interest arising in Canada that is determined by reference to the 

receipts, sales, income, profits or other cash flow of the debtor or a related person, to any 

change in the value of any property of the debtor or a related person or to any dividend, 

partnership distribution or similar payment made by the debtor or a related person.1 Any

such interest may be taxed in Canada according to the laws of Canada. 

Under subparagraph 6(a) or 6(b), if the beneficial owner is a resident of the other 

Contracting State, the gross amount of the “contingent interest” may be taxed at a rate not 

exceeding 15 percent. 

The second class of interest is dealt with in subparagraph 6(c). This exception is

consistent with the policy of Code sections 860E(e) and 860G(b) that excess inclusions 

with respect to a real estate mortgage investment conduit (REMIC) should bear full U.S. 

tax in all cases. Without a full tax at source, foreign purchasers of residual interests 

would have a competitive advantage over U.S. purchasers at the time these interests are 

initially offered. Also, absent this rule, the U.S. fisc would suffer a revenue loss with 

respect to mortgages held in a REMIC because of opportunities for tax avoidance created 

by differences in the timing of taxable and economic income produced by these interests. 

Therefore, subparagraph 6(c) provides a bilateral provision that interest that is an 

excess inclusion with respect to a residual interest in a REMIC may be taxed by each 

State in accordance with its domestic law. While the provision is written reciprocally, at 

the time the Protocol was signed, the provision had no application in respect of Canadiansource interest, as Canada did not have REMICs. 

Paragraph 7 of Article XI 

Paragraph 7 is in all material respects the same as paragraph 8 of Article XI of the 

existing Convention. The only difference is that, consistent with the changes made in 

Article 9 of the Protocol, paragraph 7 removes the references to a fixed base. 

Paragraph 7 restricts the right of a Contracting State to impose tax on interest paid 

by a resident of the other Contracting State. The first State may not impose any tax on 

such interest except insofar as the interest is paid to a resident of that State or arises in 

that State or the debt claim in respect of which the interest is paid is effectively connected 

with a permanent establishment situated in that State. 

New subparagraph 6(b) of Article XI erroneously refers to a “similar payment made by the debtor to a 

related person.” The correct formulation, which the Contracting States agree to apply, is “similar payment 

made by the debtor or a related person.” 

22
 

1 
 

 

 

Relationship to other Articles 

Notwithstanding the foregoing limitations on source State taxation of interest, the 

saving clause of paragraph 2 of Article XXIX (Miscellaneous Rules) permits the United 

States to tax its residents and citizens, subject to the special foreign tax credit rules of 

paragraph 5 of Article XXIV (Elimination of Double Taxation), as if the Convention had 

not come into force. 

Article 7 

Article 7 of the Protocol amends Article XII (Royalties) of the existing 

Convention. As with other benefits of the Convention, the benefits of Article XII are 

available to a resident of a Contracting State only if that resident is entitled to those 

benefits under the provisions of Article XXIX A (Limitation on Benefits). 

See the Technical Explanation for new paragraphs 6 and 7 of Article IV

(Residence) for discussion regarding the interaction between domestic law concepts of 

beneficial ownership and the treaty rules to determine when a person is considered to 

derive an item of income for purposes of obtaining benefits of the Convention such as 

withholding rate reductions. 

Paragraph 1 

Paragraph 1 of Article 7 of the Protocol replaces paragraph 5 of Article XII of the 

Convention. In all material respects, new paragraph 5 is the same as paragraph 5 of 

Article XII of the existing Convention. However, new paragraph 5 adds clarifying 

language consistent with the changes made in Articles 4, 5, and 6 of the Protocol with 

respect to income attributable to a permanent establishment that has ceased to exist. To

conform with Article 9 of the Protocol, which deletes Article XIV (Independent Personal 

Services) of the Convention, paragraph 1 of Article 7 of the Protocol also amends 

paragraph 5 of Article XII by omitting the reference to a “fixed base.” 

New paragraph 5 provides that the 10 percent limitation on tax in the source State 

provided by paragraph 2, and the exemption in the source State for certain royalties 

provided by paragraph 3, do not apply if the beneficial owner of the royalties carries on 

or has carried on business in the source State through a permanent establishment and the 

right or property in respect of which the royalties are paid is attributable to such 

permanent establishment. In such case, the royalty income would be taxable by the 

source State under the provisions of Article VII (Business Profits). 

Paragraph 2 

Paragraph 2 of Article 7 of the Protocol sets forth a new subparagraph 6(a) of 

Article XII that is in all material respects the same as subparagraph 6(a) of Article XII of 

the existing Convention. The only difference is that, consistent with the changes made in 

Article 9 of the Protocol, new subparagraph 6(a) omits references to a “fixed base.” 

Paragraph 3 

Paragraph 3 of Article 7 of Protocol amends paragraph 8 of Article XII of the 

Convention to remove references to a “fixed base.” In addition, paragraph 8 of the

General Note confirms the intent of the Contracting States that the reference in 

subparagraph 3(c) of Article XII of the Convention to information provided in connection 

with a franchise agreement generally refers only to information that governs or otherwise 

23
 
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. 

Article 8 

Paragraph 1 

Paragraph 1 of Article 8 of the Protocol replaces paragraph 2 of Article XIII 

(Gains) of the existing Convention. Consistent with Article 9 of the Protocol, new 

paragraph 2 does not contain any reference to property pertaining to a fixed base or to the 

performance of independent personal services. 

New paragraph 2 of Article XIII provides that the Contracting State in which a 

resident of the other Contracting State has or had a permanent establishment may tax 

gains from the alienation of personal property constituting business property if such gains 

are attributable to such permanent establishment. Unlike paragraph 1 of Article VII

(Business Profits), paragraph 2 limits the right of the source State to tax such gains to a 

twelve-month period following the termination of the permanent establishment. 

Paragraph 2 

Paragraph 2 of Article 8 of the Protocol replaces paragraph 5 of Article XIII of 

the existing Convention. In general, new paragraph 5 provides an exception to the 

general rule stated in paragraph 4 that gains from the alienation of any property, other 

than property referred to in paragraphs 1, 2, and 3, shall be taxable only in the 

Contracting State of which the alienator is a resident. Paragraph 5 provides that a

Contracting State may, according to its domestic law, impose tax on gains derived by an 

individual who is a resident of the other Contracting State if such individual was a 

resident of the first-mentioned State for 120 months (whether or not consecutive) during 

any period of 20 consecutive years preceding the alienation of the property, and was a 

resident of that State at any time during the 10-year period immediately preceding the 

alienation of the property. Further, the property (or property received in substitution in a 

tax-free transaction in the first-mentioned State) must have been owned by the individual 

at the time he ceased to be a resident of the first-mentioned State and must not have been 

property that the individual was treated as having alienated by reason of ceasing to be a 

resident of the first-mentioned State and becoming a resident of the other Contracting 

State. 

The provisions of new paragraph 5 are substantially similar to paragraph 5 of 

Article XIII of the existing Convention. However, the Protocol adds a new requirement 

to paragraph 5 that the property not be “a property that the individual was treated as 

having alienated by reason of ceasing to be a resident of the first-mentioned State and

becoming a resident of the other Contracting State.” This new requirement reflects the 

fact that the main purpose of paragraph 5 – ensuring that gains that accrue while an 

individual is resident in a Contracting State remain taxable for the stated time after the 

individual has moved to the other State – is met if that pre-departure gain is taxed in the 

first State immediately before the individual’s emigration. This rule applies whether or 

not the individual makes the election provided by paragraph 7 of Article XIII, as

amended, which is described below. 

Paragraph 3 

Paragraph 3 of Article 8 of the Protocol replaces paragraph 7 of Article XIII. 

24
 
The purpose of paragraph 7, in both its former and revised form, is to provide a 

rule to coordinate U.S. and Canadian taxation of gains in the case of a timing mismatch. 

Such a mismatch may occur, for example, where a Canadian resident is deemed, for 

Canadian tax purposes, to recognize capital gain upon emigrating from Canada to the 

United States, or in the case of a gift that Canada deems to be an income producing event 

for its tax purposes but with respect to which the United States defers taxation while 

assigning the donor's basis to the donee. The former paragraph 7 resolved the timing 

mismatch of taxable events by allowing the individual to elect to be liable to tax in the

deferring Contracting State as if he had sold and repurchased the property for an amount 

equal to its fair market value at a time immediately prior to the deemed alienation. 

The election under former paragraph 7 was not available to certain non-U.S. 

citizens subject to tax in Canada by virtue of a deemed alienation because such 

individuals could not elect to be liable to tax in the United States. To address this 

problem, the Protocol replaces the election provided in former paragraph 7, with an 

election by the taxpayer to be treated by a Contracting State as having sold and 

repurchased the property for its fair market value immediately before the taxable event in 

the other Contracting State. The election in new paragraph 7 therefore will be available 

to any individual who emigrates from Canada to the United States, without regard to 

whether the person is a U.S. citizen immediately before ceasing to be a resident of 

Canada. If the individual is not subject to U.S. tax at that time, the effect of the election 

will be to give the individual an adjusted basis for U.S. tax purposes equal to the fair 

market value of the property as of the date of the deemed alienation in Canada, with the 

result that only post-emigration gain will be subject to U.S. tax when there is an actual

alienation. If the Canadian resident is also a U.S. citizen at the time of his emigration 

from Canada, then the provisions of new paragraph 7 would allow the U.S. citizen to 

accelerate the tax under U.S. tax law and allow tax credits to be used to avoid double 

taxation. This would also be the case if the person, while not a U.S. citizen, would 

otherwise be subject to taxation in the United States on a disposition of the property. 

In the case of Canadian taxation of appreciated property given as a gift, absent 

paragraph 7, the donor could be subject to tax in Canada upon making the gift, and the 

donee may be subject to tax in the United States upon a later disposition of the property 

on all or a portion of the same gain in the property without the availability of any foreign 

tax credit for the tax paid to Canada. Under new paragraph 7, the election will be 

available to any individual who pays taxes in Canada on a gain arising from the 

individual’s gifting of a property, without regard to whether the person is a U.S. taxpayer 

at the time of the gift. The effect of the election in such case will be to give the donee an 

adjusted basis for U.S. tax purposes equal to the fair market value as of the date of the 

gift. If the donor is a U.S. taxpayer, the effect of the election will be the realization of 

gain or loss for U.S. purposes immediately before the gift. The acceleration of the U.S. 

tax liability by reason of the election in such case enables the donor to utilize foreign tax 

credits and avoid double taxation with respect to the disposition of the property. 

Generally, the rule does not apply in the case of death. Note, however, that 

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

that coordinate the income tax that Canada imposes by reason of death with the U.S. 

estate tax. 

If in one Contracting State there are losses and gains from deemed alienations of 

different properties, then paragraph 7 must be applied consistently in the other 

Contracting State within the taxable period with respect to all such properties. Paragraph

7 only applies, however, if the deemed alienations of the properties result in a net gain. 

25
 
Taxpayers may make the election provided by new paragraph 7 only with respect 

to property that is subject to a Contracting State’s deemed disposition rules and with 

respect to which gain on a deemed alienation is recognized for that Contracting State’s 

tax purposes in the taxable year of the deemed alienation. At the time the Protocol was 

signed, the following were the main types of property that were excluded from the 

deemed disposition rules in the case of individuals (including trusts) who cease to be 

residents of Canada: real property situated in Canada; interests and rights in respect of

pensions; life insurance policies (other than segregated fund (investment) policies); rights 

in respect of annuities; interests in testamentary trusts, unless acquired for consideration; 

employee stock options; property used in a business carried on through a permanent 

establishment in Canada (including intangibles and inventory); interests in most Canadian 

personal trusts; Canadian resource property; and timber resource property. 

Paragraph 4 

Consistent with the provisions of Article 9 of the Protocol, paragraph 4 of Article 

8 of the Protocol amends subparagraph 9(c) of Article XIII of the existing Convention to 

remove the words “or pertained to a fixed base.” 

Relationship to other Articles 

The changes to Article XIII set forth in paragraph 3 were announced in a press 

release issued by the Treasury Department on September 18, 2000. Consistent with that 

press release, subparagraph 3(e) of Article 27 of the Protocol provides that the changes, 

jointly effectuated by paragraphs 2 and 3, will be generally effective for alienations of

property that occur after September 17, 2000. 

Article 9 

To conform with the current U.S. and OECD Model Conventions, Article 9 of the 

Protocol deletes Article XIV (Independent Personal Services) of the Convention. The 

subsequent articles of the Convention are not renumbered. Paragraph 4 of the General

Note elaborates that current tax treaty practice omits separate articles for independent 

personal services because a determination of the existence of a fixed base is qualitatively 

the same as the determination of the existence of a permanent establishment. 

Accordingly, the taxation of income from independent personal services is adequately 

governed by the provisions of Articles V (Permanent Establishment) and VII (Business 

Profits). 

Article 10 

Article 10 of the Protocol renames Article XV of the Convention as “Income from 

Employment” to conform with the current U.S. and OECD Model Conventions, and 

replaces paragraphs 1 and 2 of that renamed article consistent with the OECD Model 

Convention. 

Paragraph 1 

New paragraph 1 of Article XV provides that, in general, salaries, wages, and 

other remuneration derived by a resident of a Contracting State in respect of an 

employment are taxable only in that State unless the employment is exercised in the other 

Contracting State. If the employment is exercised in the other Contracting State, the 

26
 
entire remuneration derived therefrom may be taxed in that other State, subject to the 

provisions of paragraph 2. 

New paragraph 1 of Article XV does not contain a reference to "similar" 

remuneration. This change was intended to clarify that Article XV applies to any form of 

compensation for employment, including payments in kind. This interpretation is 

consistent with paragraph 2.1 of the Commentary to Article 15 (Income from

Employment) of the OECD Model and the Technical Explanation of the 2006 U.S. 

Model. 

Paragraph 2 

New paragraph 2 of Article XV provides two limitations on the right of a source 

State to tax remuneration for services rendered in that State. New paragraph 2 is divided 

into two subparagraphs that each sets forth a rule which, notwithstanding any contrary

result due to the application of paragraph 1 of Article XV, prevents the source State from

taxing income from employment in that State. 

First, subparagraph 2(a) provides a safe harbor rule that the remuneration may not 

be taxed in the source State if such remuneration is $10,000 or less in the currency of the 

source State. This rule is identical to the rule in subparagraph 2(a) of Article XV of the 

existing Convention. It is understood that, consistent with the prior rule, the safe harbor 

will apply on a calendar-year basis. 

Second, if the remuneration is not exempt from tax in the source State by virtue of 

subparagraph 2(a), subparagraph 2(b) provides an additional rule that the source State 

may not tax remuneration for services rendered in that State if the recipient is present in 

the source State for a period (or periods) that does not exceed in the aggregate 183 days 

in any twelve-month period commencing or ending in the fiscal year concerned, and the 

remuneration is not paid by or on behalf of a person who is a resident of that other State 

or borne by a permanent establishment in that other State. For purposes of this article,

"borne by" means allowable as a deduction in computing taxable income. 

Assume, for example, that Mr. X, an individual resident in Canada, is an 

employee of the Canadian permanent establishment of USCo, a U.S. company. Mr. X is 

sent to the United States to perform services and is present in the United States for less 

than 183 days. Mr. X receives more than $10,000 (U.S.) in the calendar year(s) in 

question. The remuneration paid to Mr. X for such services is not exempt from U.S. tax 

under paragraph 1, because his employer, USCo, is a resident of the United States and 

pays his remuneration. If instead Mr. X received less than $10,000 (U.S.), such earnings 

would be exempt from tax in the United States, because in all cases where an employee 

earns less than $10,000 in the currency of the source State, such earnings are exempt 

from tax in the source State. 

As another example, assume Ms. Y, an individual resident in the United States is 

employed by USCo, a U.S. company. Ms. Y is sent to Canada to provide services in the 

Canadian permanent establishment of USCo. Ms. Y is present in Canada for less than

183 days. Ms. Y receives more than $10,000 (Canadian) in the calendar year(s) in 

question. USCo charges the Canadian permanent establishment for Ms. Y’s 

remuneration, which the permanent establishment takes as a deduction in computing its 

taxable income. The remuneration paid to Ms. Y for such services is not exempt from 

Canadian tax under paragraph 1, because her remuneration is borne by the Canadian 

permanent establishment. 

27
 
New subparagraph 2(b) refers to remuneration that is paid by or on behalf of a 

“person” who is a resident of the other Contracting State, as opposed to an “employer.” 

This change is intended only to clarify that both the United States and Canada understand 

that in certain abusive cases, substance over form principles may be applied to 

recharacterize an employment relationship, as prescribed in paragraph 8 of the 

Commentary to Article 15 (Income from Employment) of the OECD Model. 

Subparagraph 2(b) is intended to have the same meaning as the analogous provisions in 

the U.S. and OECD Models. 

Paragraph 6 of the General Note 

Paragraph 6 of the General Note contains special rules regarding employee stock 

options. There are no similar rules in the U.S. Model or the OECD Model, although the 

issue is discussed in detail in paragraph 12 of the Commentary to Article 15 (Income

from Employment) of the OECD Model. 

The General Note sets forth principles that apply for purposes of applying Article 

XV and Article XXIV (Elimination of Double Taxation) 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 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. For this 

purpose, the term “employer” is considered to include any entity related to the service

recipient. The reference to a disposal (or deemed disposal) reflects the fact that under 

Canadian law and under certain provisions of U.S. law, income or gain attributable to the 

granting or exercising of the option may, in some cases, not be recognized until 

disposition of the securities. 

Subparagraph 6(a) of the General Note provides a specific rule to address 

situations where, under the domestic law of the Contracting States, an employee would 

be taxable by both Contracting States in respect of the income in connection with the 

exercise or disposal of the option. The rule provides an allocation of taxing rights where 

(1) an employee has been granted a stock option in the course of employment in one of

the Contracting States, and (2) his principal place of employment has been situated in one 

or both of the Contracting States during the period between grant and exercise (or 

disposal) of the option. In this situation, each Contracting State may tax as Contracting 

State of source only that proportion of the income that relates to the period or periods 

between the grant and the exercise (or disposal) of the option during which the 

individual’s principal place of employment was situated in that Contracting State. The 

proportion attributable to a Contracting State is determined by multiplying the income by 

a fraction, the numerator of which is the number of days between the grant and exercise 

(or disposal) of the option during which the employee’s principal place of employment 

was situated in that Contracting State and the denominator of which is the total number of 

days between grant and exercise (or disposal) of the option that the employee was 

employed by the employer. 

If the individual is a resident of one of the Contracting States at the time he 

exercises the option, that Contracting State will have the right, as the State of residence, 

to tax all of the income under the first sentence of paragraph 1 of Article XV. However, 

to the extent that the employee renders his employment in the other Contracting State for 

some period of time between the date of the grant of the option and the date of the 

exercise (or disposal) of the option, the proportion of the income that is allocated to the 

other Contracting State under subparagraph 6(a) of the General Note will, subject to 

28
 
paragraph 2, be taxable by that other State under the second sentence of paragraph 1 of

Article XV of the Convention. For this purpose, the tests of paragraph 2 of Article XV

are applied to the year or years in which the relevant services were performed in the other 

Contracting State (and not to the year in which the option is exercised or disposed). To 

the extent the same income is subject to taxation in both Contracting States after 

application of Article XV, double taxation will be alleviated under the rules of Article 

XXIV (Elimination of Double Taxation). 

Subparagraph 6(b) of the General Note provides that notwithstanding 

subparagraph 6(a), if the competent authorities of both Contracting States agree that the 

terms of the option were such that the grant of the option is 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. 

Article 11 

Consistent with Article 9 and paragraph 1 of Article 10 of the Protocol, 

paragraphs 1, 2, and 3 of Article 11 of the Protocol revise paragraphs 1, 2, and 4 of 

Article XVI (Artistes and Athletes) of the existing Convention by deleting references to 

former Article XIV (Independent Personal Services) of the Convention and deleting and 

replacing other language in acknowledgement of the renaming of Article XV (Income

from Employment). 

Article 12 

Article 12 of the Protocol deletes Article XVII (Withholding of Taxes in Respect 

of Personal Services) from the Convention. However, the subsequent Articles are not 

renumbered. 

Article 13 

Article 13 of the Protocol replaces paragraphs 3, 4, and 7 and adds paragraphs 8 

through 17 to Article XVIII (Pensions and Annuities) of the Convention. 

Paragraph 1 

Roth IRAs 

Paragraph 1 of Article 13 of the Protocol separates the provisions of paragraph 3 

of Article XVIII into two subparagraphs. Subparagraph 3(a) contains the existing 

definition of the term “pensions,” while subparagraph 3(b) adds a new rule to address the 

treatment of Roth IRAs or similar plan (as described below). 

Subparagraph 3(a) of Article XVIII provides that the term "pensions" for 

purposes of the Convention includes any payment under a superannuation, pension, or 

other retirement arrangement, Armed-Forces retirement pay, war veterans pensions and 

allowances, and amounts paid under a sickness, accident, or disability plan, but does not 

include payments under an income-averaging annuity contract (which are subject to 

Article XXII (Other Income)) or social security benefits, including social security 

benefits in respect of government services (which are subject to paragraph 5 of Article 

XVIII). Thus, the term “pensions” includes pensions paid by private employers 

(including pre-tax and Roth 401(k) arrangements) as well as any pension paid in respect 

29
 
of government services. Further, the definition of “pensions” includes, for example, 

payments from individual retirement accounts (IRAs) in the United States and from

registered retirement savings plans (RRSPs) and registered retirement income funds 

(RRIFs) in Canada. 

Subparagraph 3(b) of Article XVIII provides that the term “pensions” generally 

includes a Roth IRA, within the meaning of Code section 408A (or a similar plan 

described below). Consequently, under paragraph 1 of Article XVIII, distributions from a 

Roth IRA to a resident of Canada generally continue to be exempt from Canadian tax to 

the extent they would have been exempt from U.S. tax if paid to a resident of the United 

States. In addition, residents of Canada generally may make an election under paragraph 

7 of Article XVIII to defer any taxation in Canada with respect to income accrued in a

Roth IRA but not distributed by the Roth IRA, until such time as and to the extent that a 

distribution is made from the Roth IRA or any plan substituted therefore. Because 

distributions will be exempt from Canadian tax to the extent they would have been 

exempt from U.S. tax if paid to a resident of the United States, the effect of these rules is 

that, in most cases, no portion of the Roth IRA will be subject to taxation in Canada. 

However, subparagraph 3(b) also provides that if an individual who is a resident 

of Canada makes contributions to his or her Roth IRA while a resident of Canada, other 

than rollover contributions from another Roth IRA (or a similar plan described below), 

the Roth IRA will cease to be considered a pension at that time with respect to 

contributions and accretions from such time and accretions from such time will be subject 

to tax in Canada in the year of accrual. Thus, the Roth IRA will in effect be bifurcated 

into a “frozen” pension that continues to be subject to the rules of Article XVIII and a 

savings account that is not subject to the rules of Article XVIII. It is understood by the 

Contracting States that, following a rollover contribution from a Roth 401(k) arrangement 

to a Roth IRA, the Roth IRA will continue to be treated as a pension subject to the rules 

of Article XVIII. 

Assume, for example, that Mr. X moves to Canada on July 1, 2008. Mr. X has a 

Roth IRA with a balance of 1,100 on July 1, 2008. Mr. X elects under paragraph 7 of

Article XVIII to defer any taxation in Canada with respect to income accrued in his Roth 

IRA while he is a resident of Canada. Mr. X makes no additional contributions to his 

Roth IRA until July 1, 2010, when he makes an after-tax contribution of 100. There are 

accretions of 20 during the period July 1, 2008 through June 30, 2010, which are not 

taxed in Canada by reason of the election under paragraph 7 of Article XVIII. There are 

additional accretions of 50 during the period July 1, 2010 through June 30, 2015, which 

are subject to tax in Canada in the year of accrual. On July 1, 2015, while Mr. X is still a

resident of Canada, Mr. X receives a lump-sum distribution of 1,270 from his Roth IRA. 

The 1,120 that was in the Roth IRA on June 30, 2010 is treated as a distribution from a 

pension plan that, pursuant to paragraph 1 of Article XVIII, is exempt from tax in Canada 

provided it would be exempt from tax in the United States under the Internal Revenue 

Code if paid to a resident of the United States. The remaining 150 comprises the aftertax contribution of 100 in 2010 and accretions of 50 that were subject to Canadian tax in 

the year of accrual. 

The rules of new subparagraph 3(b) of Article XVIII also will apply to any plan 

or arrangement created pursuant to legislation enacted by either Contracting State after 

September 21, 2007 (the date of signature of the Protocol) that the competent authorities 

agree is similar to a Roth IRA. 

30
 
 

Source of payments under life insurance and annuity contracts 

Paragraph 1 of Article 13 also replaces paragraph 4 of Article XVIII. 

Subparagraph 4(a) contains the existing definition of annuity, while subparagraph 4(b) 

adds a source rule to address the treatment of certain payments by branches of insurance 

companies. 

Subparagraph 4(a) provides that, for purposes of the Convention, the term

"annuity" means a stated sum paid periodically at stated times during life or during a 

specified number of years, under an obligation to make the payments in return for 

adequate and full consideration other than services rendered. The term does not include a 

payment that is not periodic or any annuity the cost of which was deductible for tax 

purposes in the Contracting State where the annuity was acquired. Items excluded from 

the definition of "annuity" and not dealt with under another Article of the Convention are 

subject to the rules of Article XXII (Other Income). 

Under the existing Convention, payments under life insurance and annuity 

contracts to a resident of Canada by a Canadian branch of a U.S. insurance company are 

subject to either a 15-percent withholding tax under subparagraph 2(b) of Article XVIII 

or, unless dealt with under another Article of the Convention, an unreduced 30-percent 

withholding tax under paragraph 1 of Article XXII, depending on whether the payments 

constitute annuities within the meaning of paragraph 4 of Article XVIII. 

On July 12, 2004, the Internal Revenue Service issued Revenue Ruling 2004-75,

2004-2 C.B. 109, which provides in relevant part that annuity payments under, and 

withdrawals of cash value from, life insurance or annuity contracts issued by a foreign 

branch of a U.S. life insurance company are U.S.-source income that, when paid to a 

nonresident alien individual, is generally subject to a 30-percent withholding tax under 

Code sections 871(a) and 1441. Revenue Ruling 2004-97, 2004-2 C.B. 516, provided 

that Revenue Ruling 2004-75 would not be applied to payments that were made before 

January 1, 2005, provided that such payments were made pursuant to binding life 

insurance or annuity contracts issued on or before July 12, 2004. 

Under new subparagraph 4(b) of Article XVIII, an annuity or other amount paid 

in respect of a life insurance or annuity contract (including a withdrawal in respect of the 

cash value thereof), will generally be deemed to arise in the Contracting State where the 

person paying the annuity or other amount (the “payer”) is resident. However, if the 

payer, whether a resident of a Contracting State or not, has a permanent establishment in 

a Contracting State other than a Contracting State in which the payer is a resident, the 

payment will be deemed to arise in the Contracting State in which the permanent 

establishment is situated if both of the following requirements are satisfied: (i) the

obligation giving rise to the annuity or other amount must have been incurred in 

connection with the permanent establishment, and (ii) the annuity or other amount must 

be borne by the permanent establishment. When these requirements are satisfied, 

payments by a Canadian branch of a U.S. insurance company will be deemed to arise in 

Canada. 

Paragraph 2 

Paragraph 2 of Article 13 of the Protocol replaces paragraph 7 of Article XVIII of 

the existing Convention. Paragraph 7 continues to provide a rule with respect to the 

taxation of a natural person on income accrued in a pension or employee benefit plan in 

the other Contracting State. Thus, paragraph 7 applies where an individual is a citizen or 

resident of a Contracting State and is a beneficiary of a trust, company, organization, or 

31
 
 

other arrangement that is a resident of the other Contracting State, where such trust, 

company, organization, or other arrangement is generally exempt from income taxation 

in that other State, and is operated exclusively to provide pension, or employee benefits. 

In such cases, the beneficiary may elect to defer taxation in his State of residence on 

income accrued in the plan until it is distributed from the plan (or from another plan in

that other Contracting State to which the income is transferred pursuant to the domestic 

law of that other Contracting State). 

Paragraph 2 of Article 13 of the Protocol makes two changes to paragraph 7 of 

Article XVIII of the existing Convention. The first change is that the phrase “pension,

retirement or employee benefits” is changed to “pension or employee benefits” solely to 

reflect the fact that in certain cases, discussed above, Roth IRAs will not be treated as 

pensions for purposes of Article XVIII. The second change is that “under” is changed to 

“subject to” to make it clear that an election to defer taxation with respect to 

undistributed income accrued in a plan may be made whether or not the competent 

authority of the first-mentioned State has prescribed rules for making an election. For the 

U.S. rules, see Revenue Procedure 2002-23, 2002-1 C.B. 744. As of the date the Protocol 

was signed, the competent authority of Canada had not prescribed rules. 

Paragraph 3 

Paragraph 3 of Article 13 of the Protocol adds paragraphs 8 through 17 to Article 

XVIII to deal with cross-border pension contributions. These paragraphs are intended to 

remove barriers to the flow of personal services between the Contracting States that could 

otherwise result from discontinuities in the laws of the Contracting States regarding the 

deductibility of pension contributions. Such discontinuities may arise where a country 

allows deductions or exclusions to its residents for contributions, made by them or on 

their behalf, to resident pension plans, but does not allow deductions or exclusions for 

payments made to plans resident in another country, even if the structure and legal 

requirements of such plans in the two countries are similar. 

There is no comparable set of rules in the OECD Model, although the issue is 

discussed in detail in the Commentary to Article 18 (Pensions). The 2006 U.S. Model 

deals with this issue in paragraphs 2 through 4 of Article 18 (Pension Funds). 

Workers on short-term assignments in the other Contracting State 

Paragraphs 8 and 9 of Article XVIII address the case of a short-term assignment 

where an individual who is participating in a “qualifying retirement plan” (as defined in 

paragraph 15 of Article XVIII) in one Contracting State (the “home State”) performs

services as an employee for a limited period of time in the other Contracting State (the 

“host State”). If certain requirements are satisfied, contributions made to, or benefits 

accrued under, the plan by or on behalf of the individual will be deductible or excludible 

in computing the individual’s income in the host State. In addition, contributions made to 

the plan by the individual’s employer will be allowed as a deduction in computing the 

employer’s profits in the host State. 

In order for paragraph 8 to apply, the remuneration that the individual receives 

with respect to the services performed in the host State must be taxable in the host State. 

This means, for example, that where the United States is the host State, paragraph 8 

would not apply if the remuneration that the individual receives with respect to the 

services performed in the United States is exempt from taxation in the United States 

under Code section 893. 

32
 
The individual also must have been participating in the plan, or in another similar 

plan for which the plan was substituted, immediately before he began performing 

services in the host State. The rule regarding a successor plan would apply if, for 

example, the employer has been acquired by another corporation that replaces the 

existing plan with its own plan, transferring membership in the old plan over into the new 

plan. 

In addition, the individual must not have been a resident (as determined under 

Article IV (Residence)) of the host State immediately before he began performing 

services in the host State. It is irrelevant for purposes of paragraph 8 whether the 

individual becomes a resident of the host State while he performs services there. A 

citizen of the United States who has been a resident of Canada may be entitled to benefits 

under paragraph 8 if (a) he performs services in the United States for a limited period of 

time and (b) he was a resident of Canada immediately before he began performing such 

services. 

Benefits are available under paragraph 8 only for so long as the individual has not 

performed services in the host State for the same employer (or a related employer) for 

more than 60 of the 120 months preceding the individual’s current taxable year. The 

purpose of this rule is to limit the period of time for which the host State will be required 

to provide benefits for contributions to a plan from which it is unlikely to be able to tax 

the distributions. If the individual continues to perform services in the host State beyond 

this time limit, he is expected to become a participant in a plan in the host State. 

Canada’s domestic law provides preferential tax treatment for employer contributions to 

foreign pension plans in respect of services rendered in Canada by short-term residents, 

but such treatment ceases once the individual has been resident in Canada for at least 60 

of the preceding 72 months. 

The contributions and benefits must be attributable to services performed by the 

individual in the host State, and must be made or accrued during the period in which the 

individual performs those services. This rule prevents individuals who render services in

the host State for a very short period of time from making disproportionately large 

contributions to home State plans in order to offset the tax liability associated with the 

income earned in the host State. In the case where the United States is the host State, 

contributions will be deemed to have been made on the last day of the preceding taxable 

year if the payment is on account of such taxable year and is treated under U.S. law as a 

contribution made on the last day of the preceding taxable year. 

If an individual receives benefits in the host State with respect to contributions to 

a plan in the home State, the services to which the contributions relate may not be taken 

into account for purposes of determining the individual’s entitlement to benefits under 

any trust, company, organization, or other arrangement that is a resident of the host State, 

generally exempt from income taxation in that State and operated to provide pension or 

retirement benefits. The purpose of this rule is to prevent double benefits for 

contributions to both a home State plan and a host State plan with respect to the same

services. Thus, for example, an individual who is working temporarily in the United 

States and making contributions to a qualifying retirement plan in Canada with respect to 

services performed in the United States may not make contributions to an individual 

retirement account (within the meaning of Code section 408(a)) in the United States with 

respect to the same services. 

Paragraph 8 states that it applies only to the extent that the contributions or 

benefits would qualify for tax relief in the home State if the individual were a resident of 

and performed services in that State. Thus, benefits would be limited in the same fashion 

33
 
as if the individual continued to be a resident of the home State. However, paragraph 9

provides that if the host State is the United States and the individual is a citizen of the 

United States, the benefits granted to the individual under paragraph 8 may not exceed

the benefits that would be allowed by the United States to its residents for contributions 

to, or benefits otherwise accrued under, a generally corresponding pension or retirement 

plan established in and recognized for tax purposes by the United States. Thus, the lower 

of the two limits applies. This rule ensures that U.S. citizens working temporarily in the 

United States and participating in a Canadian plan will not get more favorable U.S. tax 

treatment than U.S. citizens participating in a U.S. plan. 

Where the United States is the home State, the amount of contributions that may 

be excluded from the employee’s income under paragraph 8 for Canadian purposes is 

limited to the U.S. dollar amount specified in Code section 415 or the U.S. dollar amount 

specified in Code section 402(g)(1) to the extent contributions are made from the 

employee’s compensation. For this purpose, the dollar limit specified in Code section 

402(g)(1) means the amount applicable under Code section 402(g)(1) (including the age 

50 catch-up amount in Code section 402(g)(1)(C)) or, if applicable, the parallel dollar 

limit applicable under Code section 457(e)(15) plus the age 50 catch-up amount under 

Code section 414(v)(2)(B)(i) for a Code section 457(g) trust. 

Where Canada is the home State, the amount of contributions that may be excluded 

from the employee’s income under paragraph 8 for U.S. purposes is subject to the 

limitations specified in subsections 146(5), 147(8), 147.1(8) and (9) and 147.2(1) and (4) 

of the Income Tax Act and paragraph 8503(4)(a) of the Income Tax Regulations, as 

applicable. If the employee is a citizen of the United States, then the amount of 

contributions that may be excluded is the lesser of the amounts determined under the 

limitations specified in the previous sentence and the amounts specified in the previous 

paragraph. 

The provisions described above provide benefits to employees. Paragraph 8 also

provides that contributions made to the home State plan by an individual’s employer will 

be allowed as a deduction in computing the employer’s profits in the host State, even 

though such a deduction might not be allowable under the domestic law of the host State. 

This rule applies whether the employer is a resident of the host State or a permanent 

establishment that the employer has in the host State. The rule also applies to

contributions by a person related to the individual’s employer, such as contributions by a 

parent corporation for its subsidiary, that are treated under the law of the host State as 

contributions by the individual’s employer. For example, if an individual who is 

participating in a qualifying retirement plan in Canada performs services for a limited 

period of time in the United States for a U.S. subsidiary of a Canadian company, a 

contribution to the Canadian plan by the parent company in Canada that is treated under 

U.S. law as a contribution by the U.S. subsidiary would be covered by the rule. 

The amount of the allowable deduction is to be determined under the laws of the 

home State. Thus, where the United States is the home State, the amount of the 

deduction that is allowable in Canada will be subject to the limitations of Code section 

404 (including the Code section 401(a)(17) and 415 limitations). Where Canada is the 

home State, the amount of the deduction that is allowable in the United States is subject 

to the limitations specified in subsections 147(8), 147.1(8) and (9) and 147.2(1) of the 

Income Tax Act, as applicable. 

34
 
Cross-border commuters 

Paragraphs 10, 11, and 12 of Article XVIII address the case of a commuter who is 

a resident of one Contracting State (the “residence State”) and performs services as an

employee in the other Contracting State (the “services State”) and is a member of a 

“qualifying retirement plan” (as defined in paragraph 15 of Article XVIII) in the services 

State. If certain requirements are satisfied, contributions made to, or benefits accrued 

under, the qualifying retirement plan by or on behalf of the individual will be deductible 

or excludible in computing the individual’s income in the residence State. 

In order for paragraph 10 to apply, the individual must perform services as an 

employee in the services State the remuneration from which is taxable in the services

State and is borne by either an employer who is a resident of the services State or by a 

permanent establishment that the employer has in the services State. The contributions 

and benefits must be attributable to those services and must be made or accrued during 

the period in which the individual performs those services. In the case where the United 

States is the residence State, contributions will be deemed to have been made on the last 

day of the preceding taxable year if the payment is on account of such taxable year and is 

treated under U.S. law as a contribution made on the last day of the preceding taxable 

year. 

Paragraph 10 states that it applies only to the extent that the contributions or 

benefits qualify for tax relief in the services State. Thus, the benefits granted in the

residence State are available only to the extent that the contributions or benefits accrued 

qualify for relief in the services State. Where the United States is the services State, the 

amount of contributions that may be excluded under paragraph 10 is the U.S. dollar 

amount specified in Code section 415 or the U.S. dollar amount specified in Code section 

402(g)(1) (as defined above) to the extent contributions are made from the employee’s 

compensation. Where Canada is the services State, the amount of contributions that may 

be excluded from the employee’s income under paragraph 10 is subject to the limitations 

specified in subsections 146(5), 147(8), 147.1(8) and (9) and 147.2(1) and (4) of the 

Income Tax Act and paragraph 8503(4)(a) of the Income Tax Regulations, as applicable. 

However, paragraphs 11 and 12 further provide that the benefits granted under 

paragraph 10 by the residence State may not exceed certain benefits that would be 

allowable under the domestic law of the residence State. 

Paragraph 11 provides that where Canada is the residence State, the amount of 

contributions otherwise allowable as a deduction under paragraph 10 may not exceed the 

individual’s deduction limit for contributions to registered retirement savings plans 

(RRSPs) remaining after taking into account the amount of contributions to RRSPs 

deducted by the individual under the law of Canada for the year. The amount deducted 

by the individual under paragraph 10 will be taken into account in computing the 

individual’s deduction limit for subsequent taxation years for contributions to RRSPs. 

This rule prevents double benefits for contributions to both an RRSP and a qualifying 

retirement plan in the United States with respect to the same services. 

Paragraph 12 provides that if the United States is the residence State, the benefits 

granted to an individual under paragraph 10 may not exceed the benefits that would be

allowed by the United States to its residents for contributions to, or benefits otherwise 

accrued under, a generally corresponding pension or retirement plan established in and 

recognized for tax purposes by the United States. For purposes of determining an 

individual’s eligibility to participate in and receive tax benefits with respect to a pension 

or retirement plan or other retirement arrangement in the United States, contributions 

35
 
made to, or benefits accrued under, a qualifying retirement plan in Canada by or on 

behalf of the individual are treated as contributions or benefits under a generally 

corresponding pension or retirement plan established in and recognized for tax purposes 

by the United States. Thus, for example, the qualifying retirement plan in Canada would 

be taken into account for purposes of determining whether the individual is an “active 

participant” within the meaning of Code section 219(g)(5), with the result that the 

individual’s ability to make deductible contributions to an individual retirement account 

in the United States would be limited. 

Paragraph 10 does not address employer deductions because the employer is 

located in the services State and is already eligible for deductions under the domestic law 

of the services State. 

U.S. citizens resident in Canada 

Paragraphs 13 and 14 of Article XVIII address the special case of a U.S. citizen 

who is a resident of Canada (as determined under Article IV (Residence)) and who 

performs services as an employee in Canada and participates in a qualifying retirement 

plan (as defined in paragraph 15 of Article XVIII) in Canada. If certain requirements are 

satisfied, contributions made to, or benefits accrued under, a qualifying retirement plan in 

Canada by or on behalf of the U.S. citizen will be deductible or excludible in computing 

his or her taxable income in the United States. These provisions are generally consistent

with paragraph 4 of Article 18 of the U.S. Model treaty. 

In order for paragraph 13 to apply, the U.S. citizen must perform services as an 

employee in Canada the remuneration from which is taxable in Canada and is borne by 

an employer who is a resident of Canada or by a permanent establishment that the 

employer has in Canada. The contributions and benefits must be attributable to those 

services and must be made or accrued during the period in which the U.S. citizen 

performs those services. Contributions will be deemed to have been made on the last day 

of the preceding taxable year if the payment is on account of such taxable year and is 

treated under U.S. law as a contribution made on the last day of the preceding taxable 

year. 

Paragraph 13 states that it applies only to the extent the contributions or benefits 

qualify for tax relief in Canada. However, paragraph 14 provides that the benefits 

granted under paragraph 13 may not exceed the benefits that would be allowed by the 

United States to its residents for contributions to, or benefits otherwise accrued under, a 

generally corresponding pension or retirement plan established in and recognized for tax 

purposes by the United States. Thus, the lower of the two limits applies. This rule 

ensures that a U.S. citizen living and working in Canada does not receive better U.S. 

treatment than a U.S. citizen living and working in the United States. The amount of 

contributions that may be excluded from the employee’s income under paragraph 13 is 

the U.S. dollar amount specified in Code section 415 or the U.S. dollar amount specified 

in Code section 402(g)(1) (as defined above) to the extent contributions are made from

the employee’s compensation. In addition, pursuant to Code section 911(d)(6), an 

individual may not claim benefits under paragraph 13 with respect to services the 

remuneration for which is excluded from the individual’s gross income under Code 

section 911(a). 

For purposes of determining the individual’s eligibility to participate in and 

receive tax benefits with respect to a pension or retirement plan or other retirement 

arrangement established in and recognized for tax purposes by the United States, 

contributions made to, or benefits accrued under, a qualifying retirement plan in Canada 

36
 
by or on behalf of the individual are treated as contributions or benefits under a generally 

corresponding pension or retirement plan established in and recognized for tax purposes 

by the United States. Thus, for example, the qualifying retirement plan in Canada would 

be taken into account for purposes of determining whether the individual is an “active 

participant” within the meaning of Code section 219(g)(5), with the result that the 

individual’s ability to make deductible contributions to an individual retirement account 

in the United States would be limited. 

Paragraph 13 does not address employer deductions because the employer is 

located in Canada and is already eligible for deductions under the domestic law of 

Canada. 

Definition of “qualifying retirement plan” 

Paragraph 15 of Article XVIII provides that for purposes of paragraphs 8 through 

14, a “qualifying retirement plan” in a Contracting State is a trust, company, 

organization, or other arrangement that (a) is a resident of that State, generally exempt 

from income taxation in that State and operated primarily to provide pension or 

retirement benefits; (b) is not an individual arrangement in respect of which the 

individual’s employer has no involvement; and (c) the competent authority of the other 

Contracting State agrees generally corresponds to a pension or retirement plan 

established in and recognized for tax purposes in that State. Thus, U.S. individual 

retirement accounts (IRAs) and Canadian registered retirement savings plans (RRSPs) are 

not treated as qualifying retirement plans unless addressed in paragraph 10 of the General 

Note (as discussed below). In addition, a Canadian retirement compensation arrangement 

(RCA) is not a qualifying retirement plan because it is not considered to be generally

exempt from income taxation in Canada. 

Paragraph 10 of the General Note provides that the types of Canadian plans that 

constitute qualifying retirement plans for purposes of paragraph 15 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 (September 21, 2007): 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. 

Paragraph 10 of the General Note also provides that the types of U.S. plans that 

constitute qualifying retirement plans for purposes of paragraph 15 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 (September 21, 2007): qualified

plans under Code section 401(a) (including Code section 401(k) arrangements), 

individual retirement plans that are part of a simplified employee pension plan that 

satisfies Code section 408(k), Code section 408(p) simple retirement accounts, Code 

section 403(a) qualified annuity plans, Code section 403(b) plans, Code section 457(g) 

trusts providing benefits under Code section 457(b) plans, the Thrift Savings Fund (Code 

section 7701(j)), and any individual retirement account under Code section 408(a) that is 

funded exclusively by rollover contributions from one or more of the preceding plans. 

If a particular plan in one Contracting State is of a type specified in paragraph 10 

of the General Note with respect to paragraph 15 of Article XVIII, it will not be 

necessary for taxpayers to obtain a determination from the competent authority of the 

37
 
other Contracting State that the plan generally corresponds to a pension or retirement 

plan established in and recognized for tax purposes in that State. A taxpayer who

believes a particular plan in one Contracting State that is not described in paragraph 10 of 

the General Note nevertheless satisfies the requirements of paragraph 15 may request a 

determination from the competent authority of the other Contracting State that the plan

generally corresponds to a pension or retirement plan established in and recognized for 

tax purposes in that State. In the case of the United States, such a determination must be 

requested under Revenue Procedure 2006-54, 2006-49 I.R.B. 655 (or any applicable 

analogous provision). In the case of Canada, the current version of Information Circular 

71-17 provides guidance on obtaining assistance from the Canadian competent authority. 

Source rule 

Paragraph 16 of Article XVIII provides that a distribution from a pension or 

retirement plan that is reasonably attributable to a contribution or benefit for which a 

benefit was allowed pursuant to paragraph 8, 10, or 13 of Article XVIII will be deemed to 

arise in the Contracting State in which the plan is established. This ensures that the 

Contracting State in which the plan is established will have the right to tax the gross 

amount of the distribution under subparagraph 2(a) of Article XVIII, even if a portion of 

the services to which the distribution relates were not performed in such Contracting 

State. 

Partnerships 

Paragraph 17 of Article XVIII provides that paragraphs 8 through 16 of Article 

XVIII apply, with such modifications as the circumstances require, as though the 

relationship between a partnership that carries on a business, and an individual who is a 

member of the partnership, were that of employer and employee. This rule is needed 

because paragraphs 8, 10, and 13, by their terms, apply only with respect to contributions 

made to, or benefits accrued under, qualifying retirement plans by or on behalf of 

individuals who perform services as an employee. Thus, benefits are not available with 

respect to retirement plans for self-employed individuals, who may be deemed under U.S. 

law to be employees for certain pension purposes. Paragraph 17 ensures that partners

participating in a plan established by their partnership may be eligible for the benefits 

provided by paragraphs 8, 10, and 13. 

Relationship to other Articles 

Paragraphs 8, 10, and 13 of Article XVIII are not subject to the saving clause of 

paragraph 2 of Article XXIX (Miscellaneous Rules) by reason of the exception in 

subparagraph 3(a) of Article XXIX. 

Article 14 

Consistent with Articles 9 and 10 of the Protocol, Article 14 of the Protocol 

amends Article XIX (Government Service) of the Convention by deleting the reference to 

“Article XIV (Independent Personal Services)” and replacing such reference with the

reference to “Article VII (Business Profits)” and by reflecting the new name of Article 

XV (Income from Employment). 

Article 15 

Article 15 of the Protocol replaces Article XX (Students) of the Convention. 

Article XX provides rules for host-country taxation of visiting students and business 

38
 
trainees. Persons who meet the tests of Article XX will be exempt from tax in the State 

that they are visiting with respect to designated classes of income. Several conditions 

must be satisfied in order for an individual to be entitled to the benefits of this Article. 

First, the visitor must have been, either at the time of his arrival in the host State 

or immediately before, a resident of the other Contracting State. 

Second, the purpose of the visit must be the full-time education or training of the 

visitor. Thus, if the visitor comes principally to work in the host State but also is a parttime student, he would not be entitled to the benefits of this Article, even with respect to 

any payments he may receive from abroad for his maintenance or education, and 

regardless of whether or not he is in a degree program. Whether a student is to be 

considered full-time will be determined by the rules of the educational institution at 

which he is studying. 

The host State exemption in Article XX applies to payments received by the 

student or business trainee for the purpose of his maintenance, education or training that 

arise outside the host State. A payment will be considered to arise outside the host State

if the payer is located outside the host State. Thus, if an employer from one of the 

Contracting States sends an employee to the other Contracting State for full-time training, 

the payments the trainee receives from abroad from his employer for his maintenance or 

training while he is present in the host State will be exempt from tax in the host State. 

Where appropriate, substance prevails over form in determining the identity of the payer. 

Thus, for example, payments made directly or indirectly by a U.S. person with whom the 

visitor is training, but which have been routed through a source outside the United States 

(e.g., a foreign subsidiary), are not treated as arising outside the United States for this 

purpose. 

In the case of an apprentice or business trainee, the benefits of Article XX will 

extend only for a period of one year from the time that the individual first arrives in the 

host country for the purpose of the individual’s training. If, however, an apprentice or 

trainee remains in the host country for a second year, thus losing the benefits of the Article, he would not retroactively lose the benefits of the Article for the first year. 

Relationship to other Articles 

The saving clause of paragraph 2 of Article XXIX (Miscellaneous Rules) does not 

apply to Article XX with respect to an individual who neither is a citizen of the host State 

nor has been admitted for permanent residence there. The saving clause, however, does 

apply with respect to citizens and permanent residents of the host State. Thus, a U.S. 

citizen who is a resident of Canada and who visits the United States as a full-time student 

at an accredited university will not be exempt from U.S. tax on remittances from abroad 

that otherwise constitute U.S. taxable income. However, an individual who is not a U.S. 

citizen, and who visits the United States as a student and remains long enough to become

a resident under U.S. law, but does not become a permanent resident (i.e., does not 

acquire a green card), will be entitled to the full benefits of the Article. 

Article 16 

Article 16 of the Protocol revises Article XXI (Exempt Organizations) of the 

existing Convention. 

39
 
Paragraph 1 

Paragraph 1 amends Article XXI by renumbering paragraphs 4, 5, and 6 as 5, 6, 

and 7, respectively. 

Paragraph 2 

Paragraph 2 replaces paragraphs 1 through 3 of Article XXI with four new 

paragraphs. In general, the provisions of former paragraphs 1 through 3 have been 

retained. 

New paragraph 1 provides that a religious, scientific, literary, educational, or 

charitable organization resident in a Contracting State shall be exempt from tax on 

income arising in the other Contracting State but only to the extent that such income is 

exempt from taxation in the Contracting State in which the organization is resident. 

New paragraph 2 retains the provisions of former subparagraph 2(a), and provides 

that a trust, company, organization, or other arrangement that is resident in a Contracting 

State and operated exclusively to administer or provide pension, retirement or employee 

benefits or benefits for the self-employed under one or more funds or plans established to 

provide pension or retirement benefits or other employee benefits is exempt from taxation 

on dividend and interest income arising in the other Contracting State in a taxable year, if 

the income of such organization or other arrangement is generally exempt from taxation 

for that year in the Contracting State in which it is resident. 

New paragraph 3 replaces and expands the scope of former subparagraph 2(b) 

Former subparagraph 2(b) provided that, subject to the provisions of paragraph 3 (new 

paragraph 4), a trust, company, organization or other arrangement that was a resident of a 

Contracting State, generally exempt from income taxation in that State and operated 

exclusively to earn income for the benefit of one or more organizations described in 

subparagraph 2(a) (new paragraph 2) was exempt from taxation on dividend and interest 

income arising in the other Contracting State in a taxable year. The Internal Revenue 

Service concluded in private letter rulings (PLR 200111027 and PLR 200111037) that a 

pooled investment fund that included as investors one or more organizations described in 

paragraph 1 could not qualify for benefits under former subparagraph 2(b). New 

paragraph 3 now allows organizations described in paragraph 1 to invest in pooled funds 

with trusts, companies, organizations, or other arrangements described in new paragraph 

2. 

Former subparagraph 2(b) did not exempt income earned by a trust, company or 

other arrangement for the benefit of religious, scientific, literary, educational or charitable 

organizations exempt from tax under paragraph 1. Therefore, the Protocol expands the 

scope of paragraph 3 to include such income. 

As noted above with respect to Article X (Dividends), paragraph 3 of the General 

Note explains that distributions from Canadian income trusts and royalty trusts that are 

treated as dividends as a result of changes to Canada’s law regarding taxation of income

and royalty trusts shall be treated as dividends for the purposes of Article X. 

Accordingly, such distributions will also be entitled to the benefits of Article XXI. 

New paragraph 4 replaces paragraph 3 and provides that the exemptions provided 

by paragraphs 1, 2, 3 do not apply with respect to the income of a trust, company, 

organization or other arrangement from carrying on a trade or business or from a related 

40
 
 

person, other than a person referred to in paragraph 1, 2 or 3. The term “related person” 

is not necessarily defined by paragraph 2 of Article IX (Related Person). 

Article 17 

Article 17 of the Protocol amends Article XXII (Other Income) of the Convention 

by adding a new paragraph 4. Article XXII generally assigns taxing jurisdiction over 

income not dealt with in the other articles (Articles VI through XXI) of the Convention. 

New paragraph 4 provides a specific rule for residence State taxation of 

compensation derived in respect of a guarantee of indebtedness. New paragraph 4

provides that compensation derived by a resident of a Contracting State in respect of the 

provision of a guarantee of indebtedness shall be taxable only in that State, unless the 

compensation is business profits attributable to a permanent establishment situated in the 

other Contracting State, in which case the provisions of Article VII (Business Profits) 

shall apply. The clarification that Article VII shall apply when the compensation is 

considered business profits was included at the request of the United States. 

Compensation paid to a financial services entity to provide a guarantee in the ordinary 

course of its business of providing such guarantees to customers constitutes business 

profits dealt with under the provisions of Article VII. However, provision of guarantees 

with respect to debt of related parties is ordinarily not an independent economic 

undertaking that would generate business profits, and thus compensation in respect of

such related-party guarantees is, in most cases, covered by Article XXII. 

Article 18 

Article 18 of the Protocol amends paragraph 2 of Article XXIII (Capital) of the 

Convention by deleting language contained in that paragraph consistent with the changes 

made by Article 9 of the Protocol. 

Article 19 

Article 19 of the Protocol deletes subparagraph 2(b) of Article XXIV (Elimination 

of Double Taxation) of the Convention and replaces it with a new subparagraph. 

New subparagraph 2(b) allows a Canadian company receiving a dividend from a 

U.S. resident company of which it owns at least 10 percent of the voting stock, a credit 

against Canadian income tax of the appropriate amount of income tax paid or accrued to 

the United States by the dividend paying company with respect to the profits out of which 

the dividends are paid. The third Protocol to the Convention, signed March 17, 1995, had 

amended subparagraph (b) to allow a Canadian company to deduct in computing its 

Canadian taxable income any dividend received by it out of the exempt surplus of a 

foreign affiliate which is a resident of the United States. This change is consistent with 

current Canadian tax treaty practice: it does not indicate any present intention to change 

Canada’s “exempt surplus” rules, and those rules remain in effect. 

Article 20 

Article 20 of the Protocol revises Article XXV (Non-Discrimination) of the 

existing Convention to bring that Article into closer conformity to U.S. tax treaty policy. 

41
 
 

Paragraphs 1 and 2 

Paragraph 1 replaces paragraph 1 of Article XXV of the existing Convention. 

New paragraph 1 provides that a national of one Contracting State may not be subject to 

taxation or connected requirements in the other Contracting State that are more 

burdensome than the taxes and connected requirements imposed upon a national of that 

other State in the same circumstances. The OECD Model would prohibit taxation that is 

"other than or more burdensome" than that imposed on U.S. persons. Paragraph 1 omits 

the words "other than or" because the only relevant question under this provision should 

be whether the requirement imposed on a national of the other Contracting State is more 

burdensome. A requirement may be different from the requirements imposed on U.S. 

nationals without being more burdensome. 

The term "national" in relation to a Contracting State is defined in subparagraph 

1(k) of Article III (General Definitions). The term includes both individuals and juridical 

persons. A national of a Contracting State is afforded protection under this paragraph 

even if the national is not a resident of either Contracting State. Thus, a U.S. citizen who 

is resident in a third country is entitled, under this paragraph, to the same treatment in 

Canada as a national of Canada in the same or similar circumstances (i.e., one who is 

resident in a third State). 

Whether or not the two persons are both taxable on worldwide income is a 

significant circumstance for this purpose. For this reason, paragraph 1 specifically refers 

to taxation or any requirement connected therewith, particularly with respect to taxation

on worldwide income, as relevant circumstances. This language means that the United 

States is not obliged to apply the same taxing regime to a national of Canada who is not 

resident in the United States as it applies to a U.S. national who is not resident in the 

United States. U.S. citizens who are not resident in the United States but who are, 

nevertheless, subject to U.S. tax on their worldwide income are not in the same

circumstances with respect to U.S. taxation as citizens of Canada who are not U.S. 

residents. Thus, for example, Article XXV would not entitle a national of Canada 

residing in a third country to taxation at graduated rates on U.S.-source dividends or other 

investment income that applies to a U.S. citizen residing in the same third country. 

Because of the increased coverage of paragraph 1 with respect to the treatment of 

nationals wherever they are resident, paragraph 2 of this Article no longer has 

application, and therefore has been omitted. 

Paragraph 3 

Paragraph 3 makes changes to renumbered paragraph 3 of Article XXV in order 

to conform with Article 10 of the Protocol by deleting the reference to “Article XV 

(Dependent Personal Services)” and replacing it with a reference to “Article XV (Income

from Employment).” 

Article 21 

Paragraph 1 of Article 21 of the Protocol replaces paragraph 6 of Article XXVI 

(Mutual Agreement Procedure) of the Convention with new paragraphs 6 and 7. New 

paragraphs 6 and 7 provide a mandatory binding arbitration proceeding (Arbitration 

Proceeding). The Arbitration Note details additional rules and procedures that apply to a 

case considered under the arbitration provisions. 

42
 
New paragraph 6 provides that a case shall be resolved through arbitration when 

the competent authorities have endeavored but are unable through negotiation to reach a 

complete agreement regarding a case and the following three conditions are satisfied. 

First, tax returns have been filed with at least one of the Contracting States with respect 

to the taxable years at issue in the case. Second, the case (i) involves the application of 

one or more Articles that the competent authorities have agreed in an exchange of notes 

shall be the subject of arbitration and is not a case that the competent authorities agree 

before the date on which an Arbitration Proceeding would otherwise have begun, is not 

suitable for determination by arbitration; or (ii) is a case that the competent authorities 

agree is suitable for determination by arbitration. Third, all concerned persons and their

authorized representatives agree, according to the provisions of subparagraph 7(d), not to 

disclose to any other person any information received during the course of the Arbitration 

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

determination of the board (confidentiality agreement). The confidentiality agreement 

may also be executed by any concerned person that has the legal authority to bind any 

other concerned person on the matter. For example, a parent corporation with the legal 

authority to bind its subsidiary with respect to confidentiality may execute a 

comprehensive confidentiality agreement on its own behalf and that of its subsidiary. 

The United States and Canada have agreed in the Arbitration Note to submit cases 

regarding the application of one or more of the following Articles to mandatory binding 

arbitration under the provisions of paragraphs 6 and 7 of Article XXVI: 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). The competent authorities may, however, agree, before the date on which an 

Arbitration Proceeding would otherwise have begun, that a particular case is not suitable 

for arbitration. 

New paragraph 7 provides six subparagraphs that detail the general rules and 

definitions to be used in applying the arbitration provisions. 

Subparagraph 7(a) provides that the term “concerned person” means the person 

that brought the case to competent authority for consideration under Article XXVI 

(Mutual Agreement Procedure) and includes all other persons, if any, whose tax liability 

to either Contracting State may be directly affected by a mutual agreement arising from

that consideration. For example, a concerned person does not only include a U.S. 

corporation that brings a transfer pricing case with respect to a transaction entered into

with its Canadian subsidiary for resolution to the U.S. competent authority, but also the 

Canadian subsidiary, which may have a correlative adjustment as a result of the 

resolution of the case. 

Subparagraph 7(c) provides that an Arbitration Proceeding begins on the later of 

two dates: two years from the “commencement date” of the case (unless the competent 

authorities have previously agreed to a different date), or the earliest date upon which all 

concerned persons have entered into a confidentiality agreement and the agreements have 

been received by both competent authorities. The “commencement date” of the case is 

defined by subparagraph 7(b) as the earliest date the information necessary to undertake 

substantive consideration for a mutual agreement has been received by both competent 

authorities. 

43
 
Paragraph 16 of the Arbitration Note provides that each competent authority will 

confirm in writing to the other competent authority and to the concerned persons the date 

of its receipt of the information necessary to undertake substantive consideration for a 

mutual agreement. In the case of the United States, this information is (i) the information 

that must be submitted to the U.S. competent authority under Section 4.05 of Rev. Proc. 

2006-54, 2006-49 I.R.B. 1035 (or any applicable successor publication), and (ii) for cases 

initially submitted as a request for an Advance Pricing Agreement, the information that

must be submitted to the Internal Revenue Service under Rev. Proc. 2006-9, 2006-2 

I.R.B. 278 (or any applicable successor publication). In the case of Canada, this 

information is the information required to be submitted to the Canadian competent 

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

The 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. It is understood that 

confirmation of the “information necessary to undertake substantive consideration for a 

mutual agreement” is envisioned to ordinarily occur within 30 days after the necessary 

information is provided to the competent authority. 

The Arbitration Note also provides for several procedural rules once an 

Arbitration Proceeding under paragraph 6 of Article XXVI (“Proceeding”) has 

commenced, but the competent authorities may modify or supplement these rules as 

necessary. In addition, the arbitration board may adopt any procedures necessary for the 

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

of Article XXVI of the Convention. 

Paragraph 5 of the Arbitration Note provides that each Contracting State has 60 

days from the date on which the Arbitration 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 the second of such communications is sent, these two 

board members will appoint a third member to serve as the chair of the board. It is 

agreed that this third member ordinarily should not be a citizen of either of the 

Contracting States. 

In the event that any members of the board are not appointed (including as a result 

of the failure of the two members appointed by the Contracting States to agree on a third 

member) by the requisite date, the remaining members are appointed by 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, by written notice to both Contracting States within 60 days of 

the date of such failure. 

Paragraph 7 of the Arbitration Note establishes deadlines for submission of 

materials by the Contracting States to the arbitration board. Each competent authority 

has 60 days from the date of appointment of the chair to submit 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. Copies of each State’s

submissions are to be provided by the board to the other Contracting State on the date the 

later of the submissions is submitted to the board. Each of the Contracting States may 

submit a Reply Submission to the board within 120 days of the appointment of the chair 

to address points raised in the other State’s Proposed Resolution or Position Paper. If one 

Contracting State fails to submit a Proposed Resolution within the requisite time, the 

Proposed Resolution of the other Contracting State is deemed to be the determination of 

the arbitration board. Additional information may be supplied to the arbitration board by 

a Contracting State only at the request of the arbitration board. The board will provide 

44
 
copies of any such requested information, along with the board’s request, to the other 

Contracting State on the date the request is made or the response is received. 

All communication with the board is to be in writing between the chair of the 

board and the designated competent authorities with the exception of communication 

regarding logistical matters. 

In making its determination, the arbitration board will apply the following 

authorities as necessary: (i) the provisions of the Convention, (ii) any agreed 

commentaries or explanation of the Contracting States concerning the Convention as 

amended, (iii) the laws of the Contracting States to the extent they are not inconsistent

with each other, and (iv) any OECD Commentary, Guidelines or Reports regarding 

relevant analogous portions of the OECD Model Tax Convention. 

The arbitration board must deliver a determination in writing to the Contracting 

States within six months of the appointment of the chair. The determination must be one 

of the two Proposed Resolutions submitted by the Contracting States. The determination 

shall provide a determination regarding only the amount of income, expense or tax 

reportable to the Contracting States. The determination has no precedential value and 

consequently the rationale behind a board’s determination would not be beneficial and 

shall not be provided by the board. 

Paragraph 11 of the Arbitration Note provides that, unless any concerned person 

does not accept the decision of the arbitration board, the determination of the board 

constitutes a resolution by mutual agreement under Article XXVI and, consequently, is 

binding on both Contracting States. Each concerned person must, within 30 days of 

receiving the determination from the competent authority to which the case was first 

presented, advise that competent authority whether the person accepts the determination. 

The failure to advise the competent authority within the requisite time is considered a 

rejection of the determination. If a determination is rejected, the case cannot be the 

subject of a subsequent MAP procedure on the same issue(s) determined by the panel, 

including a subsequent Arbitration Proceeding. After the commencement of an 

Arbitration Proceeding but before a decision of the board has been accepted by all 

concerned persons, the competent authorities may reach a mutual agreement to resolve 

the case and terminate the Proceeding. 

For purposes of the Arbitration Proceeding, the members of the arbitration board 

and their staffs shall be considered “persons or authorities” to whom information may be 

disclosed under Article XXVII (Exchange of Information). The Arbitration Note 

provides that all materials prepared in the course of, or relating to, the Arbitration 

Proceeding are considered information exchanged between the Contracting States. No 

information relating to the Arbitration Proceeding or the board’s determination may be 

disclosed by 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. Members of the arbitration board and their staffs must agree in 

statements sent to each of the Contracting States in confirmation of their appointment to 

the arbitration board to abide by and be subject to the confidentiality and nondisclosure 

provisions of Article XXVII of the Convention and the applicable domestic laws of the 

Contracting States, with the most restrictive of the provisions applying. 

The applicable domestic law of the Contracting States determines the treatment of 

any interest or penalties associated with a competent authority agreement achieved 

through arbitration. 

45
 
 

In general, fees and expenses are borne equally by the Contracting States, 

including the cost of translation services. However, meeting facilities, related resources, 

financial management, other logistical support, and general and administrative 

coordination of the Arbitration Proceeding will be provided, at its own cost, by the 

Contracting State that initiated the Mutual Agreement Procedure. The fees and expenses

of members of the board will be set in accordance with the International Centre for 

Settlement of Investment Disputes (ICSID) Schedule of Fees for arbitrators (in effect on 

the date on which the arbitration board proceedings begin). All other costs are to be 

borne by the Contracting State that incurs them. Since arbitration of MAP cases is 

intended to assist taxpayers in resolving a governmental difference of opinion regarding 

the taxation of their income, and is merely an extension of the competent authority 

process, no fees will be chargeable to a taxpayer in connection with arbitration. 

Article 22 

Article 22 of the Protocol amends Article XXVI A (Assistance in Collection) of 

the existing Convention. Article XXVI A sets forth provisions under which the United 

States and Canada have agreed to assist each other in the collection of taxes. 

Paragraph 1 

Paragraph 1 replaces subparagraph 8(a) of Article XXVI A. In general, new 

subparagraph 8(a) provides the circumstances under which no assistance is to be given 

under the Article for a claim in respect of an individual taxpayer. New subparagraph 8(a)

contains language that is in substance the same as subparagraph 8(a) of Article XXVI A 

of the existing Convention. However, the revised subparagraph also provides that no 

assistance in collection is to be given for a revenue claim from a taxable period that 

ended before November 9, 1995 in respect of an individual taxpayer, if the taxpayer 

became a citizen of the requested State at any time before November 9, 1995 and is such 

a citizen at the time the applicant State applies for collection of the claim. 

The additional language is intended to avoid the potentially discriminating 

application of former subparagraph 8(a) as applied to persons who were not citizens of 

the requested State in the taxable period to which a particular collection request related,

but who became citizens of the requested State at a time prior to the entry into force of 

Article XXVI A as set forth in the third protocol signed March 17, 1995. New 

subparagraph 8(a) addresses this situation by treating the citizenship of a person in the 

requested State at anytime prior to November 9, 1995 as comparable to citizenship in the 

requested State during the period for which the claim for assistance relates if 1) the 

person is a citizen of the requested state at the time of the request for assistance in 

collection, and 2) the request relates to a taxable period ending prior to November 9, 

1995. As is provided in subparagraph 3(g) of Article 27, this change will have effect for 

revenue claims finally determined after November 9, 1985, the effective date of the 

adoption of collection assistance in the third protocol signed March 17, 1995. 

Paragraph 2 

Paragraph 2 replaces paragraph 9 of Article XXVI A of the Convention. Under 

paragraph 1 of Article XXVI A, each Contracting State generally agrees to lend 

assistance and support to the other in the collection of revenue claims. The term 

"revenue claim" is defined in paragraph 1 to include all taxes referred to in paragraph 9 of 

the Article, as well as interest, costs, additions to such taxes, and civil penalties. New 

paragraph 9 provides that, notwithstanding the provisions of Article II (Taxes Covered) 

of the Convention, Article XXVI A shall apply to all categories of taxes collected, and to 

contributions to social security and employment insurance premiums levied, by or on 

46
 
behalf of the Government of a Contracting State. Prior to the Protocol, paragraph 9 did 

not contain a specific reference to contributions to social security and employment 

insurance premiums. Although the prior language covered U.S. federal social security 

and unemployment taxes, the language did not cover Canada’s social security (e.g., Canada Pension Plan) and employment insurance programs, contributions to which are 

not considered taxes under Canadian law and therefore would not otherwise have come 

within the scope of the paragraph. 

Article 23 

Article 23 of the Protocol replaces Article XXVII (Exchange of Information) of 

the Convention. 

Paragraph 1 of Article XXVII 

New paragraph 1 of Article XXVII is substantially the same as paragraph 1 of 

Article XXVII of the existing Convention. Paragraph 1 authorizes the competent 

authorities to exchange information as may be relevant for carrying out the provisions of 

the Convention or the domestic laws of Canada and the United States concerning taxes 

covered by the Convention, insofar as the taxation under those domestic laws is not 

contrary to the Convention. New paragraph 1 changes the phrase “is relevant” to “may

be relevant” to clarify that the language incorporates the standard in Code section 7602 

which authorizes the Internal Revenue Service to examine "any books, papers, records, or 

other data which may be relevant or material." (Emphasis added.) In United States v. 

Arthur Young & Co., 465 U.S. 805, 814 (1984), the Supreme Court stated that “the 

language ’may be’ reflects Congress's express intention to allow the Internal Revenue 

Service to obtain ‘items of even potential relevance to an ongoing investigation, without 

reference to its admissibility.’" (Emphasis in original.) However, the language "may be" 

would not support a request in which a Contracting State simply asked for information 

regarding all bank accounts maintained by residents of that Contracting State in the other 

Contracting State, or even all accounts maintained by its residents with respect to a 

particular bank. 

The authority to exchange information granted by paragraph 1 is not restricted by 

Article I (Personal Scope), and thus need not relate solely to persons otherwise covered 

by the Convention. Under paragraph 1, information may be exchanged for use in all 

phases of the taxation process including assessment, collection, enforcement or the 

determination of appeals. Thus, the competent authorities may request and provide 

information for cases under examination or criminal investigation, in collection, on 

appeals, or under prosecution. 

Any information received by a Contracting State pursuant to the Convention is to 

be treated as secret in the same manner as information obtained under the tax laws of that 

State. Such information shall be disclosed only to persons or authorities, including courts 

and administrative bodies, involved in the assessment or collection of, the administration 

and enforcement in respect of, or the determination of appeals in relation to, the taxes 

covered by the Convention and the information may be used by such persons only for 

such purposes. (In accordance with paragraph 4, for the purposes of this Article the 

Convention applies to a broader range of taxes than those covered specifically by Article 

II (Taxes Covered)). Although the information received by persons described in 

paragraph 1 is to be treated as secret, it may be disclosed by such persons in public court 

proceedings or in judicial decisions. 

Paragraph 1 also permits, however, a Contracting State to provide information 

received from the other Contracting State to its states, provinces, or local authorities, if it 

47
 
relates to a tax imposed by that state, province, or local authority that is substantially 

similar to a national-level tax covered under Article II (Taxes Covered). This provision

does not authorize a Contracting State to request information on behalf of a state, 

province, or local authority. Paragraph 1 also authorizes the competent authorities to 

release information to any arbitration panel that may be established under the provisions 

of new paragraph 6 of Article XXVI (Mutual Agreement Procedure). Any information 

provided to a state, province, or local authority or to an arbitration panel is subject to the 

same use and disclosure provisions as is information received by the national 

Governments and used for their purposes. 

The provisions of paragraph 1 authorize the U.S. competent authority to continue 

to allow legislative bodies, such as the tax-writing committees of Congress and the 

Government Accountability Office to examine tax return information received from

Canada when such bodies or offices are engaged in overseeing the administration of U.S. 

tax laws or a study of the administration of U.S. tax laws pursuant to a directive of 

Congress. However, the secrecy requirements of paragraph 1 must be met. 

It is contemplated that Article XXVII will be utilized by the competent authorities 

to exchange information upon request, routinely, and spontaneously. 

Paragraph 2 of Article XXVII 

New paragraph 2 conforms with the corresponding U.S. and OECD Model 

provisions. The substance of the second sentence of former paragraph 2 is found in new 

paragraph 6 of the Article, discussed below. 

Paragraph 2 provides that if a Contracting State requests information in 

accordance with Article XXVII, the other Contracting State shall use its information 

gathering measures to obtain the requested information. The instruction to the requested

State to “use its information gathering measures" to obtain the requested information 

communicates the same instruction to the requested State as the language of former 

paragraph 2 that stated that the requested State shall obtain the information “in the same

way as if its own taxation was involved.” Paragraph 2 makes clear that the obligation to 

provide information is limited by the provisions of paragraph 3, but that such limitations 

shall not be construed to permit a Contracting State to decline to obtain and supply 

information because it has no domestic tax interest in such information. 

In the absence of such a paragraph, some taxpayers have argued that 

subparagraph 3(a) prevents a Contracting State from requesting information from a bank 

or fiduciary that the Contracting State does not need for its own tax purposes. This 

paragraph clarifies that paragraph 3 does not impose such a restriction and that a 

Contracting State is not limited to providing only the information that it already has in its 

own files. 

Paragraph 3 of Article XXVII 

New paragraph 3 is substantively the same as paragraph 3 of Article XXVII of the 

existing Convention. Paragraph 3 provides that the provisions of paragraphs 1 and 2 do 

not impose on Canada or the United States the obligation to carry out administrative 

measures at variance with the laws and administrative practice of either State; to supply 

information which is not obtainable under the laws or in the normal course of the 

administration of either State; or to supply information which would disclose any trade, 

business, industrial, commercial, or professional secret or trade process, or information 

the disclosure of which would be contrary to public policy. 

48
 
Thus, a requesting State may be denied information from the other State if the 

information would be obtained pursuant to procedures or measures that are broader than 

those available in the requesting State. However, the statute of limitations of the 

Contracting State making the request for information should govern a request for 

information. Thus, the Contracting State of which the request is made should attempt to 

obtain the information even if its own statute of limitations has passed. In many cases, 

relevant information will still exist in the business records of the taxpayer or a third party, 

even though it is no longer required to be kept for domestic tax purposes. 

While paragraph 3 states conditions under which a Contracting State is not 

obligated to comply with a request from the other Contracting State for information, the 

requested State is not precluded from providing such information, and may, at its 

discretion, do so subject to the limitations of its internal law. 

As discussed with respect to paragraph 2, in no case shall the limitations in 

paragraph 3 be construed to permit a Contracting State to decline to obtain information 

and supply information because it has no domestic tax interest in such information. 

Paragraph 4 of Article XXVII 

The language of new paragraph 4 is substantially similar to former paragraph 4. 

New paragraph 4, however, consistent with new paragraph 1, discussed above, replaces 

the words “is relevant” with “may be relevant” in subparagraph 4(b). 

Paragraph 4 provides that, for the purposes of Article XXVII, the Convention 

applies to all taxes imposed by a Contracting State, and to other taxes to which any other 

provision of the Convention applies, but only to the extent that the information may be 

relevant for the purposes of the application of that provision. 

Article XXVII does not apply to taxes imposed by political subdivisions or local 

authorities of the Contracting States. Paragraph 4 is designed to ensure that information 

exchange will extend to taxes of every kind (including, for example, estate, gift, excise, 

and value added taxes) at the national level in the United States and Canada. 

Paragraph 5 of Article XXVII 

New paragraph 5 conforms with the corresponding U.S. and OECD Model 

provisions. Paragraph 5 provides that a Contracting State may not decline to provide 

information because that information is held by a financial institution, nominee or person 

acting in an agency or fiduciary capacity. Thus, paragraph 5 would effectively prevent a 

Contracting State from relying on paragraph 3 to argue that its domestic bank secrecy 

laws (or similar legislation relating to disclosure of financial information by financial 

institutions or intermediaries) override its obligation to provide information under 

paragraph 1. This paragraph also requires the disclosure of information regarding the 

beneficial owner of an interest in a person. 

Paragraph 6 of Article XXVII 

The substance of new paragraph 6 is similar to the second sentence of paragraph 2 

of Article XXVII of the existing Convention. New paragraph 6 adopts the language of

paragraph 6 of Article 26 (Exchange of Information and Administrative Assistance) of

the U.S. Model. New paragraph 6 provides that the requesting State may specify the 

form in which information is to be provided (e.g., depositions of witnesses and

authenticated copies of original documents). The intention is to ensure that the informa- tion may be introduced as evidence in the judicial proceedings of the requesting State. 

49
 
The requested State should, if possible, provide the information in the form requested to 

the same extent that it can obtain information in that form under its own laws and 

administrative practices with respect to its own taxes. 

Paragraph 7 of Article XXVII 

New paragraph 7 is consistent with paragraph 8 of Article 26 (Exchange of 

Information and Administrative Assistance) of the U.S. Model. Paragraph 7 provides

that the requested State shall allow representatives of the requesting State to enter the 

requested State to interview individuals and examine books and records with the consent 

of the persons subject to examination. Paragraph 7 was intended to reinforce that the 

administrations can conduct consensual tax examinations abroad, and was not intended to 

limit travel or supersede any arrangements or procedures the competent authorities may 

have previously had in place regarding travel for tax administration purposes. 

Paragraph 13 of General Note 

As is explained in paragraph 13 of the General Note, the United States and 

Canada understand and agree that the standards and practices described in Article XXVII 

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. 

Article 24 

Article 24 amends Article XXIX (Miscellaneous Rules) of the Convention. 

Paragraph 1 

Paragraph 1 replaces paragraph 2 of Article XXIX of the existing Convention. 

New paragraph 2 is divided into two subparagraphs. In general, subparagraph 2(a)

provides a “saving clause” pursuant to which the United States and Canada may each tax 

its residents, as determined under Article IV (Residence), and the United States may tax 

its citizens and companies, including those electing to be treated as domestic corporations 

(e.g. under Code section 1504(d)), as if there were no convention between the United 

States and Canada with respect to taxes on income and capital. Subparagraph 2(a)

contains language that generally corresponds to former paragraph 2, but omits certain 

language pertaining to former citizens, which are addressed in new subparagraph 2(b). 

New subparagraph 2(b) generally corresponds to the provisions of former

paragraph 2 addressing former citizens of the United States. However, new subparagraph

2(b) also includes a reference to former long-term residents of the United States. This 

addition, as well as other changes in subparagraph 2(b), brings the Convention in 

conformity with the U.S. taxation of former citizens and long-term residents under Code 

section 877. 

Similar to subparagraph 2(a), new subparagraph 2(b) operates as a “saving 

clause” and provides that notwithstanding the other provisions of the Convention, a 

former citizen or former long-term resident of the United States, may, for a period of ten 

years following the loss of such status, be taxed in accordance with the laws of the United 

States with respect to income from sources within the United States (including income

deemed under the domestic law of the United States to arise from such sources). 

50
 
Paragraphs 11 and 12 of the General Note provide definitions based on Code 

section 877 that are relevant to the application of paragraph 2 of Article XXIX. 

Paragraph 11 of the General Note provides that the term “long-term resident” means 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 eightyear threshold is met, one does not count any year in which the individual is treated as a 

resident of Canada under this Convention (or as a resident of any country other than the 

United States under the provisions of any other U.S. tax treaty), and the individual does 

not waive the benefits of such treaty applicable to residents of the other country. This 

understanding is consistent with how this provision is generally interpreted in U.S. tax 

treaties. 

Paragraph 12 of the General Note provides that the phrase “income deemed under 

the domestic law of the United States to arise from such sources” as used in new 

subparagraph 2(b) includes 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 individual 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 will be treated as if

he 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. 

Paragraph 2 

Paragraph 2 replaces subparagraph 3(a) of Article XXIX of the existing 

Convention. Paragraph 3 provides that, notwithstanding paragraph 2 of Article XXIX, 

the United States and Canada must respect specified provisions of the Convention in 

regard to certain persons, including residents and citizens. Therefore, subparagraph 3(a) 

lists certain paragraphs and Articles of the Convention that represent exceptions to the 

"saving clause" in all situations. New subparagraph 3(a) is substantially similar to former 

subparagraph 3(a), but now contains a reference to paragraphs 8, 10, and 13 of Article 

XVIII (Pensions and Annuities) to reflect the changes made to that article in paragraph 3 

of Article 13 of the Protocol. 

Article 25 

Article 25 of the Protocol replaces Article XXIX A (Limitation on Benefits) of

the existing Convention, which was added to the Convention by the Protocol done on 

March 17, 1995. Article XXIX A addresses the problem of “treaty shopping” by 

residents of third States by requiring, in most cases, that the person seeking benefits not 

only be a U.S. resident or Canadian resident but also satisfy other tests. For example, a 

resident of a third State might establish an entity resident in Canada for the purpose of

deriving income from the United States and claiming U.S. treaty benefits with respect to 

that income. Article XXIX A limits the benefits granted by the United States or Canada

under the Convention to those persons whose residence in the other Contracting State is 

not considered to have been motivated by the existence of the Convention. As replaced

by the Protocol, new Article XXIX A is reciprocal, and many of the changes to the 

former paragraphs of Article XXIX A are made to effectuate this reciprocal application. 

51
 
 

Absent Article XXIX A, an entity resident in one of the Contracting States would 

be entitled to benefits under the Convention, unless it were denied such benefits as a 

result of limitations under domestic law (e.g., business purpose, substance-over-form, 

step transaction, or conduit principles or other anti-avoidance rules) applicable to a 

particular transaction or arrangement. As noted below in the explanation of paragraph 7, 

general anti-abuse provisions of this sort apply in conjunction with the Convention in 

both the United States and Canada. In the case of the United States, such anti-abuse 

provisions complement the explicit anti-treaty-shopping rules of Article XXIX A. While 

the anti-treaty-shopping rules determine whether a person has a sufficient nexus to 

Canada to be entitled to benefits under the Convention, the anti-abuse provisions under 

U.S. domestic law determine whether a particular transaction should be recast in 

accordance with the substance of the transaction. 

Paragraph 1 of Article XXIX A 

New paragraph 1 of Article XXIX A provides that, for the purposes of the 

application of the Convention, a “qualifying person” shall be entitled to all of the benefits 

of the Convention and, except as provided in paragraphs 3, 4, and 6, a person that is not a 

qualifying person shall not be entitled to any benefits of the Convention. 

Paragraph 2 of Article XXIX A 

New paragraph 2 lists a number of characteristics any one of which will make a 

United States or Canadian resident a qualifying person. The “look-through” principles

introduced by the Protocol (e.g. paragraph 6 of Article IV (Residence)) are to be applied 

in conjunction with Article XXIX A. Accordingly, the provisions of Article IV shall 

determine the person who derives an item of income, and the objective tests of Article 

XXIX A shall be applied to that person to determine whether benefits shall be granted. 

The rules are essentially mechanical tests and are discussed below. 

Individuals and governmental entities 

Under new paragraph 2, the first two categories of qualifying persons are (1) 

natural persons resident in the United States or Canada (as listed in subparagraph 2(a)), 

and (2) the Contracting States, political subdivisions or local authorities thereof, and any 

agency or instrumentality of such Government, political subdivision or local authority (as 

listed in subparagraph 2(b)). Persons falling into these two categories are unlikely to be

used, as the beneficial owner of income, to derive benefits under the Convention on 

behalf of a third-country person. If such a person receives income as a nominee on 

behalf of a third-country resident, benefits will be denied with respect to those items of 

income under the articles of the Convention that would otherwise grant the benefit, 

because of the requirements in those articles that the beneficial owner of the income be a 

resident of a Contracting State. 

Publicly traded entities 

Under new subparagraph 2(c), a company or trust resident in a Contracting State 

is a qualifying person if the company's principal class of shares, and any disproportionate 

class of shares, or the trust's units, or disproportionate interest in a trust, are primarily and 

regularly traded on one or more recognized stock exchanges. The term "recognized stock 

exchange" is defined in subparagraph 5(f) of the Article to mean, in the United States, the 

NASDAQ System and any stock exchange registered as a national securities exchange 

with the Securities and Exchange Commission, and, in Canada, any Canadian stock 

52
 
exchanges that are "prescribed stock exchanges" or “designated stock exchanges” under 

the Income Tax Act. These are, at the time of signature of the Protocol, the Montreal 

Stock Exchange, the Toronto Stock Exchange, and Tiers 1 and 2 of the TSX Venture 

Exchange. Additional exchanges may be added to the list of recognized exchanges by 

exchange of notes between the Contracting States or by agreement between the 

competent authorities. 

If a company has only one class of shares, it is only necessary to consider whether 

the shares of that class meet the relevant trading requirements. If the company has more 

than one class of shares, it is necessary as an initial matter to determine which class or 

classes constitute the "principal class of shares." The term "principal class of shares" is 

defined in subparagraph 5(e) of the Article to mean the ordinary or common shares of the 

company representing the majority of the aggregate voting power and value of the 

company. If the company does not have a class of ordinary or common shares 

representing the majority of the aggregate voting power and value of the company, then 

the "principal class of shares" is that class or any combination of classes of shares that 

represents, in the aggregate, a majority of the voting power and value of the company. 

Although in a particular case involving a company with several classes of shares it is 

conceivable that more than one group of classes could be identified that account for more 

than 50% of the voting power and value of the shares of the company, it is only necessary 

for one such group to satisfy the requirements of this subparagraph in order for the 

company to be entitled to benefits. Benefits would not be denied to the company even if 

a second, non-qualifying, group of shares with more than half of the company's voting 

power and value could be identified. 

A company whose principal class of shares is regularly traded on a recognized 

stock exchange will nevertheless not qualify for benefits under subparagraph 2(c) if it has 

a disproportionate class of shares that is not regularly traded on a recognized stock 

exchange. The term "disproportionate class of shares" is defined in subparagraph 5(b) of 

the Article. A company has a disproportionate class of shares if it has outstanding a class 

of shares which is subject to terms or other arrangements that entitle the holder to a larger 

portion of the company's income, profit, or gain in the other Contracting State than that to 

which the holder would be entitled in the absence of such terms or arrangements. Thus, 

for example, a company has a disproportionate class of shares if it has outstanding a class 

of "tracking stock" that pays dividends based upon a formula that approximates the 

company's return on its assets employed in the United States. Similar principles apply to 

determine whether or not there are disproportionate interests in a trust. 

The following example illustrates the application of subparagraph 5(b). 

Example. OCo is a corporation resident in Canada. OCo has two classes of 

shares: Common and Preferred. The Common shares are listed and regularly traded on a 

designated stock exchange in Canada. The Preferred shares have no voting rights and are 

entitled to receive dividends equal in amount to interest payments that OCo receives from 

unrelated borrowers in the United States. The Preferred shares are owned entirely by a 

single investor that is a resident of a country with which the United States does not have a 

tax treaty. The Common shares account for more than 50 percent of the value of OCo 

and for 100 percent of the voting power. Because the owner of the Preferred shares is 

entitled to receive payments corresponding to the U.S.-source interest income earned by 

OCo, the Preferred shares are a disproportionate class of shares. Because the Preferred 

shares are not primarily and regularly traded on a recognized stock exchange, OCo will 

not qualify for benefits under subparagraph 2(c). 

53
 
The term "regularly traded" is not defined in the Convention. In accordance with 

paragraph 2 of Article III (General Definitions) and paragraph 1 of the General Note, this 

term will be defined by reference to the domestic tax laws of the State from which 

benefits of the Convention are sought, generally the source State. In the case of the 

United States, this term is understood to have the meaning it has under Treas. Reg. 

section 1.884-5(d)(4)(i)(B), relating to the branch tax provisions of the Code, as may be 

amended from time to time. Under these regulations, a class of shares is considered to be 

"regularly traded" if two requirements are met: trades in the class of shares are made in 

more than de minimis quantities on at least 60 days during the taxable year, and the 

aggregate number of shares in the class traded during the year is at least 10 percent of the 

average number of shares outstanding during the year. Sections 1.884-5(d)(4)(i)(A), (ii) 

and (iii) will not be taken into account for purposes of defining the term "regularly 

traded" under the Convention. 

The regularly-traded requirement can be met by trading on one or more 

recognized stock exchanges. Therefore, trading may be aggregated for purposes of this 

requirement. Thus, a U.S. company could satisfy the regularly traded requirement 

through trading, in whole or in part, on a recognized stock exchange located in Canada. 

Authorized but unissued shares are not considered for purposes of this test. 

The term “primarily traded” is not defined in the Convention. In accordance with 

paragraph 2 of Article III (General Definitions) and paragraph 1 of the General Note, this 

term will have the meaning it has under the laws of the State concerning the taxes to 

which the Convention applies, generally the source State. In the case of the United 

States, this term is understood to have the meaning it has under Treas. Reg. section 

1.884-5(d)(3), as may be amended from time to time, relating to the branch tax provisions 

of the Code. Accordingly, stock of a corporation is “primarily traded” if the number of 

shares in the company’s principal class of shares that are traded during the taxable year 

on all recognized stock exchanges exceeds the number of shares in the company’s 

principal class of shares that are traded during that year on all other established securities 

markets. 

Subject to the adoption by Canada of other definitions, the U.S. interpretation of 

“regularly traded” and “primarily traded” will be considered to apply, with such 

modifications as circumstances require, under the Convention for purposes of Canadian 

taxation. 

Subsidiaries of publicly traded entities 

Certain companies owned by publicly traded corporations also may be qualifying 

persons. Under subparagraph 2(d), a company resident in the United States or Canada 

will be a qualifying person, even if not publicly traded, if more than 50 percent of the 

vote and value of its shares, and more than 50 percent of the vote and value of each 

disproportionate class of shares, is owned (directly or indirectly) by five or fewer persons 

that are qualifying persons under subparagraph 2(c). In addition, each company in the 

chain of ownership must be a qualifying person. Thus, for example, a company that is a 

resident of Canada, all the shares of which are owned by another company that is a 

resident of Canada, would qualify for benefits of the Convention if the principal class of 

shares (and any disproportionate classes of shares) of the parent company are regularly 

and primarily traded on a recognized stock exchange. However, such a subsidiary would 

not qualify for benefits under subparagraph 2(d) if the publicly traded parent company 

were a resident of a third state, for example, and not a resident of the United States or 

Canada. Furthermore, if a parent company qualifying for benefits under subparagraph 

2(c) indirectly owned the bottom-tier company through a chain of subsidiaries, each 

54
 
 

subsidiary in the chain, as an intermediate owner, must be a qualifying person in order for 

the bottom-tier subsidiary to meet the test in subparagraph 2(d). 

Subparagraph 2(d) provides that a subsidiary can take into account ownership by 

as many as five companies, each of which qualifies for benefits under subparagraph 2(c) 

to determine if the subsidiary qualifies for benefits under subparagraph 2(d). For 

example, a Canadian company that is not publicly traded but that is owned, one-third 

each, by three companies, two of which are Canadian resident corporations whose 

principal classes of shares are primarily and regularly traded on a recognized stock 

exchange, will qualify under subparagraph 2(d). 

By applying the principles introduced by the Protocol (e.g. paragraph 6 of Article 

IV) in the context of this rule, one “looks through” entities in the chain of ownership that 

are viewed as fiscally transparent under the domestic laws of the State of residence (other 

than entities that are resident in the State of source). 

The 50-percent test under subparagraph 2(d) applies only to shares other than 

"debt substitute shares." The term "debt substitute shares" is defined in subparagraph 

5(a) to mean shares defined in paragraph (e) of the definition in the Canadian Income Tax 

Act of "term preferred shares" (see subsection 248(1) of the Income Tax Act), which 

relates to certain shares received in debt-restructuring arrangements undertaken by reason 

of financial difficulty or insolvency. Subparagraph 5(a) also provides that the competent 

authorities may agree to treat other types of shares as debt substitute shares. 

Ownership/base erosion test 

Subparagraph 2(e) provides a two-part test under which certain other entities may 

be qualifying persons, based on ownership and lack of "base erosion." A company 

resident in the United States or Canada will satisfy the first of these tests if 50 percent or 

more of the vote and value of its shares and 50 percent or more of the vote and value of 

each disproportionate class of shares, in both cases not including debt substitute shares, is 

not owned, directly or indirectly, by persons other than qualifying persons. Similarly, a 

trust resident in the United States or Canada will satisfy this first test if 50 percent or 

more of its beneficial interests, and 50 percent or more of each disproportionate interest, 

is not owned, directly or indirectly, by persons other than qualifying persons. The 

wording of these tests is intended to make clear that, for example, if a Canadian company 

is more than 50 percent owned, either directly or indirectly (including cumulative indirect 

ownership through a chain of entities), by a U.S. resident corporation that is, itself, 

wholly owned by a third-country resident other than a qualifying person, the Canadian 

company would not pass the ownership test. This is because more than 50 percent of its 

shares is owned indirectly by a person (the third-country resident) that is not a qualifying 

person. 

It is understood by the Contracting States that in determining whether a company 

satisfies the ownership test described in subparagraph 2(e)(i), a company, 50 percent of 

more of the aggregate vote and value of the shares of which and 50 percent or more of the 

vote and value of each disproportionate class of shares (in neither case including debt

substitute shares) of which is owned, directly or indirectly, by a company described in 

subparagraph 2(c) will satisfy the ownership test of subparagraph 2(e)(i). In such case, 

no further analysis of the ownership of the company described in subparagraph 2(c) is 

required. Similarly, in determining whether a trust satisfies the ownership test described 

in subparagraph 2(e)(ii), a trust, 50 percent or more of the beneficial interest in which and 

50 percent or more of each disproportionate interest in which, is owned, directly or 

indirectly, by a trust described in subparagraph (2)(c) will satisfy the ownership test of 

55
 
subparagraph (2)(e)(ii), and no further analysis of the ownership of the trust described in 

subparagraph 2(c) is required. 

The second test of subparagraph 2(e) is the so-called "base erosion" test. A 

company or trust that passes the ownership test must also pass this test to be a qualifying 

person under this subparagraph. This test requires that the amount of expenses that are 

paid or payable by the entity in question, directly or indirectly, to persons that are not 

qualifying persons, and that are deductible from gross income (with both deductibility

and gross income as determined under the tax laws of the State of residence of the 

company or trust), be less than 50 percent of the gross income of the company or trust. 

This test is applied for the fiscal period immediately preceding the period for which the 

qualifying person test is being applied. If it is the first fiscal period of the person, the test 

is applied for the current period. 

The ownership/base erosion test recognizes that the benefits of the Convention 

can be enjoyed indirectly not only by equity holders of an entity, but also by that entity's

obligees, such as lenders, licensors, service providers, insurers and reinsurers, and others. 

For example, a third-country resident could license technology to a Canadian-owned 

Canadian corporation to be sub-licensed to a U.S. resident. The U.S.-source royalty 

income of the Canadian corporation would be exempt from U.S. withholding tax under 

Article XII (Royalties) of the Convention. While the Canadian corporation would be 

subject to Canadian corporation income tax, its taxable income could be reduced to near 

zero as a result of the deductible royalties paid to the third-country resident. If, under a 

convention between Canada and the third country, those royalties were either exempt 

from Canadian tax or subject to tax at a low rate, the U.S. treaty benefit with respect to 

the U.S.-source royalty income would have flowed to the third-country resident at little or 

no tax cost, with no reciprocal benefit to the United States from the third country. The 

ownership/base erosion test therefore requires both that qualifying persons substantially 

own the entity and that the entity's tax base is not substantially eroded by payments 

(directly or indirectly) to nonqualifying persons. 

For purposes of this subparagraph 2(e) and other provisions of this Article, the 

term "shares" includes, in the case of a mutual insurance company, any certificate or 

contract entitling the holder to voting power in the corporation. This is consistent with 

the interpretation of similar limitation on benefits provisions in other U.S. treaties. In 

Canada, the principles that are reflected in subsection 256(8.1) of the Income Tax Act 

will be applied, in effect treating memberships, policies or other interests in a corporation 

incorporated without share capital as representing an appropriate number of shares. 

The look-through principles introduced by the Protocol (e.g. new paragraph 6 of 

Article IV) are to be taken into account when applying the ownership and base erosion 

provisions of Article XXIX A. Therefore, one “looks through” an entity that is viewed as 

fiscally transparent under the domestic laws of the residence State (other than entities that 

are resident in the source State) when applying the ownership/base erosion test. Assume, 

for example, that USCo, a company incorporated in the United States, wishes to obtain

treaty benefits by virtue of the ownership and base erosion rule. USCo is owned by

USLLC, an entity that is treated as fiscally transparent in the United States. USLLC in 

turn is wholly owned in equal shares by 10 individuals who are residents of the United 

States. Because the United States views USLLC as fiscally transparent, the 10 U.S. 

individuals shall be regarded as the owners of USCo for purposes of the ownership test. 

Accordingly, USCo would satisfy the ownership requirement of the ownership/base 

erosion test. However, if USLLC were instead owned in equal shares by four U.S. 

individuals and six individuals who are not residents of either the United States or 

56
 
 

 

Canada, USCo would not satisfy the ownership requirement. Similarly, for purposes of 

the base erosion test, deductible payments made to USLLC will be treated as made to 

USLLC’s owners. 

Other qualifying persons 

Under new subparagraph 2(f), an estate resident in the United States or Canada is 

a qualifying person entitled to the benefits of the Convention. 

New subparagraphs 2(g) and 2(h) specify the circumstances under which certain 

types of not-for-profit organizations will be qualifying persons. Subparagraph 2(g) 

provides that a not-for-profit organization that is resident in the United States or Canada 

is a qualifying person, and thus entitled to benefits, if more than half of the beneficiaries, 

members, or participants in the organization are qualifying persons. The term "not-forprofit organization" of a Contracting State is defined in subparagraph 5(d) of the Article 

to mean an entity created or established in that State that is generally exempt from

income taxation in that State by reason of its not-for-profit status. The term includes 

charities, private foundations, trade unions, trade associations, and similar organizations. 

New subparagraph 2(h) specifies that certain trusts, companies, organizations, or 

other arrangements described in paragraph 2 of Article XXI (Exempt Organizations) are 

qualifying persons. To be a qualifying person, the trust, company, organization or other 

arrangement must be established for the purpose of providing pension, retirement, or 

employee benefits primarily to individuals who are (or were, within any of the five 

preceding years) qualifying persons. A trust, company, organization, or other 

arrangement will be considered to be established for the purpose of providing benefits 

primarily to such persons if more than 50 percent of its beneficiaries, members, or 

participants are such persons. Thus, for example, a Canadian Registered Retirement 

Savings Plan ("RRSP") of a former resident of Canada who is working temporarily 

outside of Canada would continue to be a qualifying person during the period of the 

individual's absence from Canada or for five years, whichever is shorter. A Canadian 

pension fund established to provide benefits to persons employed by a company would be 

a qualifying person only if most of the beneficiaries of the fund are (or were within the 

five preceding years) individual residents of Canada or residents or citizens of the United 

States. 

New subparagraph 2(i) specifies that certain trusts, companies, organizations, or 

other arrangements described in paragraph 3 of Article XXI (Exempt Organizations) are 

qualifying persons. To be a qualifying person, the beneficiaries of a trust, company, 

organization or other arrangement must be described in subparagraph 2(g) or 2(h). 

The provisions of paragraph 2 are self-executing, unlike the provisions of 

paragraph 6, discussed below. The tax authorities may, of course, on review, determine 

that the taxpayer has improperly interpreted the paragraph and is not entitled to the 

benefits claimed. 

Paragraph 3 of Article XXIX A 

Paragraph 3 provides an alternative rule, under which a United States or Canadian 

resident that is not a qualifying person under paragraph 2 may claim benefits with respect 

to those items of income that are connected with the active conduct of a trade or business 

in its State of residence. 

57
 
This is the so-called "active trade or business" test. Unlike the tests of paragraph

2, the active trade or business test looks not solely at the characteristics of the person 

deriving the income, but also at the nature of the person’s activity and the connection 

between the income and that activity. Under the active trade or business test, a resident 

of a Contracting State deriving an item of income from the other Contracting State is 

entitled to benefits with respect to that income if that person (or a person related to that

person under the principles of Code section 482, or in the case of Canada, section 251 of 

the Income Tax Act) is engaged in an active trade or business in the State where it is 

resident, the income in question is derived in connection with, or is incidental to, that 

trade or business, and the size of the active trade or business in the residence State is 

substantial relative to the activity in the other State that gives rise to the income for which 

benefits are sought. Further details on the application of the substantiality requirement 

are provided below. 

Income that is derived in connection with, or is incidental to, the business of 

making or managing investments will not qualify for benefits under this provision, unless 

those investment activities are carried on with customers in the ordinary course of the 

business of a bank, insurance company, registered securities dealer, or deposit-taking 

financial institution. 

Income is considered derived "in connection" with an active trade or business if, 

for example, the income-generating activity in the State is "upstream," "downstream," or 

parallel to that conducted in the other Contracting State. Thus, for example, if the U.S. 

activity of a Canadian resident company consisted of selling the output of a Canadian 

manufacturer or providing inputs to the manufacturing process, or of manufacturing or 

selling in the United States the same sorts of products that were being sold by the 

Canadian trade or business in Canada, the income generated by that activity would be 

treated as earned in connection with the Canadian trade or business. Income is 

considered "incidental" to a trade or business if, for example, it arises from the short-term

investment of working capital of the resident in securities issued by persons in the State 

of source. 

An item of income may be considered to be earned in connection with or to be 

incidental to an active trade or business in the United States or Canada even though the 

resident claiming the benefits derives the income directly or indirectly through one or 

more other persons that are residents of the other Contracting State. Thus, for example, a 

Canadian resident could claim benefits with respect to an item of income earned by a 

U.S. operating subsidiary but derived by the Canadian resident indirectly through a 

wholly-owned U.S. holding company interposed between it and the operating subsidiary. 

This language would also permit a resident to derive income from the other Contracting 

State through one or more residents of that other State that it does not wholly own. For 

example, a Canadian partnership in which three unrelated Canadian companies each hold 

a one-third interest could form a wholly-owned U.S. holding company with a U.S. 

operating subsidiary. The "directly or indirectly" language would allow otherwise 

unavailable treaty benefits to be claimed with respect to income derived by the three 

Canadian partners through the U.S. holding company, even if the partners were not 

considered to be related to the U.S. holding company under the principles of Code section 

482. 

As described above, income that is derived in connection with, or is incidental to, 

an active trade or business in a Contracting State, must pass the substantiality 

requirement to qualify for benefits under the Convention. The trade or business must be 

substantial in relation to the activity in the other Contracting State that gave rise to the 

income in respect of which benefits under the Convention are being claimed. To be 

58
 
 

considered substantial, it is not necessary that the trade or business be as large as the 

income-generating activity. The trade or business cannot, however, in terms of income, 

assets, or other similar measures, represent only a very small percentage of the size of the 

activity in the other State. 

The substantiality requirement is intended to prevent treaty shopping. For 

example, a third-country resident may want to acquire a U.S. company that manufactures 

television sets for worldwide markets; however, since its country of residence has no tax 

treaty with the United States, any dividends generated by the investment would be subject 

to a U.S. withholding tax of 30 percent. Absent a substantiality test, the investor could 

establish a Canadian corporation that would operate a small outlet in Canada to sell a few 

of the television sets manufactured by the U.S. company and earn a very small amount of 

income. That Canadian corporation could then acquire the U.S. manufacturer with 

capital provided by the third-country resident and produce a very large number of sets for 

sale in several countries, generating a much larger amount of income. It might attempt to 

argue that the U.S.-source income is generated from business activities in the United 

States related to the television sales activity of the Canadian parent and that the dividend 

income should be subject to U.S. tax at the 5 percent rate provided by Article X 

(Dividends) of the Convention. However, the substantiality test would not be met in this 

example, so the dividends would remain subject to withholding in the United States at a 

rate of 30 percent. 

It is expected that if a person qualifies for benefits under one of the tests of 

paragraph 2, no inquiry will be made into qualification for benefits under paragraph 3.

Upon satisfaction of any of the tests of paragraph 2, any income derived by the beneficial 

owner from the other Contracting State is entitled to treaty benefits. Under paragraph 3,

however, the test is applied separately to each item of income. 

Paragraph 4 of Article XXIX A 

Paragraph 4 provides a limited "derivative benefits" test that entitles a company 

that is a resident of the United States or Canada to the benefits of Articles X (Dividends), 

XI (Interest), and XII (Royalties), even if the company is not a qualifying person and 

does not satisfy the active trade or business test of paragraph 3. In general, a derivative

benefits test entitles the resident of a Contracting State to treaty benefits if the owner of 

the resident would have been entitled to the same benefit had the income in question been 

earned directly by that owner. To qualify under this paragraph, the company must satisfy 

both the ownership test in subparagraph 4(a) and the base erosion test of subparagraph 

4(b). 

Under subparagraph 4(a), the derivative benefits ownership test requires that the 

company’s shares representing more than 90 percent of the aggregate vote and value of 

all of the shares of the company, and at least 50 percent of the vote and value of any 

disproportionate class of shares, in neither case including debt substitute shares, be 

owned directly or indirectly by persons each of whom is either (i) a qualifying person or 

(ii) another person that satisfies each of three tests. The three tests of subparagraph 4(a) 

that must be satisfied by these other persons are as follows: 

First, the other person must be a resident of a third State with which the 

Contracting State that is granting benefits has a comprehensive income tax convention. 

The other person must be entitled to all of the benefits under that convention. Thus, if the 

person fails to satisfy the limitation on benefits tests, if any, of that convention, no 

benefits would be granted under this paragraph. Qualification for benefits under an 

59
 
active trade or business test does not suffice for these purposes, because that test grants 

benefits only for certain items of income, not for all purposes of the convention. 

Second, the other person must be a person that would qualify for benefits with 

respect to the item of income for which benefits are sought under one or more of the tests 

of paragraph 2 or 3 of Article XXIX A, if the person were a resident of the Contracting 

State that is not providing benefits for the item of income and, for purposes of paragraph 

3, the business were carried on in that State. For example, a person resident in a third 

country would be deemed to be a person that would qualify under the publicly-traded test 

of paragraph 2 of Article XXIX A if the principal class of its shares were primarily and

regularly traded on a stock exchange recognized either under the Convention between the 

United States and Canada or under the treaty between the Contracting State granting 

benefits and the third country. Similarly, a company resident in a third country would be 

deemed to satisfy the ownership/base erosion test of paragraph 2 under this hypothetical 

analysis if, for example, it were wholly owned by an individual resident in that third 

country and the company's tax base were not substantially eroded by payments (directly 

or indirectly) to nonqualifying persons. 

The third requirement is that the rate of tax on the item of income in respect of 

which benefits are sought must be at least as low under the convention between the 

person's country of residence and the Contracting State granting benefits as it is under the 

Convention. 

Subparagraph 4(b) sets forth the base erosion test. This test requires that the 

amount of expenses that are paid or payable by the company in question, directly or 

indirectly, to persons that are not qualifying persons under the Convention, and that are 

deductible from gross income (with both deductibility and gross income as determined 

under the tax laws of the State of residence of the company), be less than 50 percent of 

the gross income of the company. This test is applied for the fiscal period immediately 

preceding the period for which the test is being applied. If it is the first fiscal period of

the person, the test is applied for the current period. This test is qualitatively the same as 

the base erosion test of subparagraph 2(e). 

Paragraph 5 of Article XXIX A 

Paragraph 5 defines certain terms used in the Article. These terms were identified 

and discussed in connection with new paragraph 2, above. 

Paragraph 6 of Article XXIX A 

Paragraph 6 provides that when a resident of a Contracting State derives income

from the other Contracting State and is not entitled to the benefits of the Convention 

under other provisions of the Article, benefits may, nevertheless be granted at the 

discretion of the competent authority of the other Contracting State. This determination 

can be made with respect to all benefits under the Convention or on an item by item

basis. In making a determination under this paragraph, the competent authority will take 

into account all relevant facts and circumstances relating to the person requesting the 

benefits. In particular, the competent authority will consider the history, structure, 

ownership (including ultimate beneficial ownership), and operations of the person. In 

addition, the competent authority is to consider (1) whether the creation and existence of 

the person did not have as a principal purpose obtaining treaty benefits that would not 

otherwise be available to the person, and (2) whether it would not be appropriate, in view 

of the purpose of the Article, to deny benefits. If the competent authority of the other 

60
 
Contracting State determines that either of these two standards is satisfied, benefits shall 

be granted. 

For purposes of implementing new paragraph 6, a taxpayer will be permitted to 

present his case to the competent authority for an advance determination based on a full 

disclosure of all pertinent information. The taxpayer will not be required to wait until it 

has been determined that benefits are denied under one of the other provisions of the 

Article. It also is expected that, if and when the competent authority determines that 

benefits are to be allowed, they will be allowed retroactively to the time of entry into 

force of the relevant provision of the Convention or the establishment of the structure in 

question, whichever is later (assuming that the taxpayer also qualifies under the relevant 

facts for the earlier period). 

Paragraph 7 of Article XXIX A 

New paragraph 7 is in substance similar to paragraph 7 of Article XXIX A of the 

existing Convention and clarifies the application of general anti-abuse provisions. New 

paragraph 7 provides that paragraphs 1 through 6 of Article XXIX A shall not be 

construed as limiting in any manner the right of a Contracting State to deny benefits 

under the Convention where it can reasonably be concluded that to do otherwise would 

result in an abuse of the provisions of the Convention. This provision permits a 

Contracting State to rely on general anti-avoidance rules to counter arrangements 

involving treaty shopping through the other Contracting State. 

Thus, Canada may apply its domestic law rules to counter abusive arrangements 

involving "treaty shopping" through the United States, and the United States may apply 

its substance-over-form and anti-conduit rules, for example, in relation to Canadian 

residents. This principle is recognized by the OECD in the Commentaries to its Model 

Tax Convention on Income and on Capital, and the United States and Canada agree that it 

is inherent in the Convention. The statement of this principle explicitly in the Protocol is 

not intended to suggest that the principle is not also inherent in other tax conventions 

concluded by the United States or Canada. 

Article 26 

Article 26 of the Protocol replaces paragraphs 1 and 5 of Article XXIX B (Taxes 

Imposed by Reason of Death) of the Convention. In addition, paragraph 7 of the General

Note provides certain clarifications for purposes of paragraphs 6 and 7 of Article XXIX 

B. 

Paragraph 1 

Paragraph 1 of Article XXIX B of the existing Convention generally addresses the 

situation where a resident of a Contracting State passes property by reason of the 

individual’s death to an organization referred to in paragraph 1 of Article XXI (Exempt 

Organizations) of the Convention. The paragraph provided that the tax consequences in a 

Contracting State arising out of the passing of the property shall apply as if the 

organization were a resident of that State. 

The Protocol replaces paragraph 1, and the changes set forth in new paragraph 1 

are intended to specifically address questions that have arisen about the application of 

former paragraph 1 where property of an individual who is a resident of Canada passes 

by reason of the individual’s death to a charitable organization in the United States that is 

not a “registered charity” under Canadian law. Under one view, paragraph 1 of Article 

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XXIX B requires Canada to treat the passing of the property as a contribution to a 

“registered charity” and thus to allow all of the same deductions for Canadian tax 

purposes as if the U.S. charity had been a “registered charity” under Canadian law. 

Under another view, paragraph 6 of Article XXI (Exempt Organizations) of the 

Convention continues to limit the amount of the income tax charitable deduction in 

Canada to the individual’s income arising in the United States. The changes set forth in 

new paragraph 1 are intended to provide relief from the Canadian tax on gain deemed 

recognized by reason of death that would otherwise give rise to Canadian tax when the 

individual passes the property to a charitable organization in the United States, but, for 

purposes of the separate Canadian income tax, do not eliminate the limitation under 

paragraph 6 of Article XXI on the amount of the deduction in Canada for the charitable 

donation to the individual’s income arising in the United States. 

As revised, paragraph 1 is divided into two subparagraphs. New subparagraph 

1(a) applies where property of an individual who is a resident of the United States passes 

by reason of the individual’s death to a qualifying exempt organization that is a resident 

of Canada. In such case, the tax consequences in the United States arising from the 

passing of such property apply as if the organization were a resident of the United States. 

A bequest by a U.S. citizen or U.S. resident (as defined for estate tax purposes under the 

Code) to an exempt organization generally is deductible for U.S. federal estate tax 

purposes under Code section 2055, without regard to whether the organization is a U.S. 

corporation. Thus, generally, the individual’s estate will be entitled to a charitable 

deduction for Federal estate tax purposes equal to the value of the property transferred to 

the organization. Generally, the effect is that no Federal estate tax will be imposed on the 

value of the property. 

New subparagraph 1(b) applies where property of an individual who is a resident 

of Canada passes by reason of the individual’s death to a qualifying exempt organization 

that is a resident of the United States. In such case, for purposes of the Canadian capital 

gains tax imposed at death, the tax consequences arising out of the passing of the 

property shall apply as if the individual disposed of the property for proceeds equal to an 

amount elected on behalf of the individual. For this purpose, the amount elected shall be 

no less than the individual’s cost of the property as determined for purposes of Canadian 

tax, and no greater than the fair market value of the property. The manner in which the 

individual’s representative shall make this election shall be specified by the competent 

authority of Canada. Generally, in the event of a full exercise of the election under new 

subparagraph 1(b), no capital gains tax will be imposed in Canada by reason of the death 

with regard to that property. 

New paragraph 1 does not address the situation in which a resident of one 

Contracting State bequeaths property with a situs in the other Contracting State to a 

qualifying exempt organization in the Contracting State of the decedent's residence. In 

such a situation, the other Contracting State may impose tax by reason of death, for 

example, if the property is real property situated in that State. 

Paragraph 2 

Paragraph 2 of Article 26 of the Protocol replaces paragraph 5 of Article XXIX B 

of the existing Convention. The provisions of new paragraph 5 relate to the operation of 

Canadian law. Because Canadian law requires both spouses to have been Canadian 

residents in order to be eligible for the rollover, these provisions are intended to provide 

deferral ("rollover") of the Canadian tax at death for certain transfers to a surviving 

spouse and to permit the Canadian competent authority to allow such deferral for certain 

transfers to a trust. For example, they would enable the competent authority to treat a 

62
 
trust that is a qualified domestic trust for U.S. estate tax purposes as a Canadian spousal 

trust as well for purposes of certain provisions of Canadian tax law and of the 

Convention. These provisions do not affect U.S. domestic law regarding qualified 

domestic trusts. Nor do they affect the status of U.S. resident individuals for any other 

purpose. 

New paragraph 5 adds a reference to subsection 70(5.2) of the Canadian Income

Tax Act. This change is needed because the rollover in respect of certain kinds of 

property is provided in that subsection. Further, new paragraph 5 adds a clause “and with 

respect to such property” near the end of the second sentence to make it clear that the 

trust is treated as a resident of Canada only with respect to its Canadian property. 

For example, assume that a U.S. decedent with a Canadian spouse sets up a 

qualified domestic trust holding U.S. and Canadian real property, and that the decedent's 

executor elects, for Federal estate tax purposes, to treat the entire trust as qualifying for

the Federal estate tax marital deduction. Under Canadian law, because the decedent is 

not a Canadian resident, Canada would impose capital gains tax on the deemed 

disposition of the Canadian real property immediately before death. In order to defer the 

Canadian tax that might otherwise be imposed by reason of the decedent’s death, under 

new paragraph 5 of Article XXIX B, the competent authority of Canada shall, at the 

request of the trustee, treat the trust as a Canadian spousal trust with respect to the 

Canadian real property. The effect of such treatment is to defer the tax on the deemed 

distribution of the Canadian real property until an appropriate triggering event such as the 

death of the surviving spouse. 

Paragraph 7 of the General Note 

In addition to the foregoing, paragraph 7 of the General Note provides certain 

clarifications for purposes of paragraphs 6 and 7 of Article XXIX B. These clarifications 

ensure that tax credits will be available in cases where there are inconsistencies in the 

way the two Contracting States view the income and the property. 

Subparagraph 7(a) of the General Note applies where an individual who 

immediately before death was a resident of Canada held at the time of death a share or 

option in respect of a share that constitutes property situated in the United States for the 

purposes of Article XXIX B and that Canada views as giving rise to employment income

(for example, a share or option granted by an employer). The United States imposes 

estate tax on the share or option in respect of a share, while Canada imposes income tax 

on income from employment. Subparagraph 7(a) provides that for purposes of clause 

6(a)(ii) of Article XXIX B, any employment income in respect of the share or option 

constitutes income from property situated in the United States. This provision ensures

that the estate tax paid on the share or option in the United States will be allowable as a 

deduction from the Canadian income tax. 

Subparagraph 7(b) of the General Note applies where an individual who 

immediately before death was a resident of Canada held at the time of death a registered 

retirement savings plan (RRSP) or other entity that is a resident of Canada and that is 

described in subparagraph 1(b) of Article IV (Residence) and such RRSP or other entity 

held property situated in the United States for the purposes of Article XXIX B. The 

United States would impose estate tax on the value of the property held by the RRSP or 

other entity (to the extent such property is subject to Federal estate tax), while Canada 

would impose income tax on a deemed distribution of the property in the RRSP or other 

entity. Subparagraph 7(b) provides that any income out of or under the entity in respect 

of the property is, for the purpose of subparagraph 6(a)(ii) of Article XXIX B, income 

63
 
from property situated in the United States. This provision ensures that the estate tax

paid on the underlying property in the United States (if any) will be allowable as a 

deduction from the Canadian income tax. 

Subparagraph 7(c) of the General Note applies where an individual who 

immediately before death was a resident or citizen of the United States held at the time of 

death an RRSP or other entity that is a resident of Canada and that is described in 

subparagraph 1(b) of Article IV (Residence). The United States would impose estate tax

on the value of the property held by the RRSP or other entity, while Canada would 

impose income tax on a deemed distribution of the property in the RRSP or other entity. 

Subparagraph 7(c) provides that for the purpose of paragraph 7 of Article XXIX B, the 

tax imposed in Canada is imposed in respect of property situated in Canada. This 

provision ensures that the Canadian income tax will be allowable as a credit against the

U.S. estate tax. 

Article 27 

Article 27 of the Protocol provides the entry into force and effective date of the 

provisions of the Protocol. 

Paragraph 1 

Paragraph 1 provides generally that the Protocol is subject to ratification in

accordance with the applicable procedures in the United States and Canada. Further, the 

Contracting States shall notify each other by written notification, through diplomatic 

channels, when their respective applicable procedures have been satisfied. 

Paragraph 2 

The first sentence of paragraph 2 generally provides that the Protocol shall enter 

into force on the date of the later of the notifications referred to in paragraph 1, or 

January 1, 2008, whichever is later. The relevant date is the date on the second of these 

notification documents, and not the date on which the second notification is provided to

the other Contracting State. The January 1, 2008 date is intended to ensure that the 

provisions of the Protocol will generally not be effective before that date. 

Subparagraph 2(a) provides that the provisions of the Protocol shall have effect in 

respect of taxes withheld at source, for amounts paid or credited on or after the first day 

of the second month that begins after the date on which the Protocol enters into force. 

Further, subparagraph 2(b) provides that the Protocol shall have effect in respect of other 

taxes, for taxable years that begin after (or, if the later of the notifications referred to in

paragraph 1 is dated in 2007, taxable years that begin in and after) the calendar year in 

which the Protocol enters into force. These provisions are generally consistent with the 

formulation in the U.S. Model treaty, with the exception that a parenthetical was added in 

subparagraph 2(b) to address the contingency that the written notifications provided 

pursuant to paragraph 1 may occur in the 2007 calendar year. Further, subparagraph 3(d) 

of Article 27 of the Protocol contains special provisions with respect to the taxation of 

cross-border interest payments that have effect for the first two calendar years that end

after the date the Protocol enters into force. Therefore, during this period, cross-border 

interest payments are not subject to the effective date provisions of subparagraph 2(a). 

Paragraph 3 

Paragraph 3 sets forth exceptions to the general effective date rules set forth in 

paragraph 2 of Article 27 of the Protocol. 

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Dual corporate residence tie-breaker 

Subparagraph 3(a) of Article 27 of the Protocol provides that paragraph 1 of 

Article 2 of the Protocol relating to Article IV (Residence) shall have effect with respect 

to corporate continuations effected after September 17, 2000. This date corresponds to a

press release issued on September 18, 2000 in which the United States and Canada 

identified certain issues with respect to these transactions and stated their intention to 

negotiate a protocol that, if approved, would address the issues effective as of the date of

the press release. 

Certain payments through fiscally transparent entities 

Subparagraph 3(b) of Article 27 of the Protocol provides that new paragraph 7 of 

Article IV (Residence) set forth in paragraph 2 of Article 2 of the Protocol shall have 

effect as of the first day of the third calendar year that ends after the Protocol enters into 

force. 

Permanent establishment from the provision of services 

Subparagraph 3(c) of Article 27 of the Protocol sets forth the effective date for the 

provisions of Article 3 of the Protocol, pertaining to Article V (Permanent Establishment) 

of the Convention. The provisions pertaining to Article V shall have effect as of the third 

taxable year that ends after the Protocol enters into force, but in no event shall it apply to 

include, in the determination of whether an enterprise is deemed to provide services 

through a permanent establishment under paragraph 9 of Article V of the Convention, 

any days of presence, services rendered, or gross active business revenues that occur or 

arise prior to January 1, 2010. Therefore, the provision will apply beginning no earlier 

than January 1, 2010 and shall not apply with regard to any presence, services or related 

revenues that occur or arise prior to that date. 

Withholding rates on cross-border interest payments 

Subparagraph 3(d) of Article 27 of the Protocol sets forth special effective date 

rules pertaining to Article 6 of the Protocol relating to Article XI (Interest) of the 

Convention. Article 6 of the Protocol sets forth a new Article XI of the Convention that 

provides for exclusive residence State taxation regardless of the relationship between the 

payer and the beneficial owner of the interest. Subparagraph 3(d), however, phases in the 

application of paragraph 1 of Article XI during the first two calendar years that end after 

the date the Protocol enters into force. During that period, paragraph 1 of Article XI of 

the Convention permits source State taxation of interest if the payer and the beneficial 

owner are related or deemed to be related by reason of paragraph 2 of Article IX (Related 

Persons) of the Convention (“related party interest”), and the interest would not otherwise 

be exempt under the provisions of paragraph 3 of Article XI as it read prior to the 

Protocol. However, subparagraph 3(d) also provides that the source State taxation on 

such related party interest is limited to 7 percent in the first calendar year that ends after 

entry into force of the Protocol and 4 percent in the second calendar year that ends after 

entry into force of the Protocol. 

Subparagraph 3(d) makes clear that the provisions of the Protocol with respect to 

exclusive residence based taxation of interest when the payer and the beneficial owner 

are not related or deemed related (“unrelated party interest”) applies for interest paid or 

credited during the first two calendar years that end after entry into force of the Protocol. 

65
 
The withholding rate reductions for related party interest and exemptions for 

unrelated party interest will likely apply retroactively. For example, if the Protocol enters 

into force on June 30, 2008, paragraph 1 of Article XI, as it reads under subparagraph 

3(d) of Article 27, will have the following effect during the first two calendar years. 

First, unrelated party interest that is paid or credited on or after January 1, 2008 will be 

exempt from taxation in the source State. Second, related party interest paid or credited 

on or after January 1, 2008 and before January 1, 2009, will be subject to source State 

taxation but at a rate not to exceed 7 percent of the gross amount of the interest. Third, 

related party interest paid or credited on or after January 1, 2009 and before January 1, 

2010, will be subject to source State taxation but at a rate not to exceed 4 percent of the 

gross amount of the interest. Finally, all interest paid or credited after January 1, 2010, 

will be subject to the regular rules of Article XI without regard to subparagraph 3(d) of

Article 27. 

Further, the provisions of subparagraph 3(d) ensure that even with respect to 

circumstances where the payer and the beneficial owner are related or deemed related 

under the provisions of paragraph 2 of Article IX, the source State taxation of such crossborder interest shall be no greater than the taxation of such interest prior to the Protocol. 

Gains 

Subparagraph 3(e) of Article 27 of the Protocol provides the effective date for 

paragraphs 2 and 3 of Article 8 of this Protocol, which relate to the changes made to 

paragraphs 5 and 7 of Article XIII (Gains) of the Convention. The changes set forth in

those paragraphs shall have effect with respect to alienations of property that occur 

(including, for greater certainty, those that are deemed under the law of a Contracting 

State to occur) after September 17, 2000. This date corresponds to the press release 

issued on September 18, 2000 which announced the intention of the United States and 

Canada to negotiate a protocol that, if approved, would incorporate the changes set forth 

in these paragraphs to coordinate the tax treatment of an emigrant’s gains in the United

States and Canada. 

Arbitration 

Subparagraph 3(f) of Article 27 of the Protocol pertains to Article 21 of the 

Protocol which implements the new arbitration provisions. An arbitration proceeding 

will generally begin two years after the date on which the competent authorities of the 

Contracting States began consideration of a case. Subparagraph 3(f), however, makes 

clear that the arbitration provisions shall apply to cases that are already under 

consideration by the competent authorities when the Protocol enters into force, and in 

such cases, for purposes of applying the arbitration provisions, the commencement date 

shall be the date the Protocol enters into force. Further, the provisions of Article 21 of

the Protocol shall be effective for cases that come into consideration by the competent 

authorities after the date that the Protocol enters into force. In order to avoid the potential 

for a large number of MAP cases becoming subject to arbitration immediately upon the 

expiration of two years from entry into force, the competent authorities are encouraged to 

develop and implement procedures for arbitration by January 1, 2009, and begin 

scheduling arbitration of otherwise unresolvable MAP cases in inventory (and meeting 

the agreed criteria) prior to two years from entry into force. 

Assistance in collection 

Subparagraph 3(g) of Article 27 of the Protocol pertains to the date when the 

changes set forth in Article 22 of the Protocol, relating to assistance in collection of taxes, 

66
 
shall have effect. Consistent with the third protocol that entered into force on November 

9, 1995, and which had effect for requests for assistance on claims finally determined 

after November 9, 1985, the provisions of Article 22 of the Protocol shall have effect for 

revenue claims finally determined by an applicant State after November 9, 1985. 

67