The United States–Canada income tax treaty was
signed on September 26, 1980. It has been amended by
protocols signed June 14, 1983, March 28, 1984, March
17, 1995, and July 29, 1997.
The United States has entered into a bilateral income tax
treaty with Canada primarily to reduce or eliminate double
taxation of income of residents of the treaty countries.
With respect to the US taxation of foreign persons of a treaty
country, treaties operate to reduce or eliminate double taxation
principally as follows:
- Exemption
from or reduced rates of US withholding tax generally
are provided for gross dividends, interest,
and royalties received as investment income from US sources;
and
- The
business income of a foreign corporation or other foreign
enterprise is not subject to taxation by the United
States unless attributable to a permanent establishment
of the foreign
enterprise in the United States.
A permanent establishment generally is an office or other
fixed place of business. However, a permanent establishment
generally does not include a fixed place of business in the
United States used only for certain activities, including:
- The
use of facilities for the purpose of storage, display,
or the delivery of goods
- The
maintenance of a stock of goods or merchandise for the
purpose of storage, display, or delivery
- The
purchase of goods or merchandise or the collection of
information
- Advertising,
the supply of information, scientific research, or similar
auxiliary activities.
A foreign enterprise from a treaty country generally is
not deemed to have a permanent establishment in the United
States merely because that enterprise carries on business
in the United States through a broker, general commission
agent, or any other independent agent. Treaties also provide special rules for the income taxation
of shipping and transport activities, real property, independent
personal services, dependent (e.g., employee) personal services,
pensions and annuities, foreign government employees, and
foreign teachers, students and business apprentices.
Treaties generally contain non-discrimination articles,
which provide that nationals (generally corporations and
citizens) of one country will not be subject to taxation
by the second country that is different or more burdensome
than the taxation to which the nationals of the second country
are subjected in the same circumstances.
Another purpose of treaties is to prevent tax evasion. To
this end, treaties establish procedures for the exchange
of information between the treaty partners.
Generally, treaty provisions will override federal domestic
law. Exceptions exist regarding the US taxation of gains
on the disposition of US real property interests and regarding
the imposition of the branch profits tax in treaty shopping
situations.
Disclosure of Treaty-Based Return Positions
Any taxpayer taking a tax return position where a US treaty
overrides or modifies an Internal Revenue law must disclose
that position in a tax return. Such a return position will
need to be disclosed if the tax liability reported on the
taxpayer's return differs from the tax liability that would
have been reported if the treaty did not exist. Also, taxpayers
that otherwise would not be required to file a US return
must now file a return to disclose return positions based
on treaty provisions. For example, any foreign corporation
claiming exemption from US tax on its US business income
as a result of having no permanent establishment in the United
States will now have to disclose that position in a tax return.
Failure to comply with these reporting requirements may
result in separate penalties for each failure to disclose
a position. The penalty is $10,000 for each failure for a
corporation. However, the penalties may be waived if the
taxpayer makes an affirmative showing of lack of wilful neglect.
For more details on the treaty, see attached pdf
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