U.S. Canada Tax Treaty

CanadaTaxTreaty-blog
Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn
Reading Time: 3 minutes

The Canada U.S. Income Tax Convention (Treaty) currently in force was first established in 1980, and since that time there have been five major alterations, or “protocols” adopted at various times. The latest, Fifth Protocol, contains some major changes, which could change the way in which tax law is interpreted in Canada and the United States, and could be used to modify the way in which tax planning is carried out.

Here are the highlights of the changes, effective as of January 1, 2010:

Elimination of withholding tax on interest payments. The former 10% withholding tax rate applied to payments of interest between unrelated parties has been eliminated. Interest not related to a “permanent establishment” in the other state will be taxable only in the country of residence. This facilitates cross border investment transactions.

“Mandatory” arbitration of provisions. Currently in matters where there is a possibility of double taxation, each country may voluntarily participate in arbitration, which may resolve the issue. Under the new rules, each country must go to arbitration if an agreement cannot be reached (although a taxpayer may elect to invoke this procedure). This article should increase confidence that double taxation can be eliminated.

“Departure Tax” capital gains – double taxation eliminated. Under current rules, a person departing from Canada was (and continues to be) required to declare capital gains and losses arising from “deemed dispositions” on departure from Canada, based on the fair market value of capital properties held on the date of departure. Under the new rules, the taxpayer can elect to have realized his gain before becoming a resident of the U.S. and therefore the U.S. would only tax capital gains on changes in value from the date of entry onward. (Certain U.S. citizens returning to the U.S., however, may be taxable on capital gains based on their world income.)

Changes in the treatment of “Limited Liability Companies” and other hybrid entities. Currently certain entities which are disregarded for income tax purposes in the United States, or which are considered “flow through” entities are considered corporations in Canada. This gives rise to many tax problems related to the recognition of foreign tax credits (especially since the hybrid entity is not considered taxable in the U.S.) Under the new rules, income, which is treated as being earned by a member or shareholder of such an entity, who is a resident of the U.S., will be deemed to be earned by the recipient in Canada. The intent of the Fifth Protocol is to provide relief for U.S. LLC’s making investments in Canada. NOTE:  However, a Canadian resident member of a U.S. LLC who receives a distribution is considered to have received a dividend, and can take a foreign tax credit under subsection 126(1) (15%) and deduct excess tax under subsection 20(11).  If the LLC does not make a distribution of income in the year it is earned, any U.S. tax can only be deducted under subsection 20(12) and no foreign tax credit would be available. (A corollary rule to take effect in two years provides that if income is NOT to be recognized by the individual member in the country of origin, it will NOT be taxable in the country of residence.) This will also coordinate with the interest withholding rules noted above. If a U.S. LLC earns interest income in Canada, the new rules will presume that the U.S. residents earned the income, and will thus eliminate withholding taxes on the income in Canada.

Mutual Recognition of RRSP’s and IRA’s. In this major change, cross border workers may be able to deduct contributions to pension plans made abroad in their country of residence. This means that if a Canadian works in the U.S. and contributes to a U.S. retirement plan, that deduction would be allowable on his Canadian return (as well as in the U.S.) to the limit of his RRSP contribution room. Similarly, U.S. citizens working in Canada and making RRSP contributions or pension plan contributions will be able to deduct the contributions on their U.S. returns.

Also read Depreciation and Section 179 deduction

Leave a Reply

Your email address will not be published. Required fields are marked *

Client Reviews
AKIF CPA
5.0
Based on 107 reviews
powered by Google
Annie Phillips
Annie Phillips
12:35 10 Oct 21
Turn around time was amazing on the project I needed done. When you don’t understand all the different forms... communication is key and you will get that here. They are there to explain what and why you need it.read more
Meru Kapadia
Meru Kapadia
23:33 01 Oct 21
I usually don't write reviews much as everyone has different experiences, but definitely wanted to share the positive... experience I have had here and why I would recommend them to all my family, friends and co-workers.I got a referral for here from a friend, so thought of giving them a try over my old CPA firm. I have been going here for a couple years now and have to say they are top notch. They are always responsive and willing to work with me even when I am delayed. I generally like to ask a lot of questions and not once did I feel like they were annoyed by it and would very thoroughly and positively answer all my concerns with detail explanations. Even during the pandemic, they worked with me 100% virtual and it was seamless. Overall, I am very happy with this firm and will continue with them for the foreseeable future.read more
Kevan Shah
Kevan Shah
21:45 01 Oct 21
I’ve been going to them for 3 years now for multiple of my businesses. I changed to them after I had problems with my... previous CPA firm and I’m so glad I did! Best decision I ever made for my businesses. They have saved me thousands of dollars over the years as well as deal with my immensely complicated tax filling issues. No matter when I call, they always help answer all my questions (and trust me I have a lot) and put my mind at ease on all my concerns. I feel as if I am family the way they take care of me. The quality of their work has not changed; very consistent and professional. It is an understatement when I say I highly recommend them.read more
Maunil Shah
Maunil Shah
16:19 01 Oct 21
AKIF CPA is the best place for your tax needs! Saim has been easily available for my all my questions and concerns. ... Couldn’t ask for a better firm that provides excellent service and a familiarity with their clients. I always recommend family and friends to AKIF CPA!!read more
Shah Hussain
Shah Hussain
03:58 01 Oct 21
Hello AKIF CPA,I wanted to share my experience with you, your team and whomever may be reading this message. My most... humble thanks to you and your team for a being such great part of my success.You have done a fabulous job for us this year, and since you took over our books (during our most devastating times) you have literally taken weight off of our shoulders.Thanks for bringing everything up to date and also providing us with numbers or as you call it consultations, ahead of time so we could seal the holes.Great work!!!Shah H.read more
Sumit Dalwadi
Sumit Dalwadi
04:57 30 Sep 21
The professionals at Akif have been absolutely amazing! Quick to answer all the questions I had and always available... to offer their guidance.read more
Calvin R
Calvin R
20:21 29 Sep 21
I recommend these guys! I will be going back next year. They made everything simple and we understood what was... happening. There we issues with our taxes due to our previous accountant and these guys fixed everything. They answered our questions and service was always with a smile.read more
Ammoria Daniels
Ammoria Daniels
02:11 16 Sep 21
We contacted Akif with an urgent matter regarding corporate taxes. Akif immediately understood what was needed and... within days had everything ready to sign. The level of service we received was amazing and unmatched. Waqar expertise in trucking industry made our situation seamless. His communication was outstanding; I heard from him daily and could have been completed sooner if I was as fast as he was 😃 Highly recommended!read more
Joe Paneitz
Joe Paneitz
18:30 18 Aug 21
What an absolute pleasure to work with this CPA firm. My business is already seeing such a positive impact and growth.... I cannot believe I didn't connect with them sooner. This firm is helping in so many ways! 5 stars is an understatement! Thank you so much for your help AKIF CPAread more
Helptest ARCpoint Labs
Helptest ARCpoint Labs
15:02 18 Aug 21
The firm is quick, responsive, and has the latest technological software. Thus far, I have been with them for 3+ years... and will continue to work with them even after relocating. They make it easy even when I'm miles away. Would highly recommend them.read more
Luz Tipaz
Luz Tipaz
16:06 13 Jul 21
Saim and his team are the best CPAs in town. I have been their client for years. All started when I needed help with... company structure with multiple companies and then accounting and Taxes. I have been very happy ever since. Thank you AKIF CPA.read more
Maria perez
Maria perez
18:31 08 Jun 21
Me and my husband have been getting all of our personal Taxes, business Taxes, monthly bookkeeping, accounting and... payroll done with AKIF CPA. Recently, we had more stuff come up and had detailed analysis done on capital gains, single family rentals (SFR) and business disposition. You will only know how great this CPA company is until you have worked with them and given them a chance. Words can’t describe our experience. AKIF CPA gets the job done every time - very reliable, professional and affordable.read more
Afnaan Amin
Afnaan Amin
22:14 02 Jun 21
Very good experience, we had unique situation in regards to cross border income as Canadians currently residing in the... US. Income on both sides of the border through completely different channels. Everything was very easy and completed timely, I also had lots of random questions and Mohammad provided top notch service along the way and even after we finished our taxes!! Highly recommended.read more
Ryan Paton
Ryan Paton
10:56 08 May 21
I moved to the USA from Canada late 2018 as part of a promotion/relocation for work. For my 2019 returns, I used an... accounting firm recommended by the local Canadian social club in my city, which was a terrible experience. They were slow to respond to inquiries and would follow up in piecemeal requests which dragged out my return process over several months, often asking for information I had already provided.For the price I paid, I vowed to find better service. I found Mohammad online and decided to reach out. Mohammad was extremely responsive, took care of my US and Canadian returns as well as my wife's business returns in a timely manner. Overall, it was a very positive experience and I would recommend him to another in my situation.read more
Tuan Vo
Tuan Vo
01:59 20 Apr 21
I relocated to Texas from Alberta, Canada and needed a CPA to help me with my cross-border taxes as I was not happy... with the CPA that I used previously. During my interviewing process to find another CPA, I had good feedback from Mohammad as he was able to answer my questions regarding my unique tax situation with expertise, and importantly to me, in a timely manner. I decided to use his services for the current tax year and I have nothing but compliments for the work Mohammad provided. If you are in need of a professional cross-border CPA, I highly recommend reaching out to Mohammad Akif.read more
See All Reviews