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10.3.2 U.S. Interpretation of the Treaty

10.3.2 U.S. Interpretation of the Treaty

10.3.2[a] Article X[1] Residence based Jurisdiction to Tax  

Paragraph1 of the Article X recognizes the right of a Contracting State to taxdividend income received by a resident of that State. Accordingly, adividend paid by a U.S. company to a Canadian resident may be taxedin Canada.

10.3.2[b] Article X(2) Source Based Jurisdiction to Tax at Reduced Rates

Paragraph2 of the Article X accords the general right of taxation to the Statein which the company paying the dividend is resident. Accordingly, adividend paid by a U.S. company to a Canadian company may also betaxed in the United States. 

Theamount of tax that may be charged on the dividend by the U.S. islimited by this paragraph to either 5 per cent or 15 percent.

Themount of tax charged by the U.S. on the dividend paid by a to a Canadian resident shall not exceed 15 percent.

10.3.2[c]Article X(3) Definition of Dividends

Paragraph3 does two things. First, for purposes of the Article, it defines theterm dividend to mean income from shares or other rightsparticipating in profits, but no debt. 

Thesecond goal of this paragraph is to preserve the respective right ofeach of the Contracting States to apply its domestic laws todetermine whether an instrument will be accorded equityclassification vs. debt classification.

10.3.2[d]Article X(4) Exception from Dividend Withholding Due to PermanentEstablishment

Paragraph4 provides a major exception to the applicant of the withholding taxtreatment on dividends described in paragraph 2. The exception ariseschiefly where the beneficial owner of the dividend is a Canadiancorporation which 1- has a permanent establishment in the U.S. and 2– the stock holdings from part of the assets of a permanentestablishment or fixed base that are otherwise effectively connectedwith such permanent establishment.

10.3.2[e]Article X(5) Limitation on the Scope of Residence-based Jurisdiction

UnderU.S. domestic law, under the American jobs Creating Act 2004,dividends paid by a foreign corporation that are resourced as U.S.under section 861(a)(2)(B) are no longer subject to secondarywithholding.

10.3.2[f] Article X(6) Limitation on the Imposition of the Branch ProfitsTax

Paragraph6 permits the U.S. to impose a secondary level of tax of 5 percent,known as a branch tax, on a Canadian corporation’s earningsattributable to its permanent establishment in the United States.

Theamount of earnings that may be taxed under this provision is theexcess of business profits attributable to all a company’spermanent establishments in the U.S. for the year or previous yearsover the sum of:

1– Business losses attributable to such permanent establishments forsuch year and previous years;

2– All taxes, other than the branch profits tax imposed on suchprofits in the U.S.;

3– Profits reinvested in the U.S.; and 

4- $500,000 Canadian or its equivalent in the U.S. currency, less anyamounts deducted by the company, or by an associated company withrespect to the same or similar business, under this rule.

10.3.2[g] Article X(7) Dividends Paid By U.S. RICS and REITS

Paragraph7 makes the 5 percent withholding rate of paragraph 2 inapplicable incertain situations. Dividends paid by U.S. regulated investmentcompanies (RIC’s) are denied the 5 per cent withholding rate evenif the Canadian shareholder is a corporation that would otherwisequalify as a direct investor by satisfying the 10 per cent ownershiprequirement. Consequently, all RIC dividends to Canadian beneficialare subjected to the 15 per cent rate that applies to dividends paidto portfolio investors.


Advisor’sGuide to Canada – U.S. Tax Treaty

By: Vitaly Timokhov, Raymond Montero, David Kerzner

Publishedby: Thomson Carswell

The Accounting and Tax
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