Convention Signed at Washington, D.C. on September 26,1980; Protocol Signed at Ottawa June 14, 1983; Protocol Signed at Washington, D.C., March 28,1984; Ratification Advised by the Senate of the United States of America on June 28, 1984; Entered into Force August 16, 1984. GENERAL EFFECTIVE DATE UNDER ARTICLE XXX: 1 JANUARY 1985 TABLE OF ARTICLES ARTICLE I------------------------------Personal Scope ARTICLE II-----------------------------Taxes Covered ARTICLE III----------------------------General Definitions ARTICLE IV----------------------------Residence ARTICLE V-----------------------------Permanent Establishment ARTICLE VI----------------------------Income from Real Property ARTICLE VII---------------------------Business Profits ARTICLE VIII--------------------------Transportation ARTICLE IX----------------------------Related Persons ARTICLE X-----------------------------Dividends ARTICLE XI----------------------------Interest ARTICLE XII---------------------------Royalties ARTICLE XIII--------------------------Gains ARTICLE XIV--------------------------Independent Personal Services ARTICLE XV---------------------------Dependent Personal Services ARTICLE XVI--------------------------Artistes and Athletes ARTICLE XVII-------------------------Withholding of Taxes in Respect of Independent Personal Services ARTICLE XVIII------------------------Pensions and Annuities ARTICLE XIX--------------------------Government Service ARTICLE XX --------------------------Students ARTICLE XXI--------------------------Exempt Organizations ARTICLE XXII-------------------------Other Income ARTICLE XXIII------------------------Capital ARTICLE XXIV------------------------Elimination of Double Taxation ARTICLE XXV-------------------------Non-Discrimination ARTICLE XXVI------------------------Mutual Agreement Procedure ARTICLE XXVII-----------------------Exchange of Information ARTICLE XXVIII----------------------Diplomatic Agents and Consular Officers ARTICLE XXIX------------------------Miscellaneous Rules ARTICLE XXX-------------------------Entry into Force ARTICLE XXXI------------------------Termination Notes of Exchange----------------------of 26 September, 1980 Letter of Submittal----------------------of 16 October, 1980 Letter of Transmittal--------------------of 12 November, 1980 Protocol 1---------------------------------of 14 June, 1983 Notes of Exchange-(Protocol 1)-------of 14 June, 1983 Letter of Submittal-(Protocol 1)-------of 2 September, 1983 Letter of Transmittal-(Protocol 1)-----of 21 September, 1983 Protocol 2---------------------------------of 28 March, 1984 Letter of Submittal-(Protocol 2--------of 2 April, 1984 Letter of Transmittal-(Protocol 2)-----of 18 April, 1984 Protocol 3---------------------------------of 17 March, 1995 Letter of Submittal-(Protocol 3)-------of 12 April, 1995 Letter of Transmittal-(Protocol 3)-----of 24 April, 1995 Protocol 4---------------------------------of 29 July, 1997 Letter of Submittal-(Protocol 4)-------of 12 August, 1997 Letter of Transmittal-(Protocol 4)-----of 23 September, 1997 The "Saving Clause"--------------------Paragraph 2 of Article XXIX CONVENTION WITH CANADA WITH RESPECT TO TAXES ON INCOME AND CAPITAL MESSAGE FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING A CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND CANADA WITH RESPECT TO TAXES ON INCOME AND CAPITAL, SIGNED AT WASHINGTON ON SEPTEMBER 26, 1980, WITH A RELATED EXCHANGE OF NOTES LETTER OF SUBMITTAL DEPARTMENT OF STATE, Washington, October 16, 1980. THE PRESIDENT, The White House. 　　THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, a Convention between the United States of America and Canada with respect to Taxes on Income and Capital (the Convention), signed at Washington on September 26, 1980, and a related exchange of notes signed on the same day. 　　The existing income tax convention with Canada, which was signed in 1942 and amended for supplementary conventions in 1950, 1956 and 1966, is the second oldest United States tax convention in force. The new Convention revises the existing convention by accommodating changes in United States and Canadian law, with particular reference to Canada's 1971 tax reform, as well as changes in treaty policy. 　　The Convention is based, in general, on the United States and OECD model conventions. It deviates from the models, however, in a number of important respects in order to take account of particular features of Canadian law and its interaction with United States law, the unique economic relationship between the United States and Canada, and the provisions of the existing convention. 　　Like the existing convention, the new Convention provides that the business profits of a resident of one Contracting State will not be subject to tax by the other State except to the extent that they are attributable to a permanent establishment which the resident has in the other State. The definition of a permanent establishment in the new Convention is more comprehensive than that in the existing convention and is very similar to the definition in the United States model. 　　The Convention follows the normal practice of providing reciprocal exemption for international shipping and air transport income. It goes beyond the model, however, by exempting on a reciprocal basis, as in the existing convention, income from the international operation of motor vehicles. It also adds an exemption for railroad operating income and a limited exemption for income from the rental of railway equipment, motor vehicles, trailers, and containers. 　　The Convention establishes maximum reciprocal rates of withholding at source for dividends, interest. and royalties. Although the rates exceed those in the United States model for several types of income, there are a number of significant reductions in withholding rates in comparison with the existing convention. 　　Portfolio dividends remain subject to a maximum 15 percent rate of tax at source. The maximum rate of tax at source on direct investment dividends is, however, reduced to 10 percent, from the 15 percent rate provided in the existing convention. This reduced rate also applies to the Canadian tax on branch profits, presently being imposed at a rate of 15 percent. Unlike the existing convention, the Convention preserves for the United States its right to impose tax on dividends paid by a Canadian corporation where at least 50 percent of the gross income of that corporation is attributable to a United States permanent establishment of that corporation. 　　As in the existing convention, the maximum rate of withholding tax at source on interest is set at 15 percent. However, the new Convention provides several exceptions to that rule under which interest is exempt at source. Interest derived, guaranteed, or insured by a Contracting State, political subdivision, local authority, or instrumentality is exempt at source, as is interest paid by an entity not subject to tax in the source State and interest on trade credits between persons dealing at arm's length. Artistic royalties, other than motion picture royalties, continue to be exempt at source. All other royalties are subject to a maximum source country tax rate of 10 percent, as compared to 15 percent under the existing convention. 　　Under the existing convention gains from the sale or exchange of capital assets are generally exempt from tax in the source State. The new Convention introduces a number of important modifications to that rule. As in the United States model, gains from the alienation of real property and property forming part of a permanent establishment may be taxed where the property or permanent establishment is situated. Consistent with current United States treaty policy, but not reflected in the United States model. the Convention further provides that gain from the alienation of shares in a corporation or interest in a partnership, estate, or trust, the property of which consists principally of real property, may be taxed by the country where the property is situated. A number of special rules are also provided which relate to specific aspects of Canadian tax treatment of capital gains when property is transferred by gift or when an individual gives up Canadian residence. These rules are designed to mesh the United States and Canadian tax systems in such cases. 　　In general, the rules in the Convention relating to the treatment of personal services income follow the pattern of the United States model. There are, however, some exceptions. In addition to the normal tests for the exemption of income from dependent personal services in the country where such services are rendered, a dollar threshold of $10,000 is provided. A special rule, not found in other United States conventions, is provided for reduced withholding, under certain circumstances, on remuneration from independent personal services. 　　The new Convention provides, as in the existing convention and United States model, that pensions and annuities are generally taxable in the State of residence of the recipient. However, it also provides that taxation by the residence State shall not exceed the amount that would be taxable if the recipient were a resident of the other State: and taxation is allowed in the State in which the payments arise, at a rate not in excess of 15 percent. 　　The Convention repeats, with certain modifications and refinements, the rules in the existing convention providing for reciprocal exemption of income derived by charitable organization of the other State and for the deductibility of contributions by residents of one State to such organizations in the other. 　　As in the model, items of income not dealt with elsewhere in the Convention are taxable in the State of residence of the recipient. However, in the Convention, such income is also taxable in the other State if it arises there. 　　In addition to the normal rules for the avoidance of double taxation, the Convention contains a rule not found in either the model or the existing convention for eliminating double taxation of United States citizens who are residents in Canada. Under Canadian law, the credit for foreign taxes on dividends, interest, and royalties is limited to 15 percent. Though the United States withholding rates under the Convention on these forms of income do not exceed 15 percent, United States citizens are subject to United States tax at normal progressive rates. Under the new Convention the United States agrees to give Canada the primary right to any tax on such income in excess of 15 percent, with the United States retaining only a residual right to tax. The nondiscrimination protection of the Convention is somewhat narrower than the United States model, but is broader than the protection in the existing convention. In a rule not found in any other United States income tax treaty, expenses incurred by a resident of a Contracting State with respect to a convention or conference held in the other State are deductible to the same extent as if the convention were held in the State of residence. 　　Under the mutual agreement procedures of the Convention, if one State adjusts the accounts of a taxpayer the other State may make a corresponding adjustment (to the benefit of the taxpayer) even after the statute of limitations has run, if that other State has received notice of the case within six years from the end of the year to which the case relates. No such waiver of the statute is provided for in the existing convention. If, on the other hand, appropriate notice is not given, and the case involves an adjustment of arrangements between related persons, the first State agrees to withdraw the adjustment. 　　The Convention provides a number of transitional rules to protect taxpayer rights in going from the existing to the new convention. 　　The Convention provides for the termination of the United States-Canada estate tax convention of 1961. That convention is presently operative only on the United States side, because Canada has repealed its Federal estate tax. A 1928 note between the United States and Canada, providing relief from double taxation of shipping profits, is also terminated by the terms of the new Convention. 　　In an exchange of notes signed at the time of the signing of the Convention, it is agreed that the competent authorities of the two States will work out procedures for certifying the eligibility of organizations to receive tax exempt income and deductible contributions. The note also recognizes Canada's objections to the so-called "unitary apportionment" system used in several states of the United States to assess the income of corporations doing business in the state. 　　The Convention is subject to ratification. It will enter into force upon the exchange of instruments of ratification. Subject to transitional rules, the Convention will have effect, for taxes withheld at the source, for amounts paid or credited on or after the first day of the second month following entry into force; and for other taxes, for taxable years beginning on or after the first of January following entry into force. 　　The Convention will remain in force indefinitely unless terminated by one of the Contracting States. It may be terminated, on six months diplomatic notice, after five years from its entry into force, or earlier in the event of significant changes in the law of either country which cannot be accommodated through negotiations. 　　A technical memorandum explaining in detail the provisions of the Convention is being prepared by the Department of the Treasury and will be submitted to the Senate Committee on Foreign Relations. 　　The Department of the Treasury, with the cooperation of the Department of State, was primarily responsible for the negotiation of the Convention. It has the approval of both Departments. Respectfully submitted, EDMUND S. MUSKIE. LETTER OF TRANSMITTAL THE WHITE HOUSE. November 12, 1980. To the Senate of the United States: 　　I transmit herewith, for Senate advice and consent to ratification, a Convention between the United States of America and Canada with respect to Taxes on Income and Capital (the Convention), signed at Washington on September 26, 1980, and a related exchange of notes for the information of the Senate. I also transmit the report of the Department of State with respect to the Convention. 　　The Convention will replace the existing tax convention with Canada, signed in 1942, as amended by supplementary conventions signed in 1950, 1956 and 1966. It is based, in general, on the United States and OECD model conventions but deviates from the models in a number of important respects in order to take account of particular features of Canadian law and its interaction with United States law, the unique economic relationship between the United States and Canada, and the provisions of the existing convention. 　　As in the existing convention, the new Convention provides that the business profits of a resident of one Contracting State will not be subject to tax by the other State except to the extent that they are attributable to a permanent establishment which the resident has in the other State. The definition of a permanent establishment in the Convention is more comprehensive than that in the existing convention and is very similar to the definition in the United States model. 　　The Convention establishes maximum reciprocal rates of withholding at source for dividends, interest, and royalties. Although the rates exceed those in the United States model for several types of income, there are a number of significant reductions in withholding rates in comparison with the existing convention. 　　I recommend that the Senate give early and favorable consideration to the Convention and give advice and consent to its ratification. JIMMY CARTER 　　　　CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND 　　　　CANADA WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL 　　The United States of America and Canada, Desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, 　　Have agreed as follows: ARTICLE I Personal Scope 　　This Convention is generally applicable to persons who are residents of one or both of the Contracting States. ARTICLE II Taxes Covered 　　1. This Convention shall apply to taxes on income and on capital imposed on behalf of each Contracting State, irrespective of the manner in which they are levied, 　　2. The existing taxes to which the Convention shall apply are: 　　(a) In the case of Canada, the taxes imposed by the Government of Canada under Parts I, XIII and XIV of the Income Tax Act; and (b) In the case of the United States, the Federal income taxes imposed by the Internal Revenue Code. 3. The Convention shall apply also to: 　　(a) Any identical or substantially similar taxes on income; and 　　(b) Taxes on capital, which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. 　　4. Notwithstanding the provisions of paragraphs 2(b) and 3, the Convention shall apply to: 　　(a) The United States accumulated earnings tax and personal holding company tax, to the extent, and only to the extent, necessary to implement the provisions of paragraphs 5 and 8 of Article X (Dividends); 　　(b) The United States excise taxes imposed with respect to private foundations, to the extent; and only to the extent, necessary to implement the provisions of paragraph 4 of Article XXI (Exempt Organizations); and 　　(c) The United States social security taxes, to the extent, and only to the extent, necessary to implement the provisions of paragraph 4 of Article XXIX (Miscellaneous Rules). ARTICLE III General Definitions 　　1. For the purposes of this Convention, unless the context otherwise requires: 　　(a) When used in a geographical sense, the term "Canada" means the territory of Canada, including any area beyond the territorial seas of Canada which, in accordance with international law and the laws of Canada, is an area within which Canada may exercise rights with respect to the seabed and subsoil and their natural resources; (b) The term "United States" means: 　　(i) The United States of America, but does not include Puerto Rico, the Virgin Islands, Guam or any other United States possession or territory; and 　　(ii) When used in a geographical sense, such term also includes any area beyond the territorial seas of the United States which, in accordance with international law and the laws of the United States, is an area within which the United States may exercise rights with respect to the seabed and subsoil and their natural resources; 　　(c) The term "Canadian tax" means the Canadian taxes referred to in paragraphs 2(a) and 3(a) of Article II (Taxes Covered); 　　(d) The term "United States tax" means the United States taxes referred to in paragraphs 2(b) and 3(a) of Article II (Taxes Covered); 　　(e) The term "person" includes an individual, an estate, a trust, a company and any other body of persons; 　　(f) The term "company" means any body corporate or any entity which is treated as a body corporate for tax purposes; 　　(g) The term "competent authority" means: 　　(i) In the case of Canada, the Minister of National Revenue or his authorized representative; and 　　(ii) In the case of the United States, the Secretary of the Treasury or his delegate; 　　(h) The term "international traffic" means any voyage of a ship or aircraft to transport passengers or property except where the principal purpose of the voyage is to transport passengers or property between places within a Contracting State; 　　(i) The term "State" means any national State, whether or not a Contracting State; and 　　(j) The term "the 1942 Convention" means the Convention and Protocol between the United States and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in the case of Income Taxes signed at Washington on March 4, 1942, as amended by the Convention signed at Ottawa on June 12, 1950, by the Convention signed at Ottawa on August 8, 1956 and by the Supplementary Convention signed at Washington on October 25, 1966. 　　2. As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires and subject to the provisions of Article XXVI (Mutual Agreement Procedures), have the meaning which it has under the law of that State concerning the taxes to which the Convention applies. ARTICLE IV Residence 　　1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature, but in the case of an estate or trust, only to the extent that income derived by such estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries. 　　2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows: 　　(a) He shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests); 　　(b) If the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode; 　　(c) If he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and 　　(d) If he is a citizen of both States or of neither of them, the competent authorities of the　Contracting States shall settle the question by mutual agreement. 　　3. Where by reason of the provisions of paragraph 1 a company is a resident of both Contracting States, then if it was created under the laws in force in a Contracting State, it shall be deemed to be a resident of that State. 　　4. Where by reason of the provisions of paragraph 1 an estate, trust or other person (other than an individual or a company) is a resident of both Contracting States, the competent authorities of the States shall by mutual agreement endeavor to settle the question and to determine the mode of application of the Convention to such person. 　　5. Notwithstanding the provisions of the preceding paragraphs, an individual shall be deemed to be a resident of a Contracting State if: 　　(a) The individual is an employee of that State or of a political subdivision, local authority or instrumentality thereof rendering services in the discharge of functions of a governmental nature in the other Contracting State or in a third State; and 　　(b) The individual is subjected in the first-mentioned State to similar obligations in respect of taxes on income as are residents of the first-mentioned State. 　　The spouse and dependent children residing with such an individual and meeting the requirements of subparagraph (b) above shall also be deemed to be residents of the first-mentioned State. ARTICLE V 　　　　　　　　　Permanent Establishment 　　1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on. 　　2. The term "permanent establishment" shall include especially: 　　(a) A place of management; 　　(b) A branch; 　　(c) An office; 　　(d) A factory; 　　(e) A workshop; and 　　(f) A mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 　　3. A building site or construction or installation project constitutes a permanent establishment if, but only if, it lasts more than 12 months. 　　4. The use of a drilling rig or ship in a Contracting State to explore for or exploit natural resources constitutes a permanent establishment if, but only if, such use is for more than 3 months in any twelvemonth period. 　　5. A person acting in a Contracting State on behalf of a resident of the other Contracting Stateother than an agent of an independent status to whom paragraph 7 applies-shall be deemed to be a permanent establishment in the first-mentioned State if such person has, and habitually exercises in that State, an authority to conclude contracts in the name of the resident. 　　6. Not withstanding the provisions of paragraphs 1, 2, and 5, the term "permanent establishment" shall be deemed not to include a fixed place of business used solely for, or a person referred to in paragraph 5 engaged solely in, one or more of the following activities: 　　(a) The use of facilities for the purpose of storage, display or delivery of goods or merchandise belonging to the resident; 　　(b) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display or delivery; 　　(c) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person; 　　(d) The purchase of goods or merchandise, or the collection of information, for the resident; and 　　(e) Advertising, the supply of information, scientific research or similar activities which have a preparatory or auxiliary character, for the resident. 　　7. A resident of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. 　　8. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not constitute either company a permanent establishment of the other. 　　9. For the purposes of the Convention, the provisions of this Article shall be applied in determining whether any person has a permanent establishment in any State. ARTICLE VI Income from Real Property 　　1. Income derived by a resident of a Contracting State from real property (including from agriculture or forestry) situated in the other Contracting State may be taxed in that other State. 　　2. For the purposes of this Convention, the term "real property" shall have the meaning which it has under the taxation laws of the Contracting State in which the property in question is situated and shall include any option or similar right in respect thereof. The term shall in any case include usufruct of real property and rights to explore for or to exploit mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as real property. 　　3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting or use in any other form of real property and to income from the alienation of such property.