PROTOCOL AMENDING TAX CONVENTION WITH CANADA MESSAGE FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING PROTOCOL AMENDING THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND CANADA WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL SIGNED AT WASHINGTON ON SEPTEMBER 26, 1980 AS AMENDED BY THE PROTOCOLS SIGNED ON JUNE 14, 1983, MARCH 28, 1984, AND MARCH 17, 1995, SIGNED AT OTTAWA ON JULY 29, 1997 LETTER OF SUBMITTAL (PROTOCOL 4) DEPARTMENT OF STATE, Washington, August 12, 1997. 　　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, the Protocol Amending the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital Signed at Washington on September 26, 1980 as Amended by the Protocols Signed on June 14, 1983, March 28, 1984 and March 17, 1995, signed at Ottawa on July 29, 1997 ("the proposed Protocol"). The proposed Protocol to the Convention addresses two issues: the taxation of gains from the sale of shares of foreign real-property holding companies and the taxation of social security benefits. 　　Article 1 of the proposed Protocol deletes and replaces paragraphs 3(a) and 3(b)(ii) of Article XIII of the Convention, which addresses the taxation of capital gains. The revised provisions would define real property situated in the United States and real property situated in Canada in such a way as to deny each country the right under this Convention to tax foreign persons on their income from the sale of the stock of foreign corporations whose assets consist primarily of domestic real estate. Both the United States and Canada currently tax foreign persons on the proceeds from the sale of both domestic real estate and the stock of domestic corporations whose assets consist primarily of domestic real estate. 　　The current Convention also permits the taxation of income from the sale of stock of foreign companies whose assets consist primarily of domestic real estate. The new limitation on each country's right to tax gains from the sale of shares of real-property holding companies would be retroactively effective to April 26, 1995. 　　Article 2 addresses taxation of social security benefits. The treatment of social security benefits by the United States and Canada was last modified by the Protocol Amending the Convention between the United States of America and Canada with Respect to Taxes on Income and on Capital Signed at Washington on September 26, 1980, as Amended by the Protocols Signed on June 14, 1983 and March 28, 1984, signed at Washington, March 17, 1995 ("the 1995 Protocol"), which applies to social security benefits paid on or after January 1, 1996. The 1995 Protocol amended the Convention to move from residence-based taxation to a system under which social security benefits are taxed by the country paying the benefits ("the source country") - at a statutory rate of 25.5 percent by the United States and 25.0 percent by Canada. In addition, Canada permits U.S. recipients of Canadian benefits to file a Canadian tax return and pay tax at lower graduated rates on net income, enabling low-income U.S. recipients of Canadian social security to pay little or no tax on their benefits. However, the United States taxes at the 25.5 percent rate permitted by the 1995 Protocol. Thus, many Canadian recipients of U.S. benefits found their benefits reduced by 25.5 percent after January 1, 1996. 　　Article 2 of the proposed Protocol returns to the system of residence-based taxation in place before the 1995 Protocol. Social security benefits will be taxable in only the country in which the recipient lives ("the country of residence"). This, under the proposed Protocol, U.S. social security benefits paid to a resident of Canada would be taxed only by Canada, and, a benefit paid by Canada under its social security legislation to a U.S. resident would be taxed only by the United States. Benefits would be taxed on a net basis at graduated rates, and low-income recipients would not pay any tax. Furthermore, the taxation of benefits by the country of residence takes into account the way the benefits would have been taxed in the source country. For example, since the United States includes only 85 percent of U.S. social security benefits in taxable income, only 85 percent of the U.S. benefits received by Canadians would be subject to Canadian tax. 　　Article 2 of the proposed Protocol will apply to amounts paid on or after January 1, 1996, the date the current rule took effect. Thus, social security recipients may receive a refund of taxes previously paid although some high-income recipients may be required to pay additional taxes to their country of residence. If, however, as a result of the change, the tax of the country of residence exceeds the amount of the refund there will be neither a refund of source-country tax nor additional tax by the country of residence. Consequently, no one will be subject to a higher rate of tax for the retroactive period. 　　(Nonetheless, in the future, some high-income recipients of benefits will be subject to a higher rate of tax if their average tax rate on these benefits in their country of residence is higher than the current rate of source-country withholding tax.) The proposed Protocol also outlines the rules that the United States and Canada will follow in giving effect to the retroactive application of the changes to the taxation of social security benefits. 　　The Department of the Treasury and the Department of State cooperated in the negotiation of the proposed Protocol. It has the full approval of both Departments. Respectfully submitted, 　　 MADELEINE ALBRIGHT. LETTER OF TRANSMITTAL (PROTOCOL 4) THE WHITE HOUSE, September 23, 1997. To the Senate of the United States: 　　I transmit herewith for Senate advice and consent to ratification the Protocol Amending the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital Signed at Washington on September 26, 1980 as Amended by the Protocols signed on June 14, 1983, March 28, 1984 and March 17, 1995, signed at Ottawa on July 29, 1997. This Protocol modified the taxation of social security benefits and the taxation of gams from the sale of shares of foreign real-property holding companies. 　　I recommend that the Senate give early and favorable consideration to this Protocol and give its advice and consent to ratification. 　　　 WILLIAM J. CLINTON. 　　　 PROTOCOL 　　 AMENDING THE CONVENTION BETWEEN 　 THE UNITED STATES OF AMERICA AND CANADA 　　 WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL 　 SIGNED AT WASHINGTON ON SEPTEMBER 26, 1980 　　 AS AMENDED BY THE PROTOCOLS SIGNED ON JUNE 14,1983, MARCH 28, 1984 AND MARCH 17, 1995 　　The United States of America and Canada, desiring to conclude a protocol to amend the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital signed at Washington on September 26, 1980, as amended by the Protocols signed on June 14, 1983, March 28, 1984 and March 17, 1995 (hereinafter referred to as "the Convention"), have agreed as follows: ARTICLE 1 1. Paragraph 3 (a) of Article XIII (Gains) of the Convention shall be deleted and replaced by the following: 　　''(a) In the case of real property situated in the United States, means a United States real property interest and real property referred to in Article VI (Income from Real Property) situated in the United States, but does not include a share of the capital stock of a company that is not a resident of the United States; and" 　　2. Paragraph 3(b)(ii) of Article XIII (Gains) of the Convention shall be deleted and replaced by the following: 　　"(ii) A share of the capital stock of a company that is a resident of Canada, the value if whose shares is derived principally from real property situated in Canada; and" ARTICLE 2 　　1. Paragraph 3 of Article XVIII (Pensions and Annuities) of the Convention shall be deleted and replaced by the following: 　　"3. For the purposes of this Convention, the term "pensions" 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 or, except for the purposes of Article XIX (Government Service), any benefit referred to in paragraph 5." 　　2. Paragraph 5 of Article XVIII (Pensions and Annuities) of the Convention shall be deleted and replaced by the following: 　　"5. Benefits under the social security legislation in a Contracting State (including tier I railroad retirement benefits but not including unemployment benefits) paid to a resident of the other Contracting State shall be taxable only in that other State, subject to the following conditions: 　　(a) a benefit under the social security legislation in the United States paid to a resident of Canada shall be taxable in Canada as though it were a benefit under the Canada Pension Plan, except that 15 per cent of the amount of the benefit shall be exempt from Canadian tax; and (b) a benefit under the social security legislation in Canada paid to a resident of the United States shall be taxable in the United States as though it were a benefit under the Social Security Act, except that a type of benefit that is not subject to Canadian tax when paid to residents of Canada shall be exempt from United States tax." ARTICLE 3 　　1. This Protocol shall be subject to ratification in accordance with the applicable procedures in the United States and Canada and instruments of ratification shall be exchanged as soon as possible. 　　2. This Protocol shall enter into force upon the exchange of instruments of ratification, and shall have effect as follows: 　　(a) Article 1 of this Protocol shall have effect as of April 26, 1995; and 　　(b) Article 2 of this Protocol shall have effect with respect to amounts paid or credited to a resident of the other Contracting State after 1995, except that where a Contracting State has, in accordance with the Convention read without reference to this Protocol, imposed a tax on benefits paid or credited under the social security legislation in that State, and those benefits are paid or credited after 1995 and 　　(i) before the calendar year in which this Protocol enters into force, if this Protocol enters into force before September 1 of that year, or 　　(ii) before the end of the calendar year in which this Protocol enters into force, if this Protocol enters into force after August 31 of that year,Article 2 shall only have effect with respect to such benefits (referred to in this Article as "source-taxed benefits") as described in paragraphs 3, 4 and 5. 　　3. With respect to source-taxed benefits paid by a Contracting State to a resident of the other Contracting State, Article 2 applies only if the resident has, within three years after the date on which this protocol enters into force, applied to the competent authority of the first-mentioned Contracting State for a refund of the tax imposed on the benefits. However, with respect to source-taxed benefits paid by the United States to a resident of Canada, the competent authority of Canada shall: 　　(a) apply for and receive such refund on behalf or the resident; 　　(b) remit to the resident, in accordance with the law of Canada governing refunds of income tax overpayments, such refund less any tax imposed in Canada on the benefits in accordance with Article 2 of this Protocol; and 　　(c) make the application referred to in subparagraph (a) only if the additional tax that would be imposed in Canada on the benefits, on the assumption that Article 2 of this Protocol applied, would be less than the tax imposed in the United States on the benefits as a result of paragraph 5 of Article XVIII (pensions and Annuities) of the Convention read without reference to this protocol. 　　4. All taxes refunded as a result of this Protocol shall be refunded without interest and interest on any taxes of a resident of a Contracting State assessed as a result of this protocol shall be computed as though those taxes became payable no earlier than December 31 of the year following the year in which this Protocol enters into force. 　　5. The competent authorities of the Contracting States shall establish procedures for making or revoking the application referred to in paragraph 3 and shall agree on such additional procedures as are necessary to ensure the appropriate implementation of this Protocol. 　　IN WITNESS WHEREOF, the undersigned, being duly authorized thereto by their respective Governments, have signed this Protocol. 　　Done at Ottawa in duplicate, in the English and French languages, both texts being equally authentic, this 29th day of July, 1997. FOR THE GOVERNMENT OF THE 　　　　　　　FOR THE GOVERNMENT OF UNITED STATES OF AMERICA: 　 CANADA: (s) Vladimir Sambaiew (s) Michael Leir