FROM THE OFFICE OF PUBLIC AFFAIRS

The Treasury Department announced on Tuesday that a protocol to the income tax Convention between the United States and Canada was signed in Ottawa by Vladimir Sambaiew, Minister-Counselor for Economic Affairs, on behalf of the United States, and Michael Leir, Director General, U.S. Relations, Department of Foreign Affairs and International Trade, on behalf of Canada.

This is the fourth protocol to the income tax Convention between the United States and Canada. The Protocol will enter into force after the countries have exchanged instruments of ratification.

The Protocol is limited to two issues: the taxation of social security benefits, and the taxation of gain from the sale of shares of real property holding companies.

With respect to the taxation of social security benefits, the Protocol returns to a system of residence-based taxation in which cross-border benefits are taxable in the country where the recipient lives, which was the general system in effect under the Convention prior to 1996. In 1996, the third Protocol to the Convention changed the taxation of social security benefits to a system in which benefits were subject to tax only by the country which paid the benefits, at a statutory rate of 25.5 percent by the US and 25 percent by Canada

By returning to a system in which social security benefits are taxable exclusively in the country where the recipient lives, social security benefits will be taxed on a net basis at graduated rates and low-income recipients will not pay any tax. Moreover, the taxation of benefits in the residence country takes into account how the benefits would have been taxed in the country paying the benefits. For example, since the United States only includes a maximum of 85 percent of the U.S. benefits in income, only 85 percent of U.S. benefits received by Canadians will be subject to Canadian tax. Canadian benefits that are exempt from Canadian tax when paid to Canadians will also be exempt from U.S. tax when paid to U.S. residents.

This provision is retroactively effective to January 1, 1996, the date the prior rule took

effect. Therefore, social security recipients will receive a refund of taxes previously paid to the country which paid the benefits although they may be required to pay additional tax to the country where they live. However, no one will be subject to a higher rate of tax for the retroactive period. The Protocol also outlines the rules that the United States and Canada will follow in giving effect to the retroactive application of this change.

United States and Canadian authorities will work together to ensure that refunds are promptly paid after the Protocol is ratified. Human Resources Development Canada and Revenue Canada will provide information regarding the refund procedure to U.S. recipients of Canadian benefits after the Protocol is ratified.

The Protocol also amends the Convention to limit each country’s right to tax non-resident’s gain from the sale of shares of real property holding companies to companies that are resident in that country. Although neither the United States nor Canada currently taxes non-residents on their gain from the sale of shares of foreign real property holding companies that own domestic real property, a bill imposing such a tax was introduced in the last session of the Canadian Parliament. This Protocol provision is retroactively effective to April 26, 1995, the date the previous Canadian legislation was proposed to be effective.

Copies of the Protocol are available from Treasury’s Office of Public Affairs by phone at (202) 622-2960 or by mail at 1500 Pennsylvania Avenue, NW., Washington, D.C. 20220.