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US-CANADA TAX TREATY

​​📌 Scope & Definitions

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Article I — Personal Scope

  • Applies to residents of one or both of the US and Canada

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Article II — Taxes Covered

  • Covers Canada's Income Tax Act and the US Internal Revenue Code, including future substantially similar taxes

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Article III — General Definitions

  • Defines key terms: Canada, United States, person, company, competent authority, and international traffic

  • Undefined terms carry their respective domestic-law meaning

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📌 Residence & Permanent Establishment

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Article IV — Residence

  • A person is a resident if liable to tax by domicile, residence, incorporation, or place of management

  • Dual-residency tie-breakers applied in this order: (1) permanent home, (2) centre of vital interests, (3) habitual abode, (4) citizenship, (5) mutual agreement

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Article V — Permanent Establishment (PE)

  • PE = fixed place of business: branch, office, factory, or mine

  • Building/construction site = PE if it exceeds 12 months

  • Drilling rig or ship = PE if present for more than 3 months in any 12-month period

  • Dependent agent with authority to conclude contracts = PE

  • Preparatory or auxiliary activities do not create a PE

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📌 Business & Property Income

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Article VI — Real Property Income

  • Income from real property situated in the other State may be taxed in the situs State

  • Covers agriculture, forestry, natural resources, direct use, letting, and alienation

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Article VII — Business Profits

  • Taxable only in the residence State unless a PE exists in the other State

  • PE profits taxed on arm's-length, separate-entity basis

  • Executive and administrative expenses are deductible against PE profits

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Article VIII — Transportation

  • Ships and aircraft in international traffic: exempt in the other State

  • Motor vehicles and rail containers: exempt if used in the other State for ≤183 days in a 12-month period

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Article IX — Related Persons / Transfer Pricing

  • Each State may adjust income where related-party transactions are not at arm's length

  • Corresponding adjustment required upon notification within 6 years of the relevant tax year-end

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📌 Capital Gains

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Article XIII — Capital Gains

  • Real property gains → taxable in the situs State

  • PE business property gains → taxable in the PE State

  • Shares of companies whose value is principally derived from real property → taxable in the situs State

  • All other capital gains → taxable only in the residence State

  • Substantial interest = ≥10% of any share class

  • Exit-tax look-back: applies to former residents who were resident for 120 months within any 20-year period and resident within the prior 10 years

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📌 Passive Income — Withholding Rates

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Article X — Dividends

  • Direct investment (≥10% voting interest): 5%

  • Portfolio holdings: 15%

  • Branch profits tax: 5%

  • RIC (Regulated Investment Company): 15%

  • REIT: domestic statutory rate (no treaty cap)

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Article XI — Interest

  • General rate: 10%

  • Government/instrumentality interest: 0% (exempt)

  • Government-guaranteed arm's-length debt: 0% (exempt)

  • Trade credits: 0% (exempt)

  • REMIC excess inclusions: full US statutory rate

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Article XII — Royalties

  • General rate: 10%

  • Literary, artistic, dramatic, musical copyrights: 0% (exempt)

  • Computer software: 0% (exempt)

  • Patents and industrial know-how: 0% (exempt)

  • Film and television works: 10%

  • Natural resource royalties: domestic statutory rate (no treaty cap)

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📌 Personal Services

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Article XIV — Independent Personal Services

  • Taxable in the residence State

  • Also taxable in the source State if income is attributable to a fixed base regularly maintained there

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Article XV — Dependent Personal Services (Employment Income)

  • Taxable only in the residence State unless work is performed in the other State

  • Exemption applies if:

    • Remuneration does not exceed USD/CAD 10,000, OR

    • Individual present for ≤183 days AND employer is not resident in the work State

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Article XVI — Artistes & Athletes

  • Taxable in the State of performance regardless of personal services rules

  • Exemption: gross receipts ≤ USD/CAD 15,000 per year

  • Sign-on bonuses: capped at 15% in employer's State

  • Team athletes in cross-border leagues: exempt

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Article XVII — Withholding on Personal Services

  • Work State may withhold on personal services income

  • First USD/CAD 5,000 per payer: withholding capped at 10%

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📌 Pensions, Annuities & Social Security

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Article XVIII — Pensions & Annuities

  • Primarily taxable in the residence State

  • Source-State withholding cap: 15% on periodic pensions and taxable portion of annuities

  • Social security benefits: taxable only in the residence State (Protocol 4, 1997)

  • RRSP: US taxation deferred until distribution for US citizens resident in Canada

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Article XIX — Government Service

  • Remuneration paid by a State to its own citizens for governmental functions: taxable only in the paying State

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Article XX — Students

  • Maintenance and education payments received from abroad are not taxable in the State of study

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📌 Other Income & Capital

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Article XXI — Exempt Organizations

  • Religious, scientific, literary, educational, and charitable entities: exempt from source-State tax on qualifying income

  • Pension fund dividend and interest income: exempt

  • Charitable contribution deductions available cross-border (subject to income limits)

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Article XXII — Other Income

  • Income not covered elsewhere: taxable only in the residence State

  • Trust and estate distributions: capped at 15% at source

  • Gambling losses deductible to the same extent as a resident

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Article XXIII — Capital

  • Real property and PE capital: taxable in the situs or PE State

  • Ships, aircraft, and all other capital: taxable only in the residence State

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📌 Relief from Double Taxation & Procedure

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Article XXIV — Elimination of Double Taxation

  • United States: provides a foreign tax credit for Canadian taxes paid

  • Canada: provides a deduction or credit for US taxes; exempt-surplus dividend deduction available

  • US citizens resident in Canada: Canada holds primary taxing rights on dividends, interest, and royalties above 15%; US retains residual right

  • Social security taxes paid to the US are creditable in Canada

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Article XXV — Non-Discrimination

  • Nationals of one State residing in the other cannot face more burdensome taxation than nationals of that State

  • Applies to all national taxes under Protocol 3 (1995)

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Article XXVI — Mutual Agreement Procedure (MAP)

  • Residents may present cases to the competent authority

  • MAP notification deadline: within 6 years of the relevant tax year-end

  • Protocol 3 introduced binding arbitration

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Article XXVI-A — Assistance in Collection

  • Each State may collect finally determined tax debts on behalf of the other

  • Retroactive reach: 10 years prior to Protocol 3's entry into force

  • No assistance if the individual was a citizen of the requested State in the relevant period

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Article XXVII — Exchange of Information

  • Competent authorities exchange information relevant to administering the Convention and domestic tax laws

  • Confidentiality obligations apply; broadened to all national taxes under Protocol 3

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📌 Special Provisions

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Article XXIX — Miscellaneous Rules

  • Saving clause: each State may tax its own residents and citizens as if no treaty were in force, with defined exceptions for pensions, government service, exempt organizations, double-tax relief, non-discrimination, and MAP

  • RRSP deferral elections available for US citizens in Canada

  • S-corporation look-through treatment applies for Canadian residents

  • Former citizens treated as citizens for 10 years (tax-motivated expatriation)

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Article XXIX-A — Limitation on Benefits (LOB) — US Side Only

  • Treaty benefits restricted to "qualifying persons": individuals, governments, publicly traded entities, widely held companies, estates, non-profits, and pension funds

  • Active business exception available

  • Derivative benefits test: ownership of >90% by equivalent beneficiaries AND <50% of expenses flowing to non-qualifying persons

  • Competent authority discretion available for non-qualifying persons

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Article XXIX-B — Taxes at Death

  • Coordinates US estate tax with Canadian deemed-disposition income tax

  • US pro-rata unified credit available for Canadian-resident estates

  • US marital credit available for qualifying property

  • Small-estate exemption: worldwide estate ≤ USD 1.2 million (US taxes only FIRPTA assets)

  • Cross-credits: Canadian income tax at death creditable against US estate tax and vice versa

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📌 Entry into Force & Termination

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Article XXX — Entry into Force

  • Signed: 26 September 1980 · In force: 16 August 1984

  • Withholding provisions: effective first day of the second month after entry into force

  • Other taxes: apply from 1 January of the year following entry into force

  • The 1942 Convention was superseded upon entry into force

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Article XXXI — Termination

  • Convention remains in force indefinitely

  • Either State may terminate after 5 years with 6 months' diplomatic notice

  • Early termination permitted if a significant domestic tax law change cannot be accommodated

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This summary is for general reference only. Always consult the full Convention text and applicable Protocols for authoritative guidance. Rates shown are maximum treaty rates; lower domestic rates take precedence where applicable. Protocol 3 (1995) and Protocol 4 (1997) introduced the most significant amendments to withholding rates and social security treatment.

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