United States Tax Treaty with Canada

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Following is a summary of the United States–Canada Income Tax Treaty, its main features, and practical implications. This is based on the treaty signed on September 26, 1980, with amendments, including the 2007 protocol. (IRS Publication 901)

Key Facts

• Purpose: Avoid double taxation and prevent fiscal evasion on income.
  
  

• Applies to: Individuals, corporations, estates, and trusts that are residents of the U.S. or Canada.
  
  

• Effective: Signed in 1980; amended by protocol in 2007, generally applies to taxable years beginning on or after January 1 following treaty entry.
  
  

• Taxes covered: Federal income taxes in the U.S. (excluding social security) and Canadian federal and provincial income taxes.
  
  

Major Provisions

1. Permanent Establishment (PE) / Business Profits

• Profits of a business in one country may only be taxed in the other if the business has a permanent establishment there.
  
  

• “Permanent establishment” typically includes a fixed place of business such as an office, branch, factory, or workshop.
  
  

Dividends, Pensions, and Annuities

• Dividends from a subsidiary to a parent company may qualify for reduced withholding if ownership thresholds are met.
  
  

• Pensions and retirement income may be taxed in the country of residence of the recipient, with certain exceptions.
  
  

• Social security benefits may be exempt from taxation in the source country under the treaty (U.S.–Canada totalization agreement applies separately).
  
  

Relief from Double Taxation

• Both countries provide foreign tax credits to their residents for taxes paid to the other country.
  
  

• Ensures income is not taxed twice, whether earned through employment, business, or investment.
  
  

Limitation on Benefits / Anti-Treaty Shopping

• Prevents residents of third countries from claiming treaty benefits without a substantial connection to the U.S. or Canada.
  
  

Exchange of Information

• Both tax authorities can exchange information to prevent tax evasion or avoidance.
  
  

Other Provisions

• Students, teachers, researchers, and trainees may receive certain tax exemptions under specific conditions.
  
  

• Artists and athletes: Income may be taxed in the country where the activity is performed.
  
  

• Arbitration: The treaty includes provisions for resolving disputes between competent authorities.
  
  

Practical Implications

• U.S. residents working in Canada or Canadian residents working in the U.S. can avoid double taxation using foreign tax credits or treaty exemptions.
  
  

• Investors receiving dividends, interest, or royalties across the border may benefit from reduced withholding rates.
  
  

• Businesses with cross-border operations benefit from clarity regarding permanent establishment and taxation rights.
  
  

• Students, trainees, and visiting researchers may be exempt from tax for limited periods under specific conditions.
  
  

Important Notes

• Treaty benefits require residency certification (Form W‑8BEN for U.S. withholding, Canadian equivalent for Canadian withholding).
  
  

• Not all income types are fully exempt; treaty rules must be verified based on the article applicable to the income.
  
  

• The saving clause allows the U.S. to tax its citizens as if the treaty were not in effect in certain circumstances.
  
  

• Provincial taxes in Canada are generally not reduced by the treaty; only federal Canadian income tax may be affected.