Businesses applaud elimination of cross-border withholding tax

Canada and the United States have signed a new treaty designed to reduce barriers to cross-border activities. The treaty eliminates the withholding tax on cross-border interest payments made by borrowers in one country to lenders in the other, and updates tax rules on pensions for workers who cross the U.S. - Canada border, according to Treasury Secretary Henry M. Paulson, Jr.

The new treaty is seen as providing the most benefit to Canadian companies that borrow from U.S. banks. Many U.S. lenders require Canadian borrowers to "gross up" their payment so that they pay the full interest plus the withholding tax that the banks are required to pay to the Canada Revenue Agency. Michael Friedman, a tax lawyer with Toronto-based McMillan Binch Mendelsohn LLP stated, "The cost of obtaining capital will be reduced because borrowers won't face the demands to gross up and the ability to borrow capital will be increased."

Included in the treaty is a provision for arbitration of unresolved double-taxation cases. Also there is a provision that extends treaty benefits to limited liability companies (LLCs). According to McMillan Binch Mendelsohn, an LLC will generally be entitled to take advantage of reduced withholding tax rates set out in the Treaty in respect of certain types of payments (e.g. interest, dividends).

The treaty also provides for mutual tax recognition of pension contributions and clarification of how stock options are to be taxed.

The treaty will enter into force once it has been ratified by both the Canadian and U.S. governments. The treaty is the largest bilateral trade agreement in the world, and Canada is the U.S.'s largest trading partner.

You can read the complete amendments to the U.S. Canada treaty.

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