Investment Income from Canadian Sources

The treaty provides beneficial treatment for certain items of Canadian source income that result from an investment of capital.

Dividends (Article X). For Canadian source dividends received by U.S. residents, the Canadian income tax generally may not be more than 15%.

A 5% rate limit applies to intercorporate dividends paid from a subsidiary to a parent corporation owning at least 10% of the subsidiary's voting stock. However, a 10% rate applies if the payer of the dividend is a nonresident-owned Canadian investment corporation.

These limits do not apply to dividends arising from a business carried on in Canada through a permanent establishment or fixed base of the recipient if the holding on which the income is paid is effectively connected with that permanent establishment or fixed base.

Interest (Article XI). For Canadian source interest received by U.S. residents, the Canadian income tax generally may not be more than 10%.

This limit does not apply to interest arising from a business carried on in Canada through a permanent establishment or fixed base of the recipient if the debt on which the income is paid is effectively connected with that permanent establishment or fixed base.

Gains from the sale of property (Article XIII). Gains from the sale of personal property by a U.S. resident having no permanent establishment or fixed base in Canada are exempt from Canadian income tax. However, the exemption from Canadian tax does not apply to gains realized by U.S. residents on Canadian real property, and on personal property belonging to a permanent establishment or fixed base of the taxpayers in Canada.

If the property subject to Canadian tax is a capital asset and was owned by the U.S. resident on September 26, 1980, not as part of the business property of a permanent establishment or fixed base in Canada, generally the taxable gain is limited to the appreciation after 1984.

Royalties (Article XII). For Canadian source royalties received by U.S. residents, the Canadian income tax generally may not be more than 10%.The following are exempt:

1. Copyright royalties and other like payments for the production or reproduction of any literary, dramatic, musical, or artistic work (other than payments for motion pictures and works on film, videotape, or other means of reproduction for use in connection with television),
2. Payments for the use of, or the right to use, computer software,
3. Payments for the use of, or the right to use, any patent or any information concerning industrial, commercial, or scientific experience (but not within a rental or franchise agreement), and
4. Payments for broadcasting as agreed to in an exchange of notes between the countries.

The limit or exemption does not apply if the right or property on which the royalties are paid is effectively connected with the U.S. resident's permanent establishment or fixed base in Canada.

Previous| First | Next

Publication Index | IRS-Forms Main | Home