Publication 597 |
2001 Tax Year |
Application of Treaty
The benefits of the income tax treaty are generally provided on the
basis of residence for income tax purposes. That is, a person who is
recognized as a resident of the United States who has income from
Canada, will often pay less income tax to Canada on that income than
if no treaty was in effect. Article IV provides definitions of
residents of Canada and the United States, and provides specific
criteria for applying the treaty in cases where a taxpayer is
considered by both countries to be a resident.
In most instances a treaty does not affect the right of a foreign
country to tax its own residents (including those who are U.S.
citizens) or of the United States to tax its residents or citizens
(including U.S. citizens who are residents of the foreign country).
This provision is known as the "saving clause."
For example, an individual who is a U.S. citizen and a resident of
Canada may have dividend income from a U.S. corporation. The treaty
provides a maximum rate of 15% on dividends received by a resident of
Canada from sources in the United States. Even though a resident of
Canada, the individual is a U.S. citizen and the saving clause
overrides the treaty article that limits the U.S. tax to 15%.
If you take the position that any U.S. tax is overruled or
otherwise reduced by a U.S. treaty (a treaty-based position), you
generally must disclose that position on Form 8833, Treaty-Based
Return Position Disclosure Under Section 6114 or 7701(b), and
attach it to your return.
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