Many Unresolved Issues Remain Despite New Canada-US Tax Protocol

On September 21 representatives from the U.S. and Canada signed the 5th Protocol to the Canada-U.S. Income Tax Convention. These amendments to the Canada-US. Tax Treaty will have a major impact on the use of hybrid entities. On the one hand the changes will allow greater use of US LLCs by permitting US residents to receive treaty benefits on Canadian source income. However, the rules will adversely affect many hybrid unlimited liability companies used by US firms to invest or carry on business in Canada.

The new changes will also permit Canada to take a more aggressive approach to combat treaty shopping. Determining whether a particular US person is entitled to treaty benefits will be significantly more complex than in the past.

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