On May 14, 2007, the Canadian Minister of Finance, the Honourable James Flaherty, stated at a speech in Toronto that he expected the long-anticipated new Protocol to the Canada-U.S. income tax convention would be signed within 90 days of that date. No announcement of the completion of the Protocol has yet been made, though we have heard that this may occur on September 10, 2007. However, even if the Protocol were to be signed in the near future, the timing does not now appear to be auspicious for the U.S. ratification of the Protocol by the end of 2007.

For the Protocol to be ratified once signed, certain steps must be taken by each country. With respect to the United States, the Protocol must be submitted to the Senate for its advice and consent to ratification; once submitted, generally a hearing will be held by the Senate Foreign Relations Committee to consider the Protocol. The Committee recently announced that a hearing will be held on July 17 to consider the proposed revised tax treaty with Belgium and the proposed protocols to the tax treaties with Denmark, Finland and Germany. The announcement states that “Additional Treaties . . .  May Be Added.” While the importance of the Canada-U.S. relationship may alter the normal procedure, it is our understanding that the Committee is now disinclined to hold more than one tax treaty hearing per year. Therefore, it appears that the window of opportunity for a signed Protocol to be submitted to the Senate, in time for the normal procedures leading up to U.S. ratification this year, could soon close.

The Canadian government announced in its March 19 Budget that the new Protocol would include certain measures such as the elimination of withholding tax on interest paid to arm’s length lenders and the gradual elimination of withholding tax on non-arm’s length interest payments. According to the Budget documents, if the treaty could be ratified this year, those measures would be effective on January 1, 2008. However, that timing is now looking very unlikely, unless the negotiators provide for retroactive application of the Protocol.

 

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