Protocol to the 1942 Treaty (1956)

PROTOCOL TO THE 1942 TREATY (1956)
Date of Conclusion: 8 August 1956.

Entry into Force: 26 September 1957.

Effective Date: 1 January 1957 (see Article II).

Termination Date: 1 January 1985.
CONVENTION BETWEEN
THE UNITED STATES OF AMERICA AND CANADA
FURTHER MODIFYING AND SUPPLEMENTING
THE CONVENTION AND ACCOMPANYING PROTOCOL OF 4 MARCH 1942   
FOR THE AVOIDANCE OF DOUBLE TAXATION AND
THE PREVENTION OF FISCAL EVASION IN THE CASE OF INCOME TAXES
Article I

The provisions of the Convention and Protocol between the United States of America and Canada, signed at Washington on March 4, 1942, as modified by the Supplementary Convention of June 12, 1950, are hereby further modified and supplemented as follows:

(a) By inserting as the third paragraph of Article V, the following new paragraph:

“An enterprise of one of the Contracting States engaged in the operation of motor vehicles, as a common carrier or as a contract carrier, shall be exempt from tax by the other Contracting State in respect of income (if taxed by the former State in respect of such income) arising from the transportation of property for hire between points in one State and points in the other State.”

(b) By amending Article VII to read as follows:

“1. A resident of Canada shall be exempt from United States tax upon compensation for personal (including professional) services performed during the taxable year within the United States of America if he is present therein for a period or periods not exceeding a total of 183 days during the taxable year and either of the following conditions is met:

(a) his compensation is received for such personal services performed as an officer or employee of a resident, or corporation or other entity of Canada or of a permanent establishment in Canada of a United States enterprise, or

(b) his compensation received for such personal services does not exceed $5,000.

  1. The provisions of paragraph 1 of this Article shall apply, mutatis mutandis, to a resident of the United States with respect to compensation for such personal services performed in Canada.”

(c) By amending Article XI as follows:

(A) By inserting in paragraph 1 immediately after “in respect of income” the words and symbols “(other than earned income)”.

(B) By adding the following new paragraph:

“5. To ensure that the benefit of the reduced rate of income tax provided for by this Article is limited to persons entitled thereto each Contracting State may make regulations requiring the withholding in such State of an additional amount from income derived from sources in the other Contracting State.”

(d) By striking out paragraph 2 of Article XI, and paragraph 6 of the Protocol as added by the Convention of June 12, 1950, redesignating paragraphs 7, 8, 9, 10, 11 and 12 thereof as paragraphs 6, 7, 8, 9, 10, and 11 respectively, and inserting in lieu of paragraph 2 of Article XI the following:

“2. Notwithstanding the provisions of paragraph 1 of this Article, income tax in excess of 5 percent shall not be imposed by one of the Contracting States in respect of dividends paid by a corporation organized under the laws of such State, or of a political subdivision thereof, to a corporation organized under the laws of the other Contracting State, or of a political subdivision thereof; if,

(a) during the whole of the taxable year of the payer corporation at least 51 percent of the voting stock of such corporation was beneficially owned by the recipient corporation either alone or in association with not more than three other corporations of such other State, but each such recipient corporation must own at least 10 percent of the voting stock of the payer corporation; and

(b) not more than one-fourth of the gross income of the payer corporation (other than a corporation the chief business of which is the making of loans) is derived from interest and dividends other than interest and dividends received from its subsidiary corporations.

This paragraph shall not apply if the competent authority in the State imposing the tax is satisfied that the corporate relationship between the corporations has been arranged or is maintained primarily with the intention of taking advantage of this paragraph.”

(e) By adding immediately after Article XIIIC the following new Article:

“Article XIIID

  1. In the computation of taxable income for any taxable year under the revenue laws of the United States, there shall be allowed as a deduction contributions to any organization created or organized under the laws of Canada (and constituting a charitable organization for the purpose of the income tax laws of Canada) if and to the extent such contributions would have been deductible as a charitable contribution had such organization been created or organized under the laws of the United States: Provided, however, that such deduction shall not exceed an amount determined by applying to the taxpayer’s taxable income (in the case of a corporation) or adjusted gross income (in the case of an individual) from sources in Canada the same percentage as is applied by Canada to income in determining the limitation of the deduction for gifts or contributions to charitable organizations of Canada.
  2. In the computation of taxable income for any taxation year under the income tax laws of Canada, there shall be allowed as a deduction gifts to any organization created or organized under the laws of the United States (and constituting a charitable contribution for the purposes of the income tax laws of the United States) if and to the extent such gifts would have been allowable had such organization been a Canadian charitable organization: Provided, however, that such deduction shall not exceed an amount determined by applying to the taxpayer’s income from sources in the United States upon which he is subject to tax in Canada the same percentage as is applied by Canada to income in determining the limitation of the deduction for such gifts.”

(f) By adding immediately after Article XIII D, as added by this Supplemental Convention, the following new Article:

“Article XIIIE

A resident of one of the Contracting States who is a beneficiary of an estate or trust of the other Contracting State shall be exempt from tax by such other State with respect to that portion of any amount paid, credited, or required to be distributed by such estate or trust to such beneficiary out of income from sources without such other State.”

(g) By amending Article XX(2) as follows:

(A) By striking out clauses (b) and (c) thereof;

(B) by striking out the designation (d) in clause (d) and inserting in lieu thereof “(b)”; and

(C) by striking out in clause (b) as so redesignated, “Income War Tax Act” and inserting in lieu thereof “Income Tax Act”.
Article II

  1. The present Supplementary Convention shall be ratified and the instruments of ratification shall be exchanged at Washington as soon as possible.
  2. The present Supplementary Convention shall become effective with respect to taxable years beginning on and after the first day of January of the calendar year in which occurs the exchange of the instruments of ratification. It shall continue effective indefinitely as though it were an integral part of the Convention of March 4, 1942, as modified and supplemented by the Convention of June 12, 1950.

In witness whereof the above-named Plenipotentiaries have signed the present Convention and have affixed thereto their respective seals.

Done, in duplicate, at Ottawa this 8th day of August 1956.