The newest protocol updating the tax treaty between the United States and Canada came into force on Monday, the federal Department of Finance announced.

The fifth protocol updating the treaty with respect to taxes on income and on capital was signed by Finance Minister Jim Flaherty and Secretary of the Treasury Henry M. Paulson, Jr. on Sept. 21, 2007.

Following the signing last year, the agreement was required to be ratified by the House of Commons in Canada and the United States Senate.

Concluding 10 years of negotiations, the protocol is intended to modernize the treaty to stimulate further trade and investment and make the tax systems more efficient.

Specifically, it eliminates withholding taxes on cross-border interest payments; extends treaty benefits to limited liability companies; allows taxpayers to require that certain key double tax issues, such as transfer pricing, be settled through arbitration; ensures that there is no double taxation on emigrants’ gains; gives mutual tax recognition of pension contributions; and clarifies how stock options are taxed.

“The entry into force of this updated treaty with our largest trading partner will benefit individuals and businesses on both sides of the border, including manufacturers,” said Flaherty in a statement. “The increased trade and investment that it will induce is particularly timely given uncertain global economic conditions.”

The treaty was last updated in July 1997.

IE