Last month the Canadian Minister of Finance and the US Treasury Secretary announced the entry into force of the Fifth Protocol to the Canada-United States Income Tax Convention, 1980 (the "Treaty"), which updates and amends the Treaty. Although the Fifth Protocol is generally effective for taxable years that begin after 2008, as noted below, several provisions have special application rules.

ELIMINATION OF WITHHOLDING TAX ON INTEREST PAYMENTS

The Fifth Protocol introduced the much-anticipated rule to reduce – and eventually eliminate – sourcecountry withholding tax on cross-border payments of interest. Subject to certain exemptions, interest arising in one country and beneficially owned by a resident of the other country will be taxable only in the other country. Certain types of interest will not benefit from the exemption, such as "participating" interest arising in Canada, and interest arising in the US that is contingent interest of a type that does not qualify as portfolio interest under US law.

This elimination of source-country withholding tax is effective retroactive to January 1, 2008 for interest paid to persons who are not "related" to the payor. The rate reductions will be phased-in for interest paid to "related persons": retroactive to January 1, 2008, the withholding rate applicable to such interest is 7%, with a rate of 4% applying to interest paid in 2009. Thereafter, the full exemption will apply. A "related person" includes a person deemed under the Treaty to be related to another person, including a person who participates directly or indirectly in the management or control of the other person. (Note that Canada recently amended its domestic tax rules to eliminate withholding taxes on most types of interest paid by Canadian residents to arm's length persons, so the effect of the Fifth Protocol on Canadian withholding tax on arm's length interest payments will be limited.)

LIMITED LIABILITY COMPANIES ("LLCs")

Historically, the Canada Revenue Agency has denied the benefit of the Treaty to LLCs on the basis that an LLC is not a resident of the US for purposes of the Treaty, as it is generally disregarded for US tax purposes. Although the Fifth Protocol falls short of extending the benefits of the Treaty to the LLC itself, the amended Treaty extends Treaty benefits to US residents who derive Canadian-source income, profit or gain through an LLC. For example, Canadian withholding tax on dividends received by an LLC, the members of which are residents of the US for purposes of the Treaty, will be reduced from the statutory rate of 25% to the applicable Treaty rate. This change will be effective for taxable years that begin after 2008. PAGE 2

OTHER HYBRIDS

The Fifth Protocol introduced a rule that will deny Treaty benefits to persons who receive amounts of income, profit or gain from certain hybrid entities, if the tax treatment of such amounts in the jurisdiction of the recipient is not the same as if the hybrid entity had not been used. This rule will apply, for example, to distributions to US residents by unlimited liability companies ("ULCs") formed under certain provincial corporate statutes (such as a Nova Scotia ULC or "NSULC"), where the ULC has "checked the box" so as to be a disregarded entity for US tax purposes. An amount of income, profit or gain (including, for example, interest or dividends) paid by a ULC to a US resident will no longer qualify for a reduced rate of withholding tax under the Treaty. Rather, the statutory withholding rate of 25% will apply to such amounts.

The rule will also affect the use of partnerships formed under Canadian law that have US resident partners and that elect to be treated for US tax purposes as a corporation. Currently, payments (for example, of interest) by a resident of Canada to such a partnership are subject to withholding tax at Treaty-reduced rates. The amended Treaty will deny Treaty benefits to such payments, with the result that the statutory rate of 25% will apply.

These rules, which were intended to target certain financing structures which the Canadian government found offensive, will also impact the tax efficiency of inoffensive, inbound to Canada acquisition or investment structures. These rules will not come into effect until January 1, 2010.

LIMITATION ON BENEFITS

The Fifth Protocol introduced Canada's first reciprocal limitation on benefits ("LOB") provision by amending existing Article XXIX-A of the Treaty. The purpose of this provision is to limit or, in some cases, deny benefits under the Treaty to residents of non-contracting states who form entities in the US or Canada in order to obtain more favourable tax treatment under the Treaty (sometimes referred to as "treaty shopping"). Prior to this amendment, Canada had relied on its domestic anti-avoidance rules to combat perceived abuses of treaty shopping. The LOB provision is generally effective for taxable years that begin after 2008.

OTHER CHANGES

The Fifth Protocol contains a number of other amendments to the Treaty. These amendments deal with matters ranging from the taxation of stock options and pensions, effective for taxation years that begin after 2008, to mandatory arbitration of Treaty disputes, generally effective as of December 15, 2008.

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