Refunds of Withholding Tax

Volume No. 09-10

“The credit for foreign taxes will likely be based on the treaty rate of 7% rather than 10%.”

The Fifth Protocol to the Canada-U.S. Treaty (the Protocol) came into force on December 15, 2008 and eliminates withholding tax on related party interest payments over three years.

Now that the Protocol is in force, the withholding tax rate on related party loans has been retroactively reduced from 10% to 7% for calendar 2008. The rate is reduced to 4% for 2009 and will be eliminated in 2010 and later years.

Since the Protocol was not ratified until December 15, 2008, the 10% rate may have been applied to interest on non-arm’s length loans for most of 2008. A U.S. taxpayer can apply to the CRA for a refund of the excess 3% withholdings applied in 2008 as long as the request is filed by December 31, 2010.

Canadian creditors who have been subjected to the 10% withholding rate can apply to the IRS for a refund by filing a form 1040NR or 1120F, as applicable, on a timely basis. However, US professional advice is strongly suggested in order to make sure the US deadlines and procedures are adhered to.

Where a request for refund is not submitted, the credit for foreign taxes will likely be based on the treaty rate of 7% rather than 10%


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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.