• Banking: Canadian Withholding Tax Elimination
  • October 2, 2007 | Author: Nora F. Osbaldeston
  • Law Firm: Miller Thomson LLP - Toronto Office
  • Canada and the United States have agreed in principle to changes to the Canada-U.S. Tax Treaty which will eliminate the withholding tax on interest paid by resident Canadian borrowers on loans made by U.S. resident lenders. The changes to the treaty are expected to come into force by year end. It is proposed that in the case of arm’s length Canadian borrowers and U.S. resident lenders, the tax will be eliminated in the year following the entry into force of the amended treaty; in the case of nonarm’s length Canadian borrowers and U.S. lenders, the tax will be eliminated over a three-year phase-out period.


    Proposed amendments to the Income Tax Act (Canada) (ITA) would eventually eliminate withholding tax on interest paid by Canadian borrowers to any arm’s length lender, regardless of the lender’s country of residence.


    The proposed changes should simplify cross-border loans. Cross-border financings are currently typically  structured to take advantage of the “5/25” withholding tax exemption under the ITA, which provides a withholding tax exemption if the borrower is not obliged to repay more than 25 percent of the principal amount of the loan within five years of the date of issue. Not having to fit within this exemption should reduce transactional costs and allow loan participants to structure transactions according to actual business needs. The proposed changes should also reduce the costs of borrowing and provide Canadians with easier access to foreign lending

    markets. Even so, nonresident lenders should still consult Canadian counsel to ensure compliance with all other Canadian tax, lending and other regulatory provisions.