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New pact comes as both countries recognize the anniversary of the US-Canada Free Trade Agreement

WASHINGTON, DC – 10/04/07 – The US and Canada have signed a new tax treaty that eliminates the so-called withholding tax on investment interest in a move expected to make businesses on both sides of the border more efficient and competitive.

The agreement is the fifth updated agreement between the US and Canada since the two countries signed the original tax treaty in 1980. The new treaty will need to be approved by both the US Senate and the Canadian Parliament in Ottawa.

The current treaty provides that lenders that are resident in one of the two countries and are receiving interest payments from borrowers resident in the other country are generally subject to a withholding tax of 10% on such interest payments.

The protocol provides that withholding tax on the interest paid on arm’s length debt will be eliminated as of the second month following the protocol’s entry into force.

Withholding tax on interest payments between related persons will also be eliminated; however, such withholding tax will be phased out over a two-year period.

Other changes in the agreement include an extension of treaty benefits to limited-liability companies commonly used by US venture-capital firms; and permitting taxpayers to ask for arbitration in disputes involving double taxation.

It also gives mutual tax recognition on pension contributions; clarification on how stock options are to be taxed; and assurances that emigrants from either country will not face double taxation on gains.

US Treasury Secretary Henry Paulson and Canadian Finance Minister Jim Flaherty both praised the initiative, saying in a joint statement that the new agreement would “ease future trade and investment” between the two countries.

The announcement of the new tax treat comes as both countries recognize the 20th anniversary of the signing of the US-Canada Free Trade Agreement.

The agreement was gorged after 16 months of negotiations and paved the way for the North American Free Trade Agreement (NAFTA), which took superseded it five years later.

Key elements of the historic pact included the elimination of tariffs and the reduction of many non-tariff barriers. It was also among the first trade agreements to address trade in services and feature a dispute settlement mechanism for the fair and independent resolution of trade disagreements.

The success of this dispute resolution model later led to similar mechanisms being integrated into the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) regimes.

Two-way trade between the US and Canada has tripled to $500 billion annually since the agreement went into effect.

In fact, the two-way trade that crosses the Ambassador Bridge between Detroit, Michigan and Windsor, Ontario equaled all US exports to Japan in 2006.

Canada is the leading export market for 39 of the 50 US states and ranked in the top three for another eight states with the country serving as a larger market for US goods than all 25 countries of the European Community combined.

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