OTTAWA, Sept 18 (Reuters) - Canada and the United States are expected to sign a new tax treaty this month that could increase Canadian companies' access to U.S. financing, experts said on Tuesday.
The two governments will eliminate the 10 percent withholding tax on interest payments made by borrowers in one country to lenders in the other.
The measure would mainly benefit Canadian companies that borrow from U.S. banks. Ottawa estimates it will cost the federal government an estimated C$250 million ($245 million) in the 2007-08 and 2008-09 fiscal years.
Finance Minister Jim Flaherty said in a speech on Sunday that the signing of a revised Canada-U.S. tax treaty would be "soon." Finance officials would not give details.
Tax lawyers who consulted with the Department of Finance said they had been told the revised treaty would be signed by the end of September.
Nancy Hughes Anthony, president of the Canadian Bankers Association, also believes an announcement is imminent.
"We understand that they are on the verge of being able to actually sign the tax treaty, which would be tremendous," she said.
The withholding tax is applied to the interest income of nonresident lenders. Canadian law obliges the Canadian borrower to withhold the tax from its interest payment to a U.S. lender and remit it directly to Ottawa.
In practice, the tax becomes a premium on capital because most sophisticated U.S. lenders require clients to "gross up" their payment so that they pay the full interest plus the tax.
"There's a very keen interest in this," said Michael Friedman, a tax lawyer with McMillan Binch Mendelsohn LLP. "The cost of obtaining capital will be reduced because borrowers won't face the demands to gross up and the ability to borrow capital will be increased."
He added: "It also reduces the legal complexity of borrowing transactions."
The 2007 federal budget said the withholding tax on arm's-length debt -- where borrower and lender are unrelated entities -- with the United States would be eliminated in the first year after the new treaty goes into effect. For non-arm's-length debt, the tax will be phased out over three years.
Ottawa also said it would then unilaterally extend the exemption to arm's-length debt with lenders in all countries.
The risk to Canadian banks is that they lose their competitive edge. But bankers have been pushing for the policy change for years and see more benefits than pitfalls.
"Anything that loosens up the free flow of capital between the two countries will be good for banks because it will be good for their customers," she said. "We hope it will result in increased foreign investment and other things that will be good for the bottom line."
1 comments:
This change means someone in Canada who borrows money from a U.S. lender will no longer have to withhold and remit Canadian tax on the interest payments.
Other amendments to the tax treaty include:
* Extending treaty benefits to limited liability companies.
* Allowing taxpayers to require that some double taxation issues be settled through arbitration.
* Ensuring there is no double taxation on capital gains of investors who move from one country to the other.
* Giving mutual tax recognition of pension contributions.
* Clarifying how stock options are taxed.
The treaty must be ratified by the Canadian and U.S governments, and is set to go into effect Jan. 1.
Post a Comment