This publication provides information on the income tax treaty between the United States and Canada. It discusses a number of treaty provisions that often apply to U.S. citizens or residents who may be liable for Canadian tax.
Treaty provisions are generally reciprocal (the same rules apply to both treaty countries). Therefore, a Canadian resident who receives income from the United States may refer to this publication to see if a treaty provision may affect the tax to be paid to the United States.
This publication does not deal with Canadian income tax laws; nor does it provide Canada's interpretation of treaty articles, definitions, or specific terms not defined in the treaty itself.
The United States—Canada income tax treaty was signed on September 26, 1980. It has been amended by five protocols, the most recent of which generally became effective January 1, 2009. In this publication, the term "article" refers to the particular article of the treaty, as amended.taxmap/pubs/p597-000.htm#en_us_publink1000104513
The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. That is, a person who is recognized as a resident of the United States who has income from Canada, will often pay less income tax to Canada on that income than if no treaty was in effect. Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for applying the treaty in cases where a taxpayer is considered by both countries to be a resident.taxmap/pubs/p597-000.htm#en_us_publink1000126039
In most instances, a treaty does not affect the right of a country to tax its own residents (including those who are U.S. citizens) or of the United States to tax its residents or citizens (including U.S. citizens who are residents of the foreign country). This provision is known as the "saving clause."
For example, an individual who is a U.S. citizen and a resident of Canada may have dividend income from a U.S. corporation. The treaty provides a maximum rate of 15% on dividends received by a resident of Canada from sources in the United States. Even though a resident of Canada, the individual is a U.S. citizen and the saving clause overrides the treaty article that limits the U.S. tax to 15%.
Exceptions to the saving clause can be found in Article XXIX, paragraph 3.
If you take the position that any U.S. tax is overruled or otherwise reduced by a U.S. treaty (a treaty-based position), you generally must disclose that position on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and attach it to your return.