811.512342 Double/14
The Canadian Legation to the Department of State 12
Memorandum
There is submitted herewith a draft of a proposed agreement between the Governments of the United States and Canada,13 the purpose of which is to prescribe maximum rates of taxation to be levied by either government on income paid to individuals and corporations of the other country.
Form of Agreement. The draft does not indicate what form the agreement should take. In this connection the matter of importance to the Canadian Government is that the arrangement should be concluded with as little delay as possible, so that the maximum rates of taxation prescribed in the agreement should become effective in both countries at the earliest moment. An executive agreement might be the most satisfactory way of handling the matter; if this is not acceptable, an inter-governmental agreement or a convention between the President and His Majesty in respect of Canada could be resorted to.
The Canadian Government can bring into effect any arrangement which may be concluded without waiting for Parliamentary approval. It is hoped that it will be found possible for the United States to take similar action, so that the application of the new rates need not await approval of the agreement by the Senate.
- Article I (a). This paragraph provides reciprocally for a maximum tax of 5 per cent in respect of income received by resident individuals in one country from sources in the other country. It follows the language inserted at the end of Section 211 (a) of the Revenue Act of 1936. The present Canadian rate of tax is 5 per cent, but the tax is not so comprehensive in its application as the similar tax imposed at the rate of 10 per cent by the United States.
- Article I (b). This paragraph similarly proposes that nonresident corporations should not be taxed by either country at a rate higher than 5 per cent in respect of all income which they receive from the other country. The present United States rates are 10 per cent on dividends and 15 per cent on income from other sources. The present Canadian rate is 5 per cent, with, however, the important qualification that dividends paid by subsidiary companies to their parent corporations in the United States are exempt from tax. Section [Page 792] 231 (a) of the Revenue Act of 1936 made provision for the reciprocal reduction of the 10 per cent rate on dividends to 5 per cent, following the conclusion of treaties with contiguous countries, but the proposal did not extend to income other than dividends. It seems logical and consistent, however, that the proposed agreement should permit a 5 per cent rate on all classes of income. It is not known why a distinction was made in the Revenue Act between the kinds of income received by non-resident corporations when no such distinction was made between the kinds of income received by non-resident individuals. There is no similar distinction in the Canadian Act.
- Article I (c). This paragraph proposes that the maximum rate to be levied on resident alien corporations in both countries should be 17 per cent. Under Section 231 (b) of the Revenue Act of 1936 a flat tax of 22 per cent was imposed on the income derived from the United States of these corporations. The rate provided in the Canadian Act on United States resident corporations is 15 per cent. The proposal in this paragraph was not directly contemplated by the language of the Revenue Act of 1936, but it is believed that resident corporations in both countries might benefit by the provisions of the proposed agreement just as reasonably as non-resident individuals and corporations.
- Article I (d). This paragraph makes it clear that either country is at liberty to increase the rates of taxation prescribed in (a), (b), and (c) on the understanding that such action releases the other country from its obligations. In this way the elasticity of the revenue systems of both countries can be fully preserved. It is not considered advisable that rates of taxation should be bound by the agreement.
- Article I (e). This paragraph would bring into effect the changes in rates consequent on the agreement as from June 22nd, 1936, the date on which the United States Revenue Act of 1936 came into effect.
- Article II. It is believed that it would be advantageous to include in the agreement a general article along these lines stating the principles upon which fiscal administration in the two countries is based, with respect to the taxation of income arising within each country and with respect to the avoidance of double taxation. The proposal involves no change in law or administrative practice in either the United States or Canada, but its inclusion might facilitate the treatment of a wide variety of items on a uniform basis in both countries.
It is suggested that the negotiation of the agreement should be proceeded with as soon as possible, so that it may be brought into effect at the earliest possible date.