811.5123 Foreign Investments/32

Memorandum by the Adviser on International Economic Affairs (Feis)

The Canadian Minister called upon the Secretary of State to present to him certain thoughts with regard to contemplated revision of our tax laws bearing upon the taxation of non-resident aliens in foreign corporations. The Secretary asked me to be present.

The Canadian Minister said he wished to rest his remarks upon the general idea that the Canadian and American peoples, and their economic relations, are extraordinarily close and that they will be best served by constantly striving to look at their interests as part of a unified whole and developing in every way relationships between them. He therefore wished to express his sense of regret if action in the tax field taken by this country would work counter to this development, which he was confident likewise represented the Secretary’s general attitude. The Secretary indicated that this was so.

Further, the Minister continued that the Canadian interest in American securities is widely scattered among a great number of small investors. If therefore prospective legislation took the form of imposing a heavy original withholding tax (22½ and 25 percent have been mentioned), and all these small investors found their dividends lessened by this amount, unless they went through the whole procedure of filing income tax returns to the United States, the Minister stated he was afraid it would adversely affect Canadian opinion. In saying this the Minister stated he did not want to seem to be threatening retaliatory action but merely to call attention to what appeared to him an inevitable consequence.

Further, the Minister dwelt upon the disappointment that would arise in Canada if the tax treaty recently negotiated between the two governments is not ratified by the United States Government. The Secretary indicated that he thought this had been ratified. The reasons for recent delay were not known either to the Secretary or to myself. The Treasury had been informed that this Department was prepared to have the treaty ratified and it understood that the Treasury had so notified Senator Pittman.

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After a considerable interchange regarding detail, the Minister tentatively advanced the suggestions first that perhaps it might be possible for the Secretary to bring it about that there was no new legislation in this field at this session, or second that the tax treaty with Canada would be promptly ratified and that provision be made in any legislation that was passed making special exception for the treaty commitments of the United States; and in that case the Canadian Treasury will be prepared immediately thereafter to enter discussion with the American Treasury with regard to the possible revision of the treaty for the purpose of carrying out the idea of equality of tax treatment as between Americans and Canadians in the matter of income derived from American sources.

The Secretary did not give any clear indication as to his judgment of the feasibility of either line of procedure. The first line was in no way encouraging. Mr. Feis indicated that the Treasury might find the second line of procedure acceptable.

It was agreed that an opportunity be presented for the Canadian Minister to discuss this matter directly with Mr. Magill, Under Secretary of the Treasury, directly in charge of the Treasury work in this field.

Throughout the discussion the Minister emphasized the fact that the Canadian Treasury is completely prepared to cooperate with the American Treasury to deal with tax evasion. It will do everything feasible to see that the American Treasury is kept fully advised of the income secured by Americans from Canadian sources.

After talking with the Secretary the Minister came to my Office and I telephoned Mr. Magill, who is up in Connecticut, and explained the gist of the matter to him and arranged for a meeting between the Minister and Mr. Magill on Wednesday morning next.