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ARTICLE · 01 DECEMBER 2009

Canada Revenue Agency Interprets Anti-Hybrid Rule

Blake, Cassels & Graydon LLP
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The Fifth Protocol to the Canada-U.S. tax treaty (the Treaty) was ratified in December 2008, and for most purposes came into force in 2009. One of the more controversial measures contained in the Protocol is the new "anti-hybrid" rule in Article IV(7) of the Treaty.

CanadaTax
Blake, Cassels & Graydon LLP
Blake, Cassels & Graydon LLP
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Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, November 2009

The Fifth Protocol to the Canada-U.S. tax treaty (the Treaty) was ratified in December 2008, and for most purposes came into force in 2009. One of the more controversial measures contained in the Protocol is the new "anti-hybrid" rule in Article IV(7) of the Treaty. This unprecedented rule takes effect on January 1, 2010.

The Anti-Hybrid Rule

There are two branches to the anti-hybrid rule.

The first branch deals with "reverse hybrid" entities. These are entities which are fiscally transparent in the source state but not in the state of residence. An example of such an entity is a partnership formed under Canadian law which has elected for U.S. tax purposes to be treated as a foreign corporation. This branch of the rule, found in Article IV(7)(a), applies to an amount paid to or derived by a U.S. person through an entity that is not a U.S. resident,

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