Canadians Could Gain Greater Access To Foreign Capital

Withholding Tax on Interest to Be Removed

Canadian borrowers are on the verge of gaining unprecedented access to foreign capital. Canada has agreed that it will soon no longer impose withholding tax on interest paid to U.S. residents. Canada has also announced that it will extend this treatment to interest paid to arm’s-length non-residents of any country. Canadian withholding taxes will no longer be a barrier to the free flow of capital between Canada and the United States, and eventually between Canada and the world.

The new broad exemption of Canadian-source interest from Canadian withholding tax will significantly reduce the nuisance of peculiar commercial terms inserted into cross-border loans to ensure that they meet Canada’s existing domestic exemption for five-year corporate debt (the "5/25 Exemption"). Once these changes are implemented, non-resident lenders will be able to offer withholding tax–exempt loans of any term to Canadians and will be able to lend to trusts and