Technical Explanation To Protocol Offers Limited Guidance On Limitation On Benefits

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, July 2008

BACKGROUND

Under prevailing U.S. tax treaty policy, newly negotiated or renegotiated U.S. tax treaties must contain "limitation on benefits" (LOB) rules. Such rules are intended to prevent perceived "treaty shopping" by residents of third countries by requiring a person to meet not only a test of residence, but also additional tests of connection to a jurisdiction, in order to qualify for benefits pursuant to a tax treaty. LOB rules were added to the Canada-United States Income Tax Convention (the Treaty) by the protocol signed in 1995, but these rules operated solely with respect to U.S. Treaty benefits. Canada's approach to perceived treaty shopping has consistently been to reject bright-line rules in favour of domestic anti-abuse provisions such as the general anti-avoidance rule