U.S. Treasury Department and Fifth Protocol
The U.S. Treasury Department advised in November 2008 that the Fifth Protocol to the Canada-United States Income Tax Convention will come into effect before the end of this year.
The Protocol contains a number of significant amendments. Employers with employees that are cross-border commuters should review their retirement plan arrangements in light of the new tax treatment imposed by the provisions of the Protocol.
Canada and the U.S. have entered into several bilateral tax treaties. However because of the unique trading relationship of Canada and the U.S., the Protocol to the Canada-United States Income Tax Treaty has culminated in a very unusual and complex agreement that contains some very unique provisions and amendments.
Employers with employees that are cross-border commuters should review their retirement plan arrangements in light of the new tax treatment imposed by the provisions of the Protocol. Five income tax changes will affect cross-border executives: exemption of employment income, stock option sourcing, stock options and death, Canadian departure tax, and pension contributions.
The Protocol significantly enhances the deductions available for cross-border commuters and assignees. Pursuant to the provisions of the Protocol, "cross-border commuters" will be permitted to deduct for residence country tax purposes contributions made to a plan in the country where they are employed provided that certain conditions are met. The Protocol also sets out new rules with respect to the treatment of contributions to qualifying pension and other retirement plans. The rules clarify that benefits accruing under these plans are not taxable. These rules will affect cross-border commuters and individuals on temporary work assignments of up to five years.
On 10 July, the U.S. Treasury Department released its technical explanation of the Protocol to the Canada-United States tax convention signed on 21 September 2007. Canada's Department of Finance has expressed its agreement with the technical explanation.
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