U.S.-Canada tax treaty: withholding rates on interest, dividends, royalties and services

Status and notes

• Pensions: the 15% rate does not apply to a lump-sum payment (Table 1, note ii).
• The fifth protocol added a services permanent establishment rule in Article V(9): services performed in the United States for 183 days or more in a 12-month period can create a permanent establishment under the conditions in that paragraph, which removes the business-profits exemption for the income attributable to it.

What sets the U.S.-Canada treaty apart

The U.S.-Canada treaty has been amended five times, and the fifth protocol changed the payments a U.S. payer makes most often. Interest is now exempt from U.S. withholding even between related companies, most software, patent and copyright royalties are exempt while trademark, film and equipment rental royalties stay at 10%, and the independent personal services article is gone: a Canadian contractor's fees are business profits, taxable only through a permanent establishment, which since 2010 can arise from services alone.

Common payments at a glance

Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.

Rates on investment and other income

Treaty in effect generally from Jan. 1, 1985. Protocols in effect from: 3rd Protocol: Jan. 1, 1996; 4th Protocol: Dec. 16, 1997 (entry into force); 5th Protocol: Jan. 1, 2009. IRS country code CA.

"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.

Pay for personal services performed in the United States

Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.

Reading the U.S.-Canada treaty as a payer

Documents and dates

The convention was signed on September 26, 1980 and has been amended by protocols signed in 1983, 1984, 1995, 1997 and 2007. The IRS tables treat it as generally in effect from January 1, 1985, the third protocol from January 1, 1996 and the fifth protocol from January 1, 2009. The fifth protocol phased in its interest exemption: unrelated-party interest was exempt from the start, and interest between related persons fell to 7% and then 4% before reaching zero in the third calendar year (Fifth Protocol Art. 27(3)(d)). Any related-party interest paid today is exempt.

Residence and hybrid entities

Canada is one of the few treaty partners whose residents commonly hold U.S. business through entities the two countries classify differently, and the treaty has specific rules for that. Article IV(6) treats income derived through an entity that the resident's own country sees as fiscally transparent (a partnership, for example) as derived by the resident owner. Article IV(7) then denies benefits in two cases:

• (a) the income is derived through an entity that Canada does not treat as transparent but the United States does. A Canadian owner of a U.S. LLC that is disregarded for U.S. tax but treated by Canada as a corporation cannot claim treaty benefits on the LLC's U.S.-source income as if it were their own.
• (b) the payment comes from a U.S. entity that Canada treats as transparent, and that treatment changes how the income is taxed in Canada. The technical explanation's example is a U.S. entity that elected to be a corporation for U.S. purposes but is a branch for Canadian purposes: its dividends, interest and royalties to its Canadian parent get no treaty reduction.

For the payer, the point is to look past the W-8 to the structure. A claim from a Canadian owner of a U.S. LLC, or from a Canadian parent of a U.S. entity that has checked the box, is the case these rules were written for. Neither rule is an exception to the saving clause (TE to the Fifth Protocol, Art. 2).

A company incorporated in only one of the two countries is resident only there; for other dual-resident companies the competent authorities decide, and until they do the company is not resident in either country for treaty purposes (Art. IV(3)).

Limitation on benefits

Article XXIX A originally applied only to U.S. relief. Since the fifth protocol it applies in both directions. A Canadian company qualifies if its principal class of shares is primarily and regularly traded on a recognized exchange, if it is more than 50% owned by five or fewer such listed companies, or if it passes an ownership and base erosion test (50% or more owned by qualifying persons and less than 50% of gross income paid as deductible payments to non-qualifying persons). An active trade or business test is applied income item by income item.

The derivative benefits test covers only dividends, interest and royalties (Arts. X, XI and XII). It requires more than 90% of the vote and value to be owned by qualifying persons or equivalent beneficiaries, plus the base erosion test. Shares that are in substance debt ("debt substitute shares") do not count toward ownership (Art. XXIX A(5)(a)), and the article keeps an express reservation of each country's general anti-abuse rules (Art. XXIX A(7)).

Contractors and the services permanent establishment

Article XIV (independent personal services) and Article XVII (which allowed 10% withholding on the first $5,000 of a contractor's fees) were deleted by the fifth protocol. A Canadian contractor's fees for work in the United States are now business profits under Article VII: exempt unless they are attributable to a U.S. permanent establishment.

Article V(9) adds a permanent establishment that needs no fixed place. Services performed in the United States create one if either:

• an individual is present in the U.S. for 183 days or more in any 12-month period and, during that time, more than 50% of the enterprise's gross active business revenues come from that individual's services here; or
• the enterprise provides services in the U.S. for 183 days or more in any 12-month period on the same or connected projects, for customers who are U.S. residents or have a U.S. permanent establishment the services relate to.

The technical explanation counts physical presence days for the first test and working days for the second; several employees working on the same day count once, and work done remotely from Canada does not count. A one-person Canadian consultancy whose owner spends most of a year on a U.S. client's site is the classic case that crosses the first test.

Construction projects are a permanent establishment only if they last more than 12 months (Art. V(3)); a drilling rig or ship used to explore or exploit natural resources, more than 3 months in any 12 (Art. V(4)).

Employees

Article XV has two independent exemptions. Pay of $10,000 or less (in U.S. dollars, for work in the U.S.) for the calendar year is exempt regardless of days or employer. Above that, pay is exempt only if the employee is present no more than 183 days in any 12-month period beginning or ending in the year, and the pay is not paid by or for a U.S. resident employer and not borne by a U.S. permanent establishment. A Canadian employee seconded to a U.S. affiliate that reimburses the cost fails the second test from the first day. Stock option gains are allocated by days worked in each country between grant and exercise (Fifth Protocol, General Note para. 6).

Performers and athletes

A performer or athlete is taxable in the U.S. if gross receipts from U.S. performances, including expenses reimbursed or borne by someone else, exceed $15,000 for the calendar year (Art. XVI(1)). Above that, the whole amount is taxable, not just the excess. Athletes on teams in leagues with regularly scheduled games in both countries are carved out to the employment article (Art. XVI(3)), and a signing bonus paid to an athlete may be taxed at up to 15% (Art. XVI(4)).

Pensions, annuities and Social Security

The source country may tax a periodic pension at up to 15% of the gross payment and an annuity at up to 15% of the taxable portion (Art. XVIII(2)). The cap does not reach a lump sum, which is withheld under the Code's own rules. Social Security benefits, including tier 1 Railroad Retirement, are taxable only in the recipient's country of residence (Art. XVIII(5)), so U.S. Social Security paid to a Canadian resident is not withheld on. A Roth IRA keeps its pension character for a Canadian resident until new contributions are made while resident in Canada (Art. XVIII(3)(b)).

Canadian pension trusts and pooled funds that hold investments for them are exempt from U.S. tax on dividends and interest, but not on income from a trade or business or from a related person (Art. XXI(2) to (4)).

Students, trainees and teachers

A Canadian student or business trainee in the U.S. for full-time education or training is exempt only on payments from outside the United States for maintenance, education or training (Art. XX). The technical explanation looks at substance: a payment funded by a U.S. payer and routed through Canada is not from outside the U.S. Trainees and apprentices get one year. There is no article for teachers or researchers, so a visiting Canadian professor's pay falls under the employment article.

Other income and guarantee fees

Article XXII lets the source country tax income not covered elsewhere, with no rate cap, except that a distribution from a U.S. estate or trust is capped at 15%. Gambling winnings are other income: the treaty lets a Canadian resident deduct wagering losses, but the payer still withholds 30% on the gross winnings and the payee recovers the excess on a return (TE to the Third Protocol, Art. 11). Guarantee fees are an exception that the fifth protocol added: they are taxable only in the guarantor's country of residence unless they are business profits of a permanent establishment (Art. XXII(4)).

Where payers get it wrong

• Withholding 10% or 15% on interest. Those were the rates before the fifth protocol. Interest is exempt, related or not; only contingent interest that is not portfolio interest (up to 15%) and REMIC excess inclusions remain taxable (Art. XI(1), XI(6)).
• Using one royalty rate for a bundled license. A contract that licenses software and a trademark together, or know-how with a franchise, has an exempt part and a 10% part. The technical explanation expects the payment to be split.
• Treating equipment rent as business profits. Unlike most modern treaties, the Canadian royalty definition includes rent for tangible personal property, so equipment rent is a 10% royalty.
• Relying on the 183-day test alone for a seconded employee. If a U.S. company pays or bears the wages, the day count does not help; only the $10,000 test can exempt the pay.
• Applying the deleted contractor articles. There is no fixed-base test and no 10% rate on the first $5,000 any more. The questions are whether the fees are business profits and whether a permanent establishment, including a services PE, exists.

Read from the treaty documents: Convention of Sept. 26, 1980 and Protocols of 1983, 1984, 1995, 1997 and 2007; Treasury Technical Explanations of the Convention, the Third Protocol and the Fifth Protocol. Texts and technical explanations: United States income tax treaties, A to Z.

How the payee claims these rates

• Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
• Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the Canada treaty's LOB provision is Article XXIX A).
• Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
• The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.

Questions payers ask

The IRS notes behind the figures

Notes to the rates (IRS Table 1)

• g Exemption or reduced rate does not apply to an excess inclusion for a residual interest in a real estate mortgage investment conduit (REMIC).
• ii In Canada, the 15% rate does not apply to a lump-sum payment. In Italy, the exemption does not apply to lump-sum or severance payments received if the applicable past employment was performed in the United States while such person was a resident of the United States. In the Netherlands, the exemption does not apply if (1) the recipient was a U.S. resident during the 5-year period before the date of payment, (2) the amount was paid for employment performed in the United States, and (3) the amount is not a periodic payment, or is a lump-sum payment in lieu of a right to receive an annuity. In the United Kingdom, the exemption does not apply to a lump-sum distribution derived from a U.S. pension plan. In India, the exemption does not apply to a lump-sum payment.
• jj The rate is 15% (10% for Bulgaria and Spain; 30% for Austria, Germany, and Switzerland) for contingent interest that does not qualify as portfolio interest. In general, contingent interest is interest that is determined with reference to (a) receipts, sales, income, profits or other cash flow of the debtor or a related person, (b) any change in the value of any property of the debtor or a related person, or (c) any dividend, partnership distribution, or similar payment made by the debtor or related person. For Sweden and Germany, contingent interest is covered by the dividends article of the treaty.
• mm The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (a) an individual (or pension fund, in some cases) holding not more than a 10% interest in the REIT, (b) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (c) a person holding not more than a 10% interest in the REIT and the REIT is diversified.

Notes to the services table (IRS Table 2)

• 11 Applies only to full-time student or trainee.
• 13 Exemption does not apply if, during the immediately preceding period, such individual claimed the benefits of Article 23(1).
• 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
• 25 Exemption does not apply if gross receipts (including reimbursements) exceed this amount.
• 52 Exemption applies to a business apprentice (trainee) only for a period not exceeding 1 year (2 years for Belgium and Bulgaria) from the date of arrival in the United States.
• 53 Treated as business profits under Article 7 (VII) of the treaty.
• 54 Employment with a team which participates in a league with regularly scheduled games in both countries is covered under the provisions for dependent personal services.
• 57 Remuneration for employment exercised aboard a ship or aircraft operated in international traffic by a resident of a contracting State may be taxed in that State. Canada may tax the income from employment if the income is derived by a resident of Canada and the ship or aircraft is operated by a resident of Canada. If operated by a Luxembourg resident and Luxembourg fails to tax the income, such income shall be taxed in the State of which the employee is a resident. The income may be taxed in Tunisia only if the ship or aircraft is operated by an enterprise that is managed and controlled in Tunisia.

Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.

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