Spring 2010 issue of Horizons

INDUSTRY u MANUFACTURING & DISTRIBUTION

final changes could result in a significant income tax withholding on repayments to the U.S.

The following is a review of the beneficial changes, followed by a discussion of the Unlimited Liability Company (ULC) issues.

1. ELIMINATION OF WITHHOLDING TAXES ON INTEREST PAYMENTS TO RELATED PARTIES

Prior to the amendment, the withholding tax on interest payments from Canadian corporations to cross-border U.S. holders of the debt in an arms- length debt was at a rate of up to 10 percent. Under the current amendment, withholding on related party or non-arms-length debt will be eliminated in the source country (Canada) completely. Withholding on interest paid to non-arms-length holders has been phased out, and for 2010 the rate will be 0 percent. (The reduced rate will not apply to interest payments to U.S. residents where the interest is determined by reference to receipts, sales, income or other cash flow of the Canadian company.) Prior to the amendment, LLCs were potentially denied the benefits of a decreased dividends rate from 15 percent to 5 percent. Beginning January 1, LLCs will be able to qualify for the benefits of the reduced rates because of the “look through” provision. U.S. companies can now look through the LLC to its members. Those members who are U.S. residents may qualify for the benefits of the treaty. The provision affords LLCs the same treatment as U.S. partnerships and S corporations. 2. EXTENSION OF TREATY BENEFITS TO LIMITED LIABILITY COMPANIES

Recent Treaty Amendment Impacts Businesses with Canadian Affiliates Canadian and U.S. businesses have been realizing the benefits of phased-in changes under the recent amendment to the Canada-U.S. Income Tax Treaty. However, effective January 1, 2010, final changes related to Canadian Unlimited Liability Companies may result in an unfavorable income tax withholding bill. Failure to understand the implications of these By Linda Paradis, CPA

3. INCREASED WITHHOLDING RATES FOR HYBRID ENTITIES

Effective January 1, benefits will no longer be allowed to U.S. residents for amounts received through hybrid

39 u spring 2010 issue