{"id":5089,"date":"2013-04-17T00:00:00","date_gmt":"2013-04-17T04:00:00","guid":{"rendered":"https:\/\/www.millerthomson.com\/overview-of-limitation-on-benefits-article-in\/"},"modified":"2026-04-09T18:07:34","modified_gmt":"2026-04-09T22:07:34","slug":"overview-of-limitation-on-benefits-article-in","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/corporate-tax\/overview-of-limitation-on-benefits-article-in\/","title":{"rendered":"Overview of limitation on benefits article in Canada-U.S. tax treaty"},"content":{"rendered":"\n

 <\/span>The Canada-United States Tax Treaty <\/em>(the \u201cTax Treaty\u201d) is unique among Canada\u2019s tax treaties in its approach to prevent \u201ctreaty shopping\u201d. Treaty shopping generally refers to the acquisition and enjoyment of treaty benefits under a given tax treaty by persons who are not bona fide tax residents of one of the countries that is a party to the particular treaty. <\/span><\/p>\n\n\n\n

The Tax Treaty is unique in that it contains a \u201climitation on benefits\u201d (\u201cLOB\u201d) provision (Article XXIX A) which is unlike the anti-treaty shopping provisions in Canada\u2019s treaties with other countries. Although the LOB article in the Tax Treaty has existed for some time, prior to the introduction of the Fifth Protocol to the Tax Treaty in 2008, the LOB article applied only in respect of U.S. taxes. With the introduction of the Fifth Protocol, the LOB article now applies with respect to both U.S. and Canadian taxes. As a result, any inbound investment into Canada that involves reliance on the benefits of the Tax Treaty must be carefully considered in light of the LOB rules.<\/span><\/p>\n\n\n\n

Canada\u2019s other tax treaties generally contain other provisions aimed at preventing treaty shopping, including reliance on Canada\u2019s general anti-avoidance rule in section 245 of the Income Tax Act (<\/em>Canada) (the \u201cAct\u201d) and on the requirement that the recipient of treaty benefits must be the \u201cbeneficial owner\u201d of the relevant income sought to be taxed by the source country. For example, Canada\u2019s recently signed tax treaty with Hong Kong specifically states in Article 26(2) that nothing in the treaty shall prevent a party from \u201capplying the provisions of its law which are designed to prevent tax avoidance, including measures relating to thin capitalization\u201d. Treaty benefits relating to dividends, interest and royalties are also denied in <\/span>Articles 10(7), 11(9) and 12(7) of the tax treaty with Hong Kong, respectively, in a broadly-worded set of situations which generally involve an analysis of the purposes of any assignment or transfer of the income or the creation, assignment or transfer of shares, debt-claim or other rights related thereto.<\/span><\/p>\n\n\n\n

The LOB article under the Tax Treaty, in contrast, is relatively specific and focussed as to the persons (referred to as \u201cqualifying persons\u201d) who are entitled to treaty benefits, and those who are not. Although the provisions are relatively complex, their specificity generally allows for a greater degree of certainty as to whether or not a given person will be entitled benefits under the Tax Treaty. The following is a brief overview of the main components of the LOB article in the Tax Treaty.<\/span><\/p>\n\n\n\n

Qualifying and non-qualifying persons<\/span><\/h2>\n\n\n\n

\u201cQualifying persons\u201d are entitled to all of the benefits under the Tax Treaty, and are defined as residents of either Canada or the U.S. who are one of the following:<\/span><\/p>\n\n\n\n