13.3 U.S Interpretation of the Treaty
13.3.1 [a] Taxation of Gains by Non-resident Aliens and Foreign Corporations
The United States generally imposes a flat 30 percent tax, collected by withholding, on the gross amount of U.S. source investment income payments including non-capital gains earned by NRA individuals and foreign corporations.
As a general rule, the regulations provide that the 30 percent tax will not include gains from the sale or exchange of property to a foreign person who is not engaged in a trade or business in the United States.
An alien who is regarded as resident in the U.S. under the Code is subject to tax in the U.S. on his/her worldwide income, including gains, regardless of its source.
If a foreign person or corporation carries on a trade or business in the U.S., federal income tax is imposed on its net income, wherever derived, that is effectively connected with the trade or business.
The tax on effectively connected income is imposed at the same rates that apply to a similarly situated U.S. person. An additional tax, the branch profits tax, may be imposed on the “dividend equivalent amounts” of a foreign corporation engaged in a U.S. trade or business.
13.3.1[b] Taxation of U.S. Real Property Interests
The foreign Investment in Real Property Tax Act of 1980(FIRPTA) subjects gain or loss of a foreign person from the disposition of a U.S. real property interest (USRPI) to tax as if the taxpayer were engaged in a trade or business with in the U.S. and the gain or loss were effectively connected with such trade or business. As a result, RIFTPA represents an exception to the general non-taxation treatment of foreign investors with U.S. source capital gains that are not effectively connected with a U.S. business of the taxpayer.
13.3.1[c] Source of Gains
Disposition of United States real property interests as defined under section 897 are U.S. source. Gains, profits and income from the sale of real property located outside the U.S., is foreign source.
Section 865 sets forth general rules relating to the sourcing of income from sales of personal property. Unless otherwise provided in the section, income from the sales of personal property by U.S. residents is sourced in the U.S., whereas, income from the sales of personal property by a non-resident is sourced outside the United States.
References:
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell
