Rev. Rul. 68-173

Advice has been requested concerning the withholding of United States tax at source from income paid to certain Canadian corporations in view of the changes made by the 1966 Supplementary Convention, page 628, this Bulletin, to the 1942 Convention (T.D. 6047, C.B. 1953-2, 59) between the United States and Canada. The 1966 Supplementary Convention was brought into force on December 20, 1967. The 1942 Convention was previously modified by the Supplementary Conventions of June 12, 1950, C.B. 1955-1, 624, and of August 8, 1956, C.B. 1957-2, 1014.

The 1966 Supplementary Convention is effective with respect to income paid on or after December 20, 1967, the date the instruments of ratification were exchanged.

Paragraph 1 of Article XI of the 1942 Convention, as modified, provided as follows:

1. The rate of income tax imposed by one of the contracting States, in respect of income (other than earned income) derived from sources therein, upon individuals residing in, or corporations organized under the laws of, the other contracting State, and not having a permanent establishment in the former State, shall not exceed 15 percent for each taxable year.

Article I of the 1966 Supplementary Convention further amended Article XI of the 1942 Convention by adding the following paragraph:

6. Paragraph 1 of this Article shall not apply in respect of income derived from sources in one of the contracting States and paid to a corporation organized under the laws of the other contracting State if such corporation is not subject to tax by the last-mentioned contracting State on that income because it is not a resident of the last-mentioned contracting State for purposes of its income tax.

Until further notice, withholding agents may continue to withhold United States income tax at a rate of 15 percent from dividends paid by a United States corporation to a corporation having an address in Canada, except, with respect to payments made on or after April 15, 1968, in those cases where the agent has actual knowledge that the Canadian corporation is not a resident of Canada for purposes of Canadian income tax. In such cases, the Canadian corporation is not entitled to any reduction of the statutory 30 percent withholding rate by virtue of the 1942 Convention, as modified by the 1966 Supplementary Convention. United States income tax shall be withheld at source at the rate of 30 percent.

Persons who pay interest, natural resource royalties, or real property rentals to Canadian corporations that file Form 1001-C or 1001A-C in accordance with the withholding regulations prescribed under the 1942 Convention (T.D. 6047, C.B. 1953-2, 59, as amended by T.D. 6576, C.B. 1961-2, 289) may continue to withhold United States tax at source at the 15 percent rate. However, with respect to payments made on or after April 15, 1968, if the withholding agent has actual knowledge that the recipient corporation is not a Canadian resident for purposes of Canadian income tax, United States tax shall be withheld at source at the rate of 30 percent.

It should be noted that paragraph (g)(1)(i) of section 1.6012-2 of the Income Tax Regulations requires a foreign corporation deriving fixed or determinable annual or periodical income from sources within the United States, upon which the tax has not been fully satisfied at the source, to make a return on Form 1120F with respect to such income and file such return with the Director, Office of International Operations, Washington, D.C. 20225.