Canada, US Trim Cross-Border Taxes

(Associated Press)

Canada and the U.S. formally agreed Friday to eliminate the so-called withholding tax on investment interest that businesses have long said curtails investment between the two countries.

U.S. Treasury Secretary Henry Paulson and Canadian Finance Minister Jim Flaherty praised the initiative, which they said had been 10 years in the making, saying it will further trade as well as investment.

The change eliminates the 10 percent tax on interest paid by borrowers in one country to lenders across the border in arm’s-length transactions.

“We share not only a 5,500-mile border, we share a commitment to trade and open investment,” Paulson said. “By further reducing barriers to cross-border activities for U.S. and Canadian taxpayers, this updating of our treaty enables to us to move even more swiftly in the dynamic global economy.”

The update to the Canada-U.S. tax treaty was promised in Canada’s last federal budget and estimated to cost Ottawa $70 million in the current fiscal year and $180 million in 2008-2009.

The withholding tax in non-arm’s-length arrangements — usually between corporate subsidiaries — also will be phased out over three years.