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CUSMA — Withholding benefits to continue

CUSMA — Withholding benefits to continue

The U.S. will interpret NAFTA references in its treaties as references to CUSMA by July 1, 2020


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Certain Canadian multinationals should continue to qualify for treaty benefits once the Canada-United States-Mexico Agreement (CUSMA) is enacted. Specifically, multinationals that currently receive reduced or zero rates of withholding under the derivative benefits test in international tax treaties should see those rates continue once the CUSMA replaces the the North American Free Trade Agreement (NAFTA). The United States recently confirmed that it will interpret current references to NAFTA in these treaties as references to the CUSMA, once that trade agreement comes into force.

This announcement provides some certainty for Canadian multinationals who were concerned that their treaty benefits may be affected once the NAFTA expires.


Most U.S. income tax treaties include Limitation on Benefits (LOB) articles, which provide that only qualified residents of a treaty country may receive treaty benefits. The LOB articles include tests to determine whether a taxpayer is a qualified resident, including the derivative benefits test. This test grants treaty benefits to taxpayers that are directly or indirectly owned by a "resident of a state that is a party to NAFTA."

Canada, the United States and Mexico completed the legislative procedures for ratification of the CUSMA in April 2020. As a result, the CUSMA will replace the NAFTA effective July 1, 2020.

U.S. announcement

The United States announced on May 19, 2020 that it will interpret all references to NAFTA in U.S. income tax treaties as references to the CUSMA as of July 1, 2020. This announcement will provide comfort to many Canadian multinationals that rely on the derivative benefits test for reduced or zero rates of withholding on certain U.S. source-income between both related and non-related parties.

For more information, contact a KPMG professional in Canada:

Russ Crawford
National Practice Leader
U.S. Corporate Tax
604 691 3516

Penny Woolford
National Practice Leader
International Corporate Tax
416 777 8906

Information is current to May 26, 2020. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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