Article 1 of the proposed Protocol deletes and replaces paragraphs 3(a) and 3(b)(ii) of…

of the Convention, which addresses the taxation of capital gains. The revised provisions would define real property situated in the United States and real property situated in Canada in such a way as to deny each country the right under this Convention to tax foreign persons on their income from the sale of the stock of foreign corporations whose assets consist primarily of domestic real estate. Both the United States and Canada currently tax foreign persons on the proceeds from the sale of both domestic real estate and the stock of domestic corporations whose assets consist primarily of domestic real estate. The current Convention also permits the taxation of income from the sale of stock of foreign companies whose assets consist primarily of domestic real estate. The new limitation on each country's right to tax gains from the sale of shares of real-property holding companies would be retroactively effective to April 26, 1995.

Article 2 addresses taxation of social security benefits. The treatment of social security benefits by the United States and Canada was last modified by the Protocol Amending the Convention between the United States of America and Canada with Respect to Taxes on Income and on Capital Signed at Washington on September 26, 1980, as Amended by the Protocols Signed on June 14, 1983 and March 28, 1984, signed at Washington, March 17, 1995 ("the 1995 Protocol"), which applies to social security benefits paid on or after January 1, 1996. The 1995 Protocol amended the Convention to move from residence-based taxation to a system under which social security benefits are taxed by the country paying the benefits ("the source country") - at a statutory rate of 25.5 percent by the United

States and 25.0 percent by Canada. In addition, Canada permits U.S. recipients of Canadian benefits to file a Canadian tax return and pay tax at lower graduated rates on net income, enabling low-income U.S. recipients of Canadian social security to pay little or no tax on their benefits. However, the United States taxes at the 25.5 percent rate permitted by the 1995 Protocol. Thus, many Canadian recipients of U.S. benefits found their benefits reduced by 25.5 percent after January 1, 1996.