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Tax Treaty Considerations for Expats in Canada

Submitted: October 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside Canada, and intend bring money earned from them into Canada during your stay. They also apply if you build up some investments in Canada during your stay, and intend to leave them there after you have left Canada. Canada has a network of tax treaties in force with over 90 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and will typically state how the various forms of income are taxed; whether the specific income is only taxed in Canada, only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. This definition of residence is known as the treaty tie-breaker. The agreements laid out in the treaty override the domestic laws in both signatory countries. The types of income covered by a treaty may include:

  • property income
  • business profits
  • dividends
  • interest
  • royalties
  • capital gains
  • employment income
  • directors’ fees
  • income from sports and entertainment
  • state and private pensions, alimony and child support
  • money for the full-time education of students, and
  • income from teaching.

It is important to recognise that a tax treaty operates on money flows both into and out of the treaty countries.

The withholding tax rate in Canada on dividends sent to residents of a country without a tax treaty is 25%. Where lower rates have been negotiated by treaty, they are generally reduced to 15%. Some treaties with lower rates include a further rate reduction to 10% or even 5%, which applies if the dividend is paid to a foreign company which owns a significant percentage (usually 10% or 25%) of the shares (or sometimes the voting rights) of the paying company.

The withholding tax rate in Canada on interest sent to a country without a tax treaty is 25%. Where lower rates have been negotiated by treaty, they are generally reduced to 15%. Certain interest payments are exempt from withholding tax. These include bank interest on foreign currency deposits, and, under certain circumstances, interest paid on mortgage debt related to overseas properties.

The withholding tax rate in Canada on most royalty payments sent to a country without a tax treaty is 25%. Where lower rates have been negotiated by treaty, they are generally reduced to 10%. Copyright royalties many forms of artistic work are exempt from royalty withholding tax.

Canada’s tax treaties with other countries generally restrict the amount of withholding tax those countries can charge Canadian residents to 15% on dividends, 10% or 15% on interest and 10% on royalties. For the complete rules and applicable rates, it is necessary to read the treaty itself. A link to each Canada treaty in force can be found here. The sections dealing with dividends, interest and royalties can usually be found half way through the treaty document.

Before arriving in Canada you may be able to arrange your existing investments to gain maximum advantage from the terms of any treaty. This may involve moving investments from one non-Canadian country to one with a more favourable tax treaty, or even to Canada itself, to reduce the tax rate paid.

If your home country generally has a higher rate of tax than Canada’s, you may benefit by becoming tax-resident in Canada as early as possible. At the end of your stay in Canada you can also rearrange your affairs to ensure that any ongoing income from Canadian employment or investments is also taxed at the lowest rate possible in the future.

 

 

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