Few Important Facets of Canada-Us Tax Treaties
Posted: Oct 09, 2013
Many countries have agreed with other countries in treaties to ease the effects of double taxation (Double Tax Avoidance Agreement). Tax treaties may cover income taxes, inheritance taxes; value added taxes, or other taxes. Besides bilateral treaties, also multilateral countries are in place.
Usually, the benefits of tax agreements are available only to persons who are residents of one of the treaty countries. In most cases, a resident of a country is any person that is subject to tax under the domestic laws of that country by reason of domicile, residence, place of incorporation, or similar criteria.
Canada has tax conventions or agreements commonly known as tax treaties with many countries. The main purposes of tax agreements are to avoid double taxation and to prevent tax evasion.
- Define which taxes are covered and who is a resident and eligible to the benefits,
- often reduce the amounts of tax to be withheld from interest, dividends, and royalties paid by a resident of one country to residents of the other country,
- limit tax of one country on business income of a resident of the other country to that income from a permanent establishment in the first country,
- define circumstances in which income of individuals resident in one country will be taxed in the other country, including salary, self-employment, pension, and other income,
- may provide for exemption of certain types of organizations or individuals, and
- Provide procedural frameworks for enforcement and dispute resolution.
The Canada-US tax treaty is unique among Canada’s tax agreements in its approach to prevent “treaty shopping”. Treaty shopping generally refers to the acquisition and enjoyment of treaty benefits under a given tax treaty by persons who are not bona fide tax residents of one of the countries that is a party to the particular treaty.
The Tax Treaty is unique in that it contains a “limitation on benefits” (“LOB”) provision (Article XXIX A) which is unlike the anti-treaty shopping provisions in Canada’s treaties with other countries.
Qualifying persons” are entitled to all of the benefits under the Canada-US tax treaty, and are defined as residents of either Canada or the U.S. who are one of the following:
- A natural person;
- A specified government body (e.g. federal, provincial or other government bodies of a contracting state);
- A publicly-traded company or trust (subject to certain qualifications);
- A corporate subsidiary of qualifying publicly-traded company (ies) or trust(s) (subject to certain qualifications);
- A company or trust that meets the ownership and “base-erosion” tests under the Tax Treaty;
- An estate;
- A not-for-profit organization (subject to certain qualifications); or
- A tax-exempt organization (subject to certain qualifications).
Persons who are not qualifying persons under one of the categories above may nonetheless be entitled to certain benefits. Despite its complexities, proper planning can often provide taxpayers with a relatively high degree of certainty as to their eligibility for benefits under the tax treaty.
Ken Donaldson is a chartered accountant who practices as an independent tax consultant. He also author of tax treaties, in this article he provides canada-us tax tips. For more information you can visit Taxca.com.