Tax Treaties: Canada Has 92 of Them in Force

Tax treaties between nations serve an important purpose: They ensure that the taxpayer is not left in the lurch when multiple countries each want to tax the same income. Canada currently has 92 tax treaties in effect with other countries, to protect taxpayers from over-taxation. Most recently, on January 15, Canada and Taipei signed an Arrangement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, based on standards developed by the OECD for the exchange of tax information.

This Arrangement limits the rate of withholding tax to 10% for the payment of interest and royalties and on dividends paid to a company that holds at least 20% of the company that pays the dividends, and to 15% in all other cases.

Tax treaties set out the terms of who will tax what income. Where both states want to tax the same income, the treaties ensure that taxes paid to one state are deducted from taxes payable to the other state so that the taxpayer does not end up paying tax on the same income twice. More commonly, these deductions are called foreign tax credits. Where income is taxable to two states, the taxes paid to the one state are claimed as a deduction from taxes paid in the second state.

In most cases, income tax collected in the source state (the state in which the income is earned) is collected by the remitter, withholding tax before sending the payment to the recipient. The tax treaty sets the withholding rate. In Canada we issue NR4 slips to non-resident recipients of Canadian-source income. On the recipient’s return for their jurisdiction, they claim a foreign tax credit for the taxes withheld by Canada.

Another role of the tax treaty is to determine what portion of foreign pension income (for example) will be taxable in Canada and what portion will be exempt. Because Canadian residents must report their world income on Canadian tax returns, they may claim a deduction for the portion of the foreign income that is agreed upon by the two countries in their tax treaty. A common example is U.S. Social Security, received by residents in Canada, which is 85% taxable in Canada, so a deduction is claimed on the recipient’s Canadian tax return for the 15% that is not taxable in Canada.

Additional Educational Resource: Cross-Border Taxation Course.

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