Guide for Payments to Non-Residents for Services in Canada

The updated 2011 guide for payments to non-residents for services provided in Canada is now available online at CRA.

Transfer pricing - loans and guarantees

A good article in the CA Magazine concerning multi-national inter-company loans and guarantees and the transfer pricing implications.

TIEA signed with the Turks and Caicos

Another tax information exchange agreement has been signed.  This one with the Turks and Caicos.   The agreement is in effect for tax matters starting October 6, 2011.  For non-criminal matters it will only affect taxable periods starting on or after that date.

Canada - Italy Tax Treaty

The latest treaty between Canada and Italy has been signed.  The treaty takes effect as of January 1 of 2011.  So be sure to check for any new areas that might be pertinent to your tax returns this year.

TIEA signed with St. Kitts and Nevis

Canada has signed a Tax Information Exchange Agreement  between Canada and St. Kitts and Nevis.  The agreement is in effect for tax matters starting November 21, 2011.  For non-criminal matters it will only affect taxable periods starting on or after that date.

Canada- Bahamas TIEA

Canada and the Bahamas have signed a Tax Information Exchange Agreement.  The agreement is applicable only to taxable periods beginning on or after November 16, 2011 (except where criminal code applies then it will apply for tax periods that begin on or after January 1, 2004).

New information for higher education outside Canada

CRA has posted three new information sheets regarding educational institutions outside Canada.

One for Educational Institutions outside of Canada, one for students and one about donations.

Canada-Barbados Tax Treaty

The Minister of Finance announced today that a protocol has been signed to amend the treaty with Barbados.  This is a good sign as it has been under negotiation for many years.

A couple of highlights are the clearer definition of resident and article XXX now protects Canada's tax base more clearly with the stipulation that "Nothing in this Agreement shall be construed as preventing Canada from imposing a tax on amounts included in the income of a resident of Canada with respect to a company, partnership, trust, or other entity, in which that resident has an interest".

International Agreement Signed

In the ongoing effort to stop international tax evasion, Canada has signed an updated international agreement to help combat tax evasion.

This updated agreement will make it a more efficient tool for combating tax evasion.

Canadians heading to the US

CRA has updated their guide:

Canadian Residents Going Down South

This guide is a quick reference for residents, but is only a quick check for you to see if you may need to look further.  Always contact a Canadian designated accountant experienced in cross-border issues before you file your Canadian (and US where necessary) tax return.

Deloitte's comments on draft foreign affiliate rules

Deloitte has commented on the draft foreign affiliate rules.

Non-Resident Discretionary Trust

The T2 Schedule 22 to report an interest in a non-resident discretionary trust has been updated to remove the reference to subsection 94(1) of the Income Tax Act.  No other changes were made to the form.

This schedule is required to be filled out when

 - a corporation
 - a controlled foreign affiliate of the corporation, or
 - any other corporation or trust that did not deal at arm's length with the corporation

held a beneficial interest in a discretionary non-resident trust at any time during the tax year.

New NR4 forms

The CRA has posted the new NR4 forms and summary forms.  NR4 forms are used to report passive income paid to non-residents - whether you have collected and remitted withholding or not.  You have to file the NR4 return by March 31, 2012, or no later than 90 days after the end of the estate's or trust's 2011 tax year.

CRA and social media

According to the OECD Report on Social Media Technologies and Tax Administration, CRA is making good use of social media for information to the public.  The next step will be to develop a mobile app such as the one done by the IRS2Go.

New NR73 form

CRA has updated their Determination of Residency Status (Leaving Canada) form.

This form is required when you leave Canada - permanently or temporarily.  It gives CRA (and you) a starting point to determine whether or not you will remain a resident of Canada.

Canada's treaties - Article 13

The article can be titled 'Gains', 'Capital Gains' or even 'Alienation of Property'.  The purpose is the same.  To determine the tax of gains on non-business property under the treaty.

In the Canada-Finland treaty, immovable property is normally taxed first in the country where it is situated then in the country of residence.  In the Canada-US and Canada-Austrailia treaties the article refers to real property.  The idea is the same - if it belongs to the land of the country then the country should be able to tax it.  The treaties will also define what real or immovable property includes (such as shares in a corporation or a partnership interest where the property is principally immovable property).

Ships and aircraft usually have a separate paragraph that should be read for each treaty.  Other gains, though, are normally taxed in the country of residence.  The wording, such as the Canada-Gabon treaty, is that they "shall" be taxed in the country of residence - which doesn't allow the source country to withhold any tax (of course, you will normally have to file something with that source country to verify that you can use the treaty provisions.

There is often an additional paragraph to check.  Particularly in Canada's newer treaties (or updated protocols).  For instance, in the Canada-Gabon treaty, if the property has been treated as a gain for tax purposes when exiting the country (such as certain property when leaving Canada) the new country of residence may treat certain of those properties to be purchased for the fair market value when entering the new country.

All of the gains can be very involved and details need to be reviewed before any decision can be made where the gain should be taxed.

Canada's treaties - Article 12

The taxation of royalties is determined by Article 12 of the treaty.  In the case of the Canada-Egypt treaty, the first paragraph indicates that royalties arising in one country may be taxed in the other country.  Remember that when you see the wording "may be taxed" it means that they may also be taxed in the originating country.  Paragraph 2 of that treaty reducing the withholding tax to 15%.  That's pretty standard for the treaties but it can be lower (for instance Canada-Australia is 10%).

Looking again at the Canada-Egypt treaty, the third paragraph of the article defines what will be considered to be a royalty.  The definitions tend to be fairly broad and take into account many payment types so you need to review the treaty to see if your payment falls within the scope of this article.  An additional paragraph to exclude certain items (such as business profits) from royalties is usually included to help clarify which payments will be subject to withholding.

Normally, you will also see a paragraph that defines the rules for sourcing.  It is important to determine the source of the royalties to determine whether a reduction in the standard non-resident withholding is available.  Because, don't forget, treaties do not assess tax, they are used to reduce double tax.  If the treaty doesn't apply to royalties, the withholding will be at the high rate for that country (25% for Canada).

Canada's treaties - Article 11

Determining the amount of withholding tax on interest being paid outside of Canada is the purpose of Article Xi.  In many situations, interest can be exempt from withholding tax under the treaty.


Before you check the treaty for interest withholding on interest being paid outside of Canada, it is a good idea to first look at paragraph 212(b) to determine whether or not withholding is even required.  If the interest is being paid to an arm's length person, it will often fall into one of the exemptions to Part XIII.


However, you still need to look at the treaty to see what taxes should be withheld on interest being paid to you (if you are a resident of Canada).  For instance, the Canada-Ecuador treaty exempt withholding on interest to a resident of Canada if the loan is guaranteed or insurance by the Export Development Corporation.  


The Canada-US treaty is much more complicated.  Although the first paragraph of the treaty exempts interest from withholding, subsequent paragraphs modify that statement.  For example interest that is contingent interest that doesn't qualify as portfolio interest is subject to the same withholding rate as dividends.


This paragraph can often be tricky in the details.  Reductions in withholding tax are only permitted based on beneficial ownership of shares.  You will also need to read this paragraph carefully for the definition of interest in each treaty to determine what is included and excluded.

Canada's treaties - Article 10

Without the tax treaty, dividends paid by a company in Canada to a person in another country would be subject to a 25% withholding tax.  This withholding is a "final tax" under Part XIII of the Income Tax Act.

Dividends being paid into Canada would have a withholding tax that is dependant on that country's tax laws.  What constitutes a dividend payment is defined in the treaty but normally defaults to the specific country tax laws.

Article 10 of the treaty does not necessarily eliminate the withholding tax on dividends but does reduce the amount of withholding at the source country level.  The percent to be withheld for Canadian purposes is most easily found by checking the non-resident tax calculator on the CRA website.  Most treaties, such as the Canada-Denmark treaty, have different rates of withholding depending on the recipient.  If the recipient is another corporation that owns shares or voting power, the withholding is often lower.

Canada's treaties - Article 9

The heading for article 9 in most of Canada's treaties, such as the Canada-Denmark treaty, is called 'associated enterprises'. In the Canada-US treaty it is called 'related persons'.

The intent, however, is similar. To ensure that transactions between associated or related persons (i.e. a parent and subsidiary corporation) take place in the same manner as those that are not related. If you would not have paid someone that you aren't related to for the expenses, those expenses are not going to be permitted for cross-border purposes either.

The article sometimes, but not always, specifies the timing for transfer pricing adjustments to be permitted also. For instance, in the Canada-Denmark treaty the maximum time limit is six years from the end of the taxation year, in the Canada-Egypt treaty the maximum time limit is five years. On the other hand, other treaties, such as the Canada-Australia and the Canada-Norway, leave the timing issue to other articles or to the laws in each country.

Canada's treaties - Article 8

Article 8 of the treaties provides an exemption to the permanent establishment rules to allow aircraft and ships that are operating internationally to have to profits attributed to their country of residence.

There is often an additional paragraph to exempt trips within a country.  That makes sense - if you are taking a trip between Toronto and Ottawa or Vancouver and Victoria, that should be taxed in Canada regardless of where the company that owns the plane is resident.

However, this article should always be read carefully as many differences can be found in different treaties.    For instance the Canada-Chile treaty indicates that it applies to enterprises of the specific countries but the Canada-China treaty requires the head office or place of effective management to be in the other country.

Article 7 - paragraphs 4 to end

While each treaty is slightly different, the final paragraphs of Article 7 add the last bits of structure to how business profits are calculated.

Paragraph 4 in the Canada-Bulgaria is fairly common as it sets out that no profits will be allocated to a PE if only the purchase of goods or merchandise is done.  Others, such as the Canada-US treaty expand on that to ensure that the provision of management, executive or administrative functions will also not be allocated income.

There is sometimes another paragraph to ensure that the business profits should be calculated the same every year.

A final paragraph indicates that if the income is covered elsewhere in the treaty, you should not use Article 7.  This gives other paragraphs an override so that income such as dividends (for example) will be taxed under the appropriate article.

The Canada-US treaty adds a paragraph 7 to ensure that the business profits allocated to the PE must be derived from the assets and activities of the PE.

Canada's treaties - Article 7 Paragraph 2 and 3

Paragraph 2 and 3 of Article 7 work to ensure that the portion of business being carried on in the other country are treated in the same manner as a separate business.  That means that you need to calculate the profit separately for each country and pay the taxes on the profit to the appropriate country.

In the Canada-Brazil treaty, paragraph 3 simply clarifies that general and administrative expenses form part of the calculation of profit.  In other treaties, such as the Canada-Venezuela it is much more specific and will not allow certain expenses (e.g. royalties and fees).

In others (i.e. Canada-US) the treaty is quite specific to say that the deductions will not be permitted unless they are deductible under the tax laws of the country.  This is to stop the movement of the expense to another country to make it tax deductible.

This also brings up transfer pricing issues as it is very important that transfers between each country are carried out at a fair market value.   Each country has it's own transfer pricing rules and contemporaneous documentation is required in all cases.  For transactions happening between Canada and the US, Japan or Australia, the PATA documentation package is accepted for meeting these provisions.

Canada's treaties - Article 7 Paragraph 1

To ensure that business profits are not double taxed, Article 7 of Canadian treaties lays out the details of how they will be taxed.

The Canada-Belgium Tax Treaty is a good example. In paragraph 1 of Article 7, it tells us that carrying on a business is not sufficient to be required to pay taxes in the other country - the enterprise must be carrying on a business in a permanent establishment (PE). Of course, you need to refer back to Article 5 to determine if you have a PE.

Without the treaty, a great many business enterprises would be taxable wherever they solicit sales. For instance, in Canada, the extended meaning of carrying on a business under the Income Tax Act includes anyone who "solicits orders or offers anything for sale" regardless of whether the transaction is completed in Canada or not.

Paragraph 1 also covers PEs that no longer exist, so a delay of payment will not change the attribution of the tax.

Canada's treaties - Article 6

Article 6 in most treaties describes what will happen in the case of immovable property (i.e. land).

In the Canada-Barbados treaty, as in many others, immovable property has the meaning of the tax laws in the country where it is situated.  For Canada, that includes such things as real property.

In all of Canada's treaties, the treaty states that income from immovable property that country may be taxed in that country.  That allows Canada to tax income from activities such as agriculture, forestry or other natural resources.

When a treaty says that the income MAY be taxed in the country, it means that the country may have withholding taxes or may have regular income taxes on income derived.

The MAY in the treaty also means that the country of residence will also likely tax the income (assuming it is taxable under their laws) but that country will allow a foreign tax credit for the tax paid to the original country.

Remember that a foreign tax credit is only permitted if the tax has been correctly paid.  In the case of Article 6, both countries have the right to tax, so a tax credit will be permitted.

Canada-Turkey Tax Treaty

The Canada-Turkey Tax Treaty came into force on May 4.

A couple of items of interest in the treaty articles I have already covered in this blog.

One is the residence rule for other than individuals is quite specific.  The treaty states that if the two countries cannot agree on where a person is resident, that person will not be able to claim any treaty benefits.  

The other is that, similar to the Canada-US Treaty, a permanent establishment will include services performed in the other state for a period or periods of more than 183 days in any twelve month period.  

Canada's treaties - Article 5 PE Part 2

The remaining paragraphs of Article 5 are very important and can differ with each treaty.

For instance, in the treaty with Bangladesh, paragraphs 3 and 4  expand on what will, and will not be considered to be a PE.  Details such as a warehouse for storage will not be considered to be a PE but an employee with the ability to sign contracts will likely cause the business to have a PE.

There is often also a paragraph excluding a business from having a PE simply because they have an agent in the country.  Another standard exclusion ensures that owning a subsidiary located in the other country will not cause you to have a PE.

You always need to look at this article for 'special' circumstances.  Such as the Canada-US treaty which includes a rule on services where an individual is in the other country for more than 183 days or the Canada-Barbados treaty which includes rules on insurance risks and premiums.

Canada's treaties - Article 5 Permanent Establishment

Article 5 of most treaties deals with what will be considered to be a "permanent establishment" (PE). This is important because, if a person is doing business through a PE in another country, normally the tax will be retained by the country where there is a PE.

Paragraph 1 usually has a short broad definition. Paragraph 2 has pretty standard definitions. Such as the ones in the Azerbaijan treaty which indicate that a PE will include a place of management, a branch, an office or factory, workshop or mine.

The important word in paragraph 2 is "include".  It provides for additional possibilities.  That means that there may be many other possibilities as well.

Canada's treaties - Article 4 Residence of Individuals

The big issue in treaties is where the taxpayer will pay tax. Often it comes down to where you are resident. Article 4 determines where you will be considered resident under the treaty.

The first part is usually to look at whether the person is resident in that country for purposes of it's tax if there was not treaty. Often that results in you being resident in both countries. All treaties have tie-breaker rules when this happens.

The tie-breaker rules for individuals can be fairly standard, but can be multi-step. The treaty with Australia is an example of only two steps. First you go with the country where you have a permanent home. If you don't have a permanent home, or have two, then you look at the personal and economic relations.

The treaty with Austria continues those two steps in the event of further ties by following with habitual abode and then nationality. Like many treaties, Austria's treaty with Canada indicates that if the matter is not settled in the content of the treaty, the Competent Authorities will have to decide.

Canada's treaties - Article 3

Article 3 of the treaty is normally the article that deals with general definitions for the treaty.

It normally includes the definition of the country. This includes the geographical area that is covered. Canada normally will include the sea and air space as well as the continental shelf. Other countries, such as Armenia, will define the geography to include internal waters.

It is important to check the definition of person in the treaty - while it will always include individuals, you need to check which other organizations are included.

This paragraph also usually includes a definition of the competent authority. The competent authority is the government body that you need to contact to resolve a treaty conflict such as both countries considering you to be resident in their country (see more on this next week).

Canada's treaties - Article 2

Article 2 of the treaties deals with what taxes will be covered under the treaty. In Canada, this usually refers only to the Income Tax Act. So that means that GST, excise tax and provincial taxes are not covered.

What taxes are covered in the other jurisdiction depend on the wording of this article. For instance in for Argentina, the taxes covered under the treaty include the income tax, the assets tax, and the personal assets tax.

Many treaties also include a paragraph in this article to include taxes imposed in each country that are identical or substantially similar if they are created after the date of the treaty. This allows countries to change legislation without immediately having to go back and negotiate treaties.

Canada's treaties - Article 1

The first article of the treaty identifies who can take advantage of the treaty.

A tax treaty between two countries doesn't increase tax but determines who is permitted to reduce double taxation under the treaty.

For instance, Canada's treaty with the People's Democratic Republic of Algeria is very straightforward - it applies to persons who are resident of one or both countries.

If something (such as a resident) is not defined, or fully defined, in the treaty, the Income Tax Conventions Interpretation Act requires that it be defined by the Income Tax Act.  So, whether or not you are resident of Canada for income tax is the issue - not whether or not you are a citizen or landed immigrant.

Read an E-book week

This week is read an e-book week.  As part of the promotion for this week, my book "Who Gets My Tax Dollars" can be purchased at half-price.  Follow this link for the Smashwords page.

Keeping Records Outside of Canada

If you are carrying on business in Canada, the Income Tax Act requires that you keep your books and records in Canada.


That requirement includes both paper documents and electronically stored documents.  And BTW electronic records stored outside of Canada and accessed in Canada don't count.  The server should be in Canada.


What if you are carrying on business but don't live in Canada year round?


Well, CRA says that if you want to store your records outside of Canada, two things must happen.  The first is that you get permission from CRA.  This is done by writing to the local Tax Services Office.  The second is that you must make your records available in Canada on request.


The second part of the request can cause issues if you have a lot of records or if you need access to them where they are stored.  In that case, your company may be able to make arrangements for the CRA auditor to travel to the records - at your expense.

Webcasts versus podcasts

So....what is the difference between a webcast and a podcast.  Many people simply think of podcasts as the audio only program.  But, that is not quite correct.

According to PCMag, although originally podcasts were made for the ipod MP3 style listening devices (hence "pod"), they now may also include video.

What separates a podcast from a webcast is that, just like the radio broad"casts", they are in a syndication format.  Think of your RSS feeds being used for these.

Webcasts, on the other hand, is the live or delayed version of the sound or video broadcast.

Free Accounting from Simply

I always like free stuff.

If you are a small business, Simply Accounting now has a free Express version of their software.

OECD on Aggressive Tax Planning

According to the OECD (2011) Tackling Aggressive Tax Planning through Improved Transparency and Disclosure, OECD Publishing traditional audits alone may not be an effective way to obtain information on aggressive tax planning schemes. Canada is one of the many countries with mandatory early disclosure rules. Currently Canada has required disclosures on tax shelters and has also proposed requirements for reportable transactions.

The OECD report also concludes that having information that is timely and comprehensive is important both for tax policy and compliance. Having these targeted disclosure initiatives will benefit taxpayers in general.

TFSAs outside Canada

Yes, you can own a TFSA when you are a non-resident of Canada.  Although you do not earn new TFSA room while you are a non-resident, the previously earned room does not disappear.

You cannot however contribute to that TFSA while you are not a Canadian resident.  If you do, expect to pay a penalty of 1% per month on the full amount of the contribution until you have withdrawn the overpayment.  A partial withdrawal will not reduce the tax calculation.

If you return to Canada, or repay the over-contribution, no further penalty will be assessed.  The penalty is not levied on the month you make the repayment - so be sure to make the repayment at the end of the month rather than the beginning of the next month.

You need to fill out an RC423 - TFSA Return, along with a Schedule B - Non-resident contributions to a TFSA.  The return is required to be filed by July 1 of the next calendar year.

It is not a good idea to assume that "what they don't know, won't hurt them".  Because there are, of course, penalties for late or non-filing of the return that will increase the amount you owe to the CRA.

More TIEAs signed

They didn't have to negotiate much more...

Guernsey and Isle of Man both signed Tax Information Exchange Agreements with Canada this week.

Jersey - not cows

When I think of Jersey and Guernsey, I think of cows.  

But these are also two jurisdictions that are consider tax havens.  

Just because you invest in a company that is located in a tax haven, does not mean that you are avoiding tax.  If you are properly reporting income from those investments in your home country that requires worldwide income to be reported.

As well as having tax laws that are favourable to non-residents, they are "secrecy jurisdictions" where it was very difficult, if not impossible for other governments to determine if their domestic tax laws were being followed by investors in these countries.

Canada will now be able to get the information necessary to make those determinations - the Tax Information Exchange Agreement between Canada and Jersey was signed January 12.  

An agreement with Guernsey is still being negotiated.

Busy 2010

Okay, if it feels like I dropped off the face of the earth for the latter half of 2010.

Not really, just been super busy.

My blog posts are starting again in 2011.

For those of you who have been asking, an updated version of my book "Who gets my tax dollars" will be ready for e-publication early in 2011 . . . I will let you know as soon as it is published.