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.