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.