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).
Wednesday, August 3, 2011
Saturday, July 16, 2011
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.
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.
Friday, July 8, 2011
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.
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.
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