Tax Treaties.

Author:Neilson, Hugh

The Canadian income tax system can be complex by itself. The complexities expand significantly where the tax systems of other countries are also relevant. Most nations have a network of "Income Tax Conventions", more often referred to as "Tax Treaties", to govern the interaction of their tax systems with those of other nations.

But this is Law Now--relating law to life in Canada. Don't tax treaties really only impact huge, publicly traded multinational corporations? What impact do they have on an average Canadian?

The short answer is "more than you might think"!

Income from Other Countries

Canada is a nation of immigrants. People are more mobile in general in the 21st century than before. Financial planners advise that an investment portfolio needs exposure to foreign markets. Many Canadians have income from foreign countries and rely on one or more treaties in respect of their income tax exposure.

As a general rule, the country from which income is derived, the "source country" has the first right to tax it--most treaties start with this presumption. However, the treaties often cap the tax which can be charged by that source country, and sometimes modify the rules in other ways.

Investment Income

Virtually all tax treaties limit the tax which the source country can collect on investment income. While Canada, as the source country, typically permits the other country's tax to reduce the Canadian tax otherwise payable on such income, the maximum credit is normally 15%. Treaties typically limit the other country's tax at, or below, this 15% level.

Many treaties go further and exempt income on investments held by a tax-exempt retirement vehicle from tax in the other country. This allows Canadian pension funds and Registered Retirement Savings Plans to diversify their portfolios internationally without attracting taxation by the foreign jurisdiction (and vice versa).


Treaties also commonly limit foreign tax applied to pensions benefits, again often at a 15% rate.

Many treaties also address amounts which would not be taxable in the source country and require Canada, as the other country, to similarly exempt such receipts from tax. Typically, non-taxable benefits sourced from Canada also will not be taxable in the other country as well.

.The treaties often address social security benefits. For example, under our treaty with the United States, 15% of U.S. social security benefits received by a Canadian resident are exempt from Canadian...

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