Monthly Archives: December 2015

CANADIAN SOURCE INTEREST PAYMENTS TO NON-RESIDENTS GENERALLY TAX-FREE

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A large percentage of countries that have income taxes levy withholding taxes on interest paid by residents of those countries to non-residents.

Up until the end of 2007, Canada generally applied withholding tax under Part XIII of the Income Tax Act (“the Act”) on Canadian-source interest payments to non-residents. This general rule was subject to many exceptions, including one commonly used one that applied to five-year corporate debt, as well as exception for government obligations and foreign currency debt. In the absence of a lower rate being applied under a tax treaty, interest that was not eligible for an exemption was subject to 25% tax.

However, that all changed in 2008. As a general rule, Canadian-source interest payments to non-residents made after 2007 will only be subject to Part XIII withholding tax in two types of situations:

  • Where the payer and the payee are not dealing at arm’s length. This would most commonly apply in connection with payments by a Canadian subsidiary corporation to its foreign parent corporation, or

 

  • Where the interest is “participating debt interest”. This is defined in subsection 212(3) of the Act as interest “that is paid or payable on an obligation….all or any portion of which interest is contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation.”

 

In the case of U.S. residents, because of the general exemption found in Article X1(1) of the Canada-U.S. Tax Convention, even interest paid between non-arm’s length parties should be exempt from Canadian tax. This could apply to interest paid by a Canadian subsidiary to a U.S. parent corporation.

However, an exception to the general exemption in Article XI(1) applies with respect to participating debt interest. Under Article XI(6)(b), Canadian tax can be applied in such cases, subject to a maximum rate of 15%.

 

HOLDING CANADIAN VACATION PROPERTIES IN A US ENTITY AVOIDS EXPOSURE TO CANADIAN TAXES ON DEATH

Many Americans hold interests in vacation or recreational properties in Canada. Often such properties are intended to be passed on from generation to generation. Canada taxes U.S. residents on capital gains from the sale or other disposition of Canadian real estate, even if such real estate is held for recreational or vacation purposes. Canada’s ability… Continue Reading

HOW CANADA TAXES REAL ESTATE GAINS OF NON-RESIDENTS

  Like many countries. Canada taxes non-residents who realize gains on real estate located within its borders[1]. This will be true whether the real estate is capital property that is held for the purposes of earning from rental or a business; capital property held for personal use; or inventory of a business (e.g. where it… Continue Reading

S CORPORATIONS BEAT-OUT LLCs FOR AMERICANS CARRYING ON BUSINESS IN CANADA

As a general rule, U.S. residents are only subject to Canadian tax on business income to the extent that such income is earned via a permanent establishment (“PE”) in Canada[1]. If a U.S. C corporation earns profits that are taxable in Canada, such profits will be subject to federal corporate taxation under Part I of… Continue Reading

THE TAX IMPLICATIONS OF SPIN-OFF REORGANIZATIONS OF US PUBCOS FOR CANADIAN RESIDENTS

It is very common for U.S. public corporations to “spin-off” their holdings in other US corporations, so that their shareholders own such holdings directly. If properly implemented, a reorganization of this nature should be tax-free for US tax purposes as result of the application of IRC Sec. 355. The Canadian Income Tax Act (“the Act”)… Continue Reading

TAX ISSUES FOR NON-RESIDENT ACTORS OR ENTERTAINERS IN CANADA

As a general rule, non-resident actors or other entertainers who derive income from performing in Canada will be subject to Canadian tax on such income. Typically, such persons are self-employed independent contractors, rather than employees. Therefore, they will be subject to tax in Canada on the basis that they are carrying on a business in… Continue Reading

CANADA-US CROSS BORDER TAX ISSUES IN CONNECTION WITH EMPLOYEE STOCK OPTIONS

Canada and the US both tax employees who receive benefits from options they are granted to acquire shares in their employer or a related entity. This article will focus on the Canadian tax implication of employee stock options (“ESO”), and how these rules apply in certain Canada-US cross-border situations. As a general rule, stock options… Continue Reading