Non-residents of Canada earning Canadian-source income should always consider not only the ITA when seeking to minimize their Canadian tax owing, but also any potentially applicable tax treaty between Canada and another relevant country. Tax treaties reduce tax payable for residents of one country earning income from the other treaty country, and so constitute an important element in cross-border tax planning. This page describes the following:
A tax treaty is an agreement between two countries entered into in order to reduce the likelihood that each country will tax the same income without regard to the other, resulting in excessively high taxation (often referred to as “double taxation”). In general terms, tax treaties are directed at situations in which a resident of one country (the “residence country”) earns income in or from the other country (the “source country”). Absent relief provided by a tax treaty, in most cases the residence country would levy tax on the basis that the recipient was a resident of that country, while the source country would tax the same income on the basis that it was earned in the source country. Tax treaties reduce the risk of such “double taxation” by restricting or eliminating the source country’s right to tax in the circumstances and on the terms set out in the tax treaty.
While Canada’s tax treaties generally follow a more or less standard format, the precise terms of any particular tax treaty are based on what the two countries have negotiated between themselves. It is therefore important to review the actual provisions of each relevant tax treaty when determining the impact to a resident of a particular country earning income in another country. Table 1 summarizes the usual or typical impact of a Canadian tax treaty on Canada’s right to tax Canadian-source income earned by a resident of the other treaty country.
Table 1: Typical Impact of Canadian Tax Treaties on Canadian-Source Income
ITA Treatment for Non-Resident
Typical Tax Treaty Treatment
Income from Land in Canada
Taxable under Part I (if carrying on business in Canada) or Part XIII (otherwise)
Business Income
Taxable under Part I if carrying on business in Canada
Only taxable if carrying on business in Canada through a Canadian permanent establishment
Employment Income
Taxable under Part I if employed “in Canada”
Interest Income*
25% withholding tax under Part XIII, if non-arm’s-length debtor or if interest is “participating”
Generally reduced to 10% or 15% (0% for qualifying U.S. residents)
Dividend Income*
25% withholding tax under Part XIII
Generally reduced to 15% with further reduction to 5% if ownership threshold met
Royalty Income*
25% withholding tax under Part XIII
Generally reduced to 10% with some items reduced to 0% (e.g., copyright royalties)
Capital Gains
Taxable under Part I if from disposition of taxable Canadian property
Wide variation, from no change to tax limited to dispositions of land in Canada and interests in equity securities deriving their value primarily from such land (with additional exemptions)
* Other than such income earned through a permanent establishment in Canada.
The impact of tax treaties on Canada’s right to tax Canadian-source capital gains is particularly diverse, with a wide variation amongst different Canadian tax treaties based on the negotiations between the two countries in question (for a summary of these variations see here.
Canada’s tax treaties generally also contain specific articles dealing with the following matters:Canada has tax treaties with over 90 countries, constituting an extensive network of bilateral tax agreements. These tax agreements can be found on the Department of Finance website. While Canada’s provinces are not themselves signatories to these tax treaties, the results of these tax treaties are effectively incorporated into provincial income tax by virtue of provincial legislation.
Canada also has tax information exchange agreements (TIEAs) with another 25 countries, along with others currently under negotiation. TIEAs are agreements between Canada and other countries that typically do not impose significant amounts of tax, making the risk of double taxation remote. They do serve however to promote transparency by allowing Canada to obtain tax-related information that assists the CRA in administering the ITA as regards residents of the other country. Canada encourages other countries to sign TIEAs with it by offering preferable tax treatment in its rules dealing with foreign corporations in which Canadian residents own shares (directly or indirectly), comparable to the treatment afforded in those rules to foreign corporations that are resident in countries with which Canada has a full tax treaty. The countries with which Canada has TIEAs are listed on the Department of Finance website.
In some cases the tax authorities of two countries that have entered into a tax treaty will come to agreement on specific issues regarding the interpretation or administration of that treaty. The CRA website lists such competent authority agreements.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI”) effects significant changes to the provisions of most of Canada’s tax treaties. The MLI was conceived as a way of effecting agreed-upon changes to a large number of bilateral tax treaties as to agreed-upon subject matter, without requiring each such tax treaty to be amended separately. Essentially, each signatory to the MLI identifies those specific treaties that it wishes to have amended by the MLI (“covered tax agreements”), and identifies which specific MLI provisions it wishes to apply to each such covered tax agreement. To the extent that both signatories to a particular tax treaty agree as to selected provisions, the MLI (once ratified by each country) is deemed to amend that tax treaty accordingly. An online matching database has been prepared by the OECD to show which treaty counterparties each country has identified as wishing to apply the MLI to and which MLI provisions such country wishes to have apply to that treaty.
The MLI entered into force in Canada December 1, 2019. 2 See Department of Finance release “Canada Ratifies the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting,” August 29, 2019. Canada has designated 84 tax treaties as covered tax agreements. 3 See “Status of List of Reservations and Notifications upon Deposit of the Instrument of Ratification,”. For each such covered tax agreement, if the treaty counterparty has also (1) designated its tax treaty with Canada as a covered tax agreement, and (2) deposited instruments of ratification with the OECD (which brings the MLI into force in that country on the first day of the month following a period of three calendar months from such deposit), the MLI’s provisions will apply:
Amongst the Canadian tax treaties that the MLI had entered into force in respect of as of the end of 2020 were Canada’s tax treaties with Luxembourg, the Netherlands, the United Kingdom, Ireland and Singapore, with others following as more countries ratify the MLI. The most significant Canadian tax treaties not impacted by the MLI are Canada’s tax treaties with the U.S. (which is not a signatory to the MLI) and with Germany and Switzerland (both of which are currently under renegotiation).
Canada’s position on the MLI has been to adopt the following amendments to its covered tax agreements:
The OECD has prepared an Explanatory Statement providing additional guidance on the interpretation of the MLI’s provisions.
The statement of purpose in Article 6(1) as amended in the manner agreed to by Canada adds a reference to the purpose of tax treaties to eliminate double taxation without creating unintended non-taxation or reduced taxation. Revised Article 6(1) reads as follows:
Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions).
It remains to be seen whether this additional text will affect the way in which courts will interpret Canada’s tax treaties. The PPT restricting taxpayers’ ability to claim treaty benefits is discussed below in 3. Claiming Treaty Benefits. Further context on Canada’s thinking on the MLI has provided by a senior Department of Finance official (Stephanie Smith) directly involved in Canada’s MLI participation, both at the Canadian Tax Foundation 2019 Annual Conference 4 Penny Woolford, Jonathan Schwarz, and Stephanie Smith, “Implementation of the Principal-Purpose Test as Part of the Multilateral Instrument: Canadian and Foreign Perspectives,” in Report of Proceedings of the Seventy-First Tax Conference, 2019 Conference Report (Toronto: Canadian Tax Foundation, 2019), 28: 1-17.” and at the 2019 meeting of the Canadian Branch of the International Fiscal Association. 5 https://taxinterpretations.com/
Because tax treaties exert such a powerful influence on how Canada taxes non-residents (or at least non-residents who are resident in a country with which Canada has a tax treaty), it is essential to understand how Canadian courts interpret and apply them.
In Canada v. Crown Forest Industries Limited et al., 6 95 DTC 5389 (SCC). the Supreme Court of Canada was called upon to interpret the 1980 version of the tax treaty between Canada and the United States. In so doing, the Court stated as follows (at 5393):
In interpreting a treaty, the paramount goal is to find the meaning of the words in question. This process involves looking to the language used and the intentions of the parties.
Reviewing the intentions of the drafters of a taxation convention is a very important element in delineating the scope of the application of that treaty. As noted by Addy, J. in J.N. Gladden Estate v. The Queen, [1985] 1 C.T.C. 163 (F.C.T.D.), at pp. 166-67:
Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned.
Thus, Canadian courts will go beyond a literal interpretation of the words of a treaty and seek to discern the intentions of the two countries that are party to it, for the purpose of applying the treaty in a manner consistent with those intentions. This is consistent with Articles 31 and 32 of the Vienna Convention on the Law of Treaties, which Canadian tax courts have cited and applied when interpreting tax treaties: 7 See for example Coblentz v. The Queen, 96 DTC 6531 (FCA).
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;
(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) any relevant rules of international law applicable in the relations between the parties.
Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable.
While tax treaties represent an agreement between two sovereign states, as a practical matter a taxpayer seeking relief under a tax treaty must generally satisfy the country whose taxes are being reduced or eliminated that the treaty in fact applies to that taxpayer’s situation. Put differently, the country whose interpretation of the treaty matters in any particular instance is the country whose right to tax is being constrained. There is no guarantee that both countries will necessarily interpret the text of the tax treaty between them in the same way.
Canada has set out the principles that it applies in interpreting its bilateral tax treaties in the Income Tax Conventions Interpretation Act. The Canadian legislation implementing tax treaties (including the MLI) provides that the ITCIA takes precedence over the terms of the tax treaty or any other law, making the ITCIA a very important source of interpretational guidance in situations where taxpayers are relying on a tax treaty to reduce Canadian taxes.
The following principles are amongst the most important found in the ITCIA:
The ITCIA also provides definitions for a number of important terms frequently found in Canada’s tax treaties (e.g., “immoveable property” and “real property”).
The OECD has prepared a Model Income Tax Convention (“OCD Model Treaty”) along with accompanying commentary (the “OECD Commentary”). The OECD Model Treaty serves as a framework for countries to use in negotiating bilateral income tax treaties. Canada uses this framework in negotiating its tax treaties, although it does depart from the OECD Model Treaty in certain respects and of course each treaty is based on the specific items agreed to by the two countries in question. It is therefore important to note that the OECD Model Treaty will not be identical to any particular Canadian tax treaty.
The Supreme Court of Canada described the OECD Model Treaty as being “[o]f high persuasive value in terms of defining the parameters of the Canada-United States Income Tax Convention (1980)”. 8 Crown Forest, above, at p. 5398. There is certainly precedent for a Canadian court to consider the OECD Model Treaty and Commentary as an extrinsic aid when interpreting a Canadian tax treaty. For example, in Prevost Car Inc. v. The Queen, 9 2009 DTC 5053 (FCA), affirming 2008 DTC 3080 (TCC). the Federal Court of Appeal stated:
[10] The worldwide recognition of the provisions of the Model Convention and their incorporation into a majority of bilateral conventions have made the Commentaries on the provisions of the OECD Model a widely-accepted guide to the interpretation and application of the provisions of existing bilateral conventions (see Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802; Klaus Vogel, “Klaus Vogel on Double Taxation Conventions” 3rd ed. (The Hague: Kluwer Law International, 1997) at 43.
However, it is important not to treat OECD materials as being equivalent to the law (i.e., the ITA or the text of an actual bilateral tax treaty), which they are clearly not. For example, in Canada v. GlaxoSmithKline Inc., 10 2012 SCC 52, para. 20. the SCC established that while OECD guidelines and commentaries may be a helpful interpretative aid to the courts, they “are not controlling as if they were a Canadian statute and the test of any set of transactions or prices ultimately must be determined according to [s. 247] rather than any particular methodology or commentary set out in the Guidelines.” 11 At para. 20. Moreover, while Canadian courts have frequently cited OECD transfer pricing guidelines when applying Canada’s transfer pricing rules, they have sometimes been reluctant to follow them. That was perhaps stated most clearly in McKesson Canada Corp. v. The Queen, 2013 TCC 404, in which Justice Patrick J. Boyle said:
I would add the observation that OECD Commentaries and Guidelines are written not only by persons who are not legislators, but in fact are the tax collection authorities of the world. Their thoughts should be considered accordingly. For tax administrators, it may make sense to identify transactions to be detected for further audit by the use of economists and their models, formulae and algorithms.
But none of that is ultimately determinative in an appeal to the Courts. The legal provisions of the Act govern and they do not mandate any such tests or approaches. The issue is to be determined through a fact finding and evaluation mission by the Court, as it is in any factually based issue on appeal, having regard to all of the evidence relating to the relevant facts and circumstances.
Ultimately the relevance of OECD guidance will depend on the facts and circumstances, in particular the extent to which the Canadian provisions (treaty or domestic law) being interpreted are the same as those to which the OECD materials relate. For example, in The Queen v. Alta Energy Luxembourg SARL, 12 2020 FCA 43. the Federal Court of Appeal rejected the CRA’s references to the OECD Commentary on Article 13 (Capital Gains) on the basis that the actual treaty being litigated (the Canada-Luxembourg Tax Treaty) simply contained a different test than that found in the corresponding article of the OCED Model Treaty. 13 At para. 36: “The commentaries, to which the Crown referred, relate to an OECD Model Tax Convention that was created after the particular exemption in issue was included in the first convention between Canada and Luxembourg. These commentaries were written for a model convention that was not adopted by Canada and Luxembourg. These commentaries are of little assistance in determining the rationale for the exemption that is in issue in this case.” Similarly, Canadian courts have rejected important elements of the OECD transfer pricing guidelines as being inconsistent with section 247 (for example, the Tax Court’s decision in Cameco rejecting the CRA’s suggestion that managing or monitoring risk is equivalent to actually bearing that risk). 14 For analysis of the decision, see Steve Suarez, “The Cameco Transfer Pricing Decision: A Victory for the Rule of Law and the Canadian Taxpayer,” Tax Notes Int’l, Nov. 26, 2018, p. 877. As such, the OECD Model Treaty and OECD Commentary should be considered when interpreting a Canadian tax treaty, but a court may or may not find them persuasive, depending on the facts.
The U.S. Treasury Department has prepared technical explanations to various iterations of the Canada-U.S. Tax Treaty, the most recent of which (the “U.S. Technical Explanation”) was produced following the 2007 Protocol to the Canada-U.S. Tax Treaty. The Department of Finance has expressed the view that the U.S. Technical Explanation “accurately reflects understandings reached in the course of negotiations with respect to the interpretation and application of various provisions of the Protocol,” 15 Release 2008-052. such that the U.S. Technical Explanation can be said to also reflect Canada’s interpretation of that treaty. Canadian courts have treated that and prior versions of the U.S. Technical Explanation as a useful source of interpretative guidance in applying the Canada-U.S. Tax Treaty. 16 See for example the Crown Forest and Coblentz cases, above; and TD Securities (USA) LLC v. The Queen, 2010 DTC 1137 (TCC).
However, the U.S. Technical Explanation is not itself equivalent to the text of the Canada-U.S. Tax Treaty, as was made clear by the Federal Court of Appeal in Canada v. Kubicek Estate: 17 97 DTC 5454 (FCA).
There is no international tradition or procedure for an exchange of subsequently bargained documents as determinative of treaty interpretation. The Technical Explanation is a domestic American document. True, it is stated to have the endorsation of the Canadian Minister of Finance, but in order to bind Canada it would have to amount to another convention, which it does not. From the Canadian viewpoint, it has about the same status as a Revenue Canada interpretation bulletin, of interest to a Court but not necessarily decisive of an issue.
In any event, the document should not be interpreted as if it were a treaty or statute dealing in detail with every possible application to particular facts. The term “held” would be literally accurate in general, but is not qualified to deal with the particular situation of property held in Canada by a U.S. resident prior to 1972.
As such, the U.S. Technical Explanation should be viewed as an interpretative aid the utility of which in any particular case will depend on the facts and circumstances.
Other potential extrinsic aids that have been considered by Canadian tax courts include the United Nations Model Double Taxation Convention 18 See Crown Forest, above; Cloutier v. The Queen, 2003 DTC 317 (TCC), American Income Life Insurance Company v. The Queen; 2008 DTC 3631 (TCC); and Knights of Columbus v. The Queen, 2008 DTC 3648 (TCC). and the U.S. Model Income Tax Convention. 19 Cloutier, above; Wolf v. The Queen, 2018 TCC 84. In appropriate cases the courts will hear expert testimony as regards the interpretation of such extrinsic aids. 20 See the Knights of Columbus and American Income Life cases, above, as well as Prevost Car Inc. v. The Queen, 2008 TCC 231; affirmed, 2009 FCA 57. See also Deegan v. Canada 2019 FC 960 (FCTD) (under appeal), in which the Federal Court of Canada considered extensive expert evidence (including from senior Department of Finance officials) in the context of a challenge to the Canada-United States Enhanced Tax Information Exchange Agreement entered into between Canada and the U.S. with regard to the U.S. Foreign Account Tax Compliance Act (FATCA) legislation.