Canada is one of the United States' most important economic partners. Home to one of the best public education systems in the world, Canada is a booming talent hub across all industries, including tech, financial services, healthcare, and agriculture. Despite being a relatively small country by population, Canada's GDP is approaching $2 trillion. Companies looking to expand globally can hire top Canadian talent by partnering with an EOR service like Via.
Business leaders looking to expand to Canada and foreigners looking to live & work in the North American country may be curious about double taxation in Canada, especially double taxation laws and treaties. In fact, Canada has 93 signed tax treaties with countries around the world.
In this guide, we’ll give you all the information you need to know about double taxation and tax treaties in Canada.
In Canada, a double taxation treaty is an agreement signed between Canada and another country to prevent double taxation of earned income and assets that may arise when a taxpayer is subject to tax in both countries for the same income or asset.
Canada has signed over 90 tax treaties with other countries, including the United States, the United Kingdom, France, Germany, and China, among others. These treaties provide relief from double taxation in various ways, including allowing taxpayers to claim foreign tax credits, exemptions, or deductions for taxes paid in the other country. Taxes like capital gains have their own set of rules in Canada.
The tax treaties typically include provisions for resolving disputes between the tax authorities and allowing for relatively simple trade and investment to flow.
The US and Canada have historically had a pretty stable working relationship, meaning they have a strong double-taxation treaty in place. The US-Canada tax treaty of 1980 stipulates the rules of how Canadian taxes and US tax are paid. This treaty has been modified a few times over the years to accommodate the changing atmosphere in the economies of both countries.
The treaty allocates who has the taxing rights in either country.
For example, foreign earned income from employment or business activities is generally taxed in the country where the activities are carried out, while dividends, interest, and royalties are generally taxed in the main country of residence for the individual.
A person is able to claim the credit they paid on their Canadian tax return or vice versa in the US to avoid double-taxation on the same income. This is achieved through a credit mechanism, in which a person can claim taxes paid in one country can be offset against taxes owed in the other country.
Under the "Saving Clause," each country is allowed to tax the person as they would in their home country.
However, you should be very careful with this provision and partner with a seasoned tax attorney or work with a Canadian EOR like Via to ensure you don’t over or under pay. The US likes to make citizens pay US taxes even if they’re living abroad, so understanding the nuances of this provision will help you save money as a US citizen living in Canada, or a business hiring full-time employees in Canada for the first time.
The permanent establishment (or PE) clause specifies the circumstances under which a business presence in one country (the source country) can be deemed to have a taxable presence or "permanent establishment" in the other country (the residence country). Permanent establish thus determines where their tax filing status will be.
The treaty defines a permanent establishment as a fixed place of business, such as an office, factory, or workshop, where the business carries out its operations. The treaty also includes other types of PEs, such as a construction site, a drilling rig, or a place where services are performed for a certain period.
Under most Canada tax treaties, social security benefits are generally taxable only in the country of residence of the recipient.
For US residents receiving social security benefits, the benefits are generally taxed in the US, regardless of their citizenship or where the benefits were earned. However, under the treaty, US social security benefits paid to Canadian residents are exempt from US taxation if the recipient is a Canadian citizen or resident, and the benefits are subject to tax only in Canada.
The US-Canada tax treaty includes provisions that regulate the taxation of certain government functions in both countries. Specifically, the treaty provides:
Taxation of Government Services: The treaty provides that fees or charges for services provided by the government of one country to the residents of the other country are not subject to tax in the other country. For example, fees for passports or visas paid to the government of one country by residents of the other country are exempt from tax.
Taxation of Diplomatic Agents and Consular Officers: The treaty exempts from tax the salaries, wages, and other similar compensation paid by a contracting state to its diplomatic agents and consular officers.
Taxation of Public Pensions: The treaty provides that public pensions paid by a contracting state to its residents are taxable only in that state and have a specific tax rate. This means that US public pensions paid to Canadian residents are taxable only in Canada, and Canadian public pensions paid to US residents are taxable only in the US.
Taxation of Government-Owned Enterprises: The treaty provides that income derived by a contracting state from the operation of a government-owned enterprise is taxable only in that state. This means that income earned by a Canadian government-owned enterprise in the US is taxable only in Canada, and income earned by a US government-owned enterprise in Canada is taxable only in the US.
Under the US-Canada tax treaty, there is a provision for the exchange of information between the tax authorities of the two countries. This provision is often referred to as the "Exchange of Information" or "EOI" clause.
With the EOI clause, the tax authorities of each country are required to exchange information that is relevant to the administration and enforcement of their respective tax laws. This includes information that is necessary to determine or verify the tax liability of a taxpayer, to investigate or prosecute tax evasion/avoidance, and to assist in the collection of taxes.
With this income tax treaty, tax authorities are allowed to request and exchange information, including bank and financial records, from each other. The information exchanged is subject to strict confidentiality requirements and can only be used for tax purposes. The EOI clause is an important tool for ensuring compliance with the tax laws of both countries and for preventing expat tax evasion and avoidance. It helps to ensure that taxpayers cannot hide assets or income in one country to avoid taxation in the other country.
Canada has tax treaties with many countries around the world, including:
United Kingdom: The UK’s taxation treaty with Canada eliminates double taxation by sharing information between countries to determine which country is credited when a person pays their taxes to avoid paying twice.
Germany: Under this tax treaty, social security benefits are only taxed in the country that they were issued in.
Mexico: Under the Canada and Mexico treaty, an individual is deemed a resident of either country when they have a permanent residence and most of their economic activity is done there. The country they pay withholding taxes will credit these payments to the other to avoid double taxation.
Netherlands: This treaty allows for the exchange of information between both countries in order to avoid evasion of taxes in the Netherlands and Canada.
Spain: Spain’s taxation treaty with Canada eliminates double taxation by sharing information between countries to determine which country is credited when a person pays their taxes to avoid double payments.
Portugal: This tax treaty was intended to avoid fiscal evasion through the exchange of information in either Portugal or Canada.
The terms of these treaties vary, but generally they establish rules for the allocation of taxing rights between the two countries, providing for the elimination of double taxation as well as the exchange of information between the two countries' tax authorities.
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