Double Taxation Relief Manual: Guidance by country: Canada: Notes
Permanent establishments (Article 5)
Under Canadian domestic law, certain non-resident companies carrying on a business in Canada are liable to a supplemental tax on their profits in addition to the normal Income Tax. Article 22(4)(d) exempts the first £250,000 or $C500,000, whichever is the greater, of the profits of the Canadian branch of a United Kingdom company from this supplemental tax.
Where the tax is charged on profits in excess of this amount, it is admissible for tax credit relief.
Business Profits (Article 7)
The protocol that entered into force in 2014 inserted a new Business Profits article. This new article was adopted by the OECD in 2010 and now appears in the OECD Model Tax Convention.
Capital gains (Article 13)
Under its domestic law (TCGA92/S276 (7) ) and under the agreement (see Article 13(4) and 13(5) as amended by the 1985 amending agreement) the United Kingdom may tax any gains derived by a resident of Canada on the disposal of certain rights and assets connected with the exploration etc. for petroleum, natural gas and other related hydrocarbons in the United Kingdom and a designated area, certain shares deriving their value from such rights or assets and interests in partnerships and trusts whose assets consist principally of such assets or rights. These provisions do not apply where the shareholding or the interest in the partnership or trust is less than 10 per cent (see Article 13(6)).
Pensions and annuities (Article 17)
For the purposes of the agreement, the term “pension” includes any payment under a superannuation, pension or retirement plan, Armed Forces retirement pay, war veterans’ pensions and allowances and any payment under a sickness, accident or disability plan and any social security payment, but it does not include an annuity.
Annuities arising in one State (the State of source) may be taxed in that State but the source State taxation is limited to 10% of the amount that would otherwise be taxable under the source State’s laws. Annuities may also be taxed in the State in which the pensioner resides.
If a United Kingdom resident has paid Canadian tax on his Canadian pension or on the whole of his Canadian annuity, he should claim repayment of the whole of the tax (charged on a pension) or part of the tax (charged on an annuity).
Alimony and similar payments (Article 17)
Alimony or maintenance paid by a resident of Canada to a divorced or separated wife or to any of their children is exempt from Canadian tax if the recipient is a resident of the United Kingdom (Article 17(5)). Any United Kingdom resident recipient who has suffered Canadian withholding tax on any such payments should be advised to claim repayment of the tax. No credit can be given for any Canadian tax withheld against the United Kingdom tax on such income.
Estates and trusts (Article 20)
Canadian domestic law imposes a withholding tax of 25 per cent on income derived by a beneficiary of an estate or trust which is resident in Canada. Article 20(1) provides that, where the income is received and beneficially owned by a resident of the United Kingdom, the withholding tax is reduced to 15 per cent.
If a United Kingdom resident beneficiary has received such income under deduction of Canadian withholding tax at 25 per cent, he can claim repayment of 10 per cent (25 per cent-15 per cent).
Credit is only available for tax at 15 per cent against the United Kingdom tax on the same income.
Offshore activities (Article 27A)
Article 27A contains provisions for the treatment of activities in connection with the exploration or exploitation of the sea bed, sub-soil and natural resources. These provide that
a) a resident of one country carrying on such activities in the other country is deemed to be carrying on a business in that other country through a permanent establishment;
b) earnings for duties in connection with such activities performed offshore in one country may be taxed in that country.
Refer to Article 27A(3) for details of certain limitations in connection with the duration of the activities.
Withdrawals from Canadian RRSPs/RRIFs
Canadian Registered Retirement Savings Plans
(RRSPs) and Registered Retirement Income Funds (RRIFs)
Where a UK resident makes a lump sum withdrawal from an RRSP or an RRIF, Canada imposes a 25 per cent withholding tax. The Canadian tax is imposed upon the lump sum withdrawal. The availability of credit relief in the UK is dependent upon when the funds held in the RRSP or RRIF were accrued, following changes made in Schedule 3 Finance Act 2017.
Funds accrued prior to 6 April 2017
Any UK tax charge on funds accrued prior to 6 April 2017 is on the disposal of assets held within the Plan or Fund to enable the lump sum to be withdrawn (and no tax is levied on the disposal of fund assets in Canada). The Elimination of Double Taxation Article (Article 21) obliges the United Kingdom to give credit for Canadian tax paid only against UK tax computed by reference to the same profits, income or chargeable gains by reference to which the Canadian tax is computed. Since no UK tax is computed by reference to income subjected to Canadian tax (that is, the withdrawal), no tax credit relief is allowable. Similarly, where the disposal of fund assets to facilitate a withdrawal gives rise to a UK tax charge, no tax credit relief is allowable since the disposal does not attract a tax charge in Canada.
Funds accrued from 6 April 2017
Funds accrued from 6 April 2017 from which a lump sum payment is made may be liable to tax in the UK. Where this applies, credit relief will be available as the UK tax will be paid by reference to the same income which has been subjected to tax in Canada.