.svg){kind=small}
%402x.svg){kind=small}
Hong Kong signed a double taxation agreement (“DTA”) with Canada on 11 November 2012. It is the 26th addition to the rapidly expanding tax treaty network of Hong Kong.
The DTA with Canada is very much based on the Organisation for Economic Co-operation and Development (OECD) model. Pursuant to the DTA, the maximum withholding tax rates for the following types of income (which must not arise through a permanent establishment in the jurisdiction of the payer) are as follows:
Interest 10% (0% if paid between unrelated parties, see below).
Royalties 10%
Dividends 15 % (reduced to 5% if the recipient is a company owning at least 10% of the voting power of the paying company).
Without the treaty relief, the Canadian tax rate is 25% for all of the aforesaid types of income. Hong Kong domestic law charges no withholding tax on dividends and interest, and at 4.5% to 16.5% for royalties in limited circumstances.
There is a substantial population of people in Hong Kong who once migrated to Canada but later returned to become residents of Hong Kong. If they have not liquidated all of their investments in Canadian securities, the DTA could be meaningful to them by virtue of the above reductions in Canadian withholding tax. The DTA also contains provisions to deal with dual residency in the two jurisdictions to render the dual resident to be a resident in either but not both of the jurisdictions. This offers planning opportunities for those who have their family presence in both jurisdictions and/or are travelling between the two jurisdictions frequently.
While most capital gains are generally taxable in the taxpayer’s resident jurisdiction only, the DTA contains a provision to reserve Canada’s right in taxing capital gains from immovable property which includes real estate. Canada may tax capital gains derived from disposal of shares in any company which is not listed on a designated stock exchange if more than 50% of the fair market value of the shares is derived directly and indirectly from real estate and timber resources properties in Canada as well as Canadian resource properties. The DTA does not specify the point of time for calculating such percentage. According to the Income Tax Act of Canada, such point of time should be any time within the period of 60 months ending on the date of the disposal. A Protocol may be entered by the two jurisdictions to confirm this point later. As Hong Kong currently does not tax capital gains from disposal of real property, the provision is only beneficial to Hong Kong residents investing into the aforesaid assets in Canada but practically of no avail to Canadian residents disposing real property in Hong Kong.
The DTA also restates a provision in the Income Tax Act of Canada exempting interest income from withholding tax. If the payer and the payee of the interest income are dealing with each other at arm’s length (which usually means they are unrelated to each other), the domestic tax law of Canada does not charge withholding tax on the amount of the interest income.
The Canadian and Hong Kong governments are obligated under the DTA to proceed with domestic legislation procedures to incorporate the DTA into their respective laws. Upon the date when such procedures are completed by both (the “Date”), the DTA will immediately apply to income from shipping and air transport as well as capital gains. As for the other parts of the DTA, it will be effective from the year of assessment/taxation year starting from 1 April in Hong Kong and 1 January in Canada after the calendar year (ending 31 December) in which the Date falls. At the time of writing (24 December 2012) the Date has not come into place. As the year of 2012 is ending soon, it is likely the majority part of the DTA will come into effect from the year of assessment 2013/14 in Hong Kong and taxation year 2014 in Canada.
The DTA contains various anti-avoidance provisions. It also contains provisions for exchange of information between the tax authorities, including information held by banks, trustees and agents. Whilst the tax relief is available only to residents of either jurisdiction, the information that may be exchanged is NOT limited to that of residents of Canada and Hong Kong. Literally, Canada may ask Hong Kong to help gather and supply information of a person who is neither resident in Hong Kong and Canada but has a branch or other forms of permanent establishment in Hong Kong.
Those who have business, investments and family in Canada and Hong Kong should immediately review their present tax positions and investment plans in both jurisdictions and consult experts for necessary changes before the DTA comes into effect.
