• Home
  • >
  • Blogs
  • >
  • UK-Canada Tax Convention: Prevent Double Taxation

UK-Canada Tax Convention: Prevent Double Taxation

Published by Sanjay Gautam
Posted Date: July 8, 2024 , Modified Date: July 10, 2024

The governments of the United Kingdom of Great Britain and Northern Ireland, and Canada have established a Convention aimed at preventing double taxation and fiscal evasion concerning income and capital gains taxes. This agreement reflects the mutual desire of both countries to foster fair tax practices and ensure tax compliance.

Article 1: Personal Scope

The Convention is applicable to individuals and entities who are residents of one or both of the contracting states—namely, the United Kingdom and Canada.

Article 2: Taxes Covered

Canadian Taxes: The Convention covers income taxes imposed by the Government of Canada, hereinafter referred to as "Canadian tax."

United Kingdom Taxes: The agreement includes income tax, corporation tax, capital gains tax, petroleum revenue tax, and development land tax, hereinafter referred to as "United Kingdom tax."

The Convention also extends to any identical or substantially similar taxes that may be imposed after the date of signature in place of or in addition to the existing taxes. Both parties are required to notify each other of changes in their respective tax laws.

Article 3: General Definitions

Territorial Definitions:

  • Canada: This term refers to the territory of Canada, including areas beyond its territorial waters where Canada may exercise sovereign rights over the seabed and subsoil and their natural resources in accordance with national legislation and international law.
  • United Kingdom: This term encompasses Great Britain and Northern Ireland, including areas designated under UK laws concerning the Continental Shelf, where the UK can exercise rights over the seabed and subsoil and their natural resources in accordance with international law.

Contracting States: The terms "a Contracting State" and "the other Contracting State" refer to the United Kingdom or Canada, as required by the context.

Person: This term includes individuals, trusts, companies, partnerships, and any other bodies of persons.

Company: This refers to any body corporate or any other entity treated as a body corporate for tax purposes. In Canadian law, the French term "société" also means a "corporation."

Enterprise of a Contracting State: This means an enterprise operated by a resident of one of the contracting states.

Competent Authority:

In Canada, this refers to the Minister of National Revenue or their authorised representative.

In the United Kingdom, this refers to the Commissioners for HM Revenue and Customs or their authorised representative.

Tax: This refers to the United Kingdom tax or Canadian tax, as required by the context.

National:

  • In relation to the United Kingdom, this includes British citizens and British subjects with the right of abode in the UK, as well as any legal entities deriving their status from UK law.
  • In relation to Canada, this includes Canadian citizens and legal entities deriving their status from Canadian law.

International Traffic: This term refers to any transport by a ship or aircraft operated by an enterprise of a contracting state, excluding operations solely between places in the other contracting state.

Undefined Terms: For terms not explicitly defined in the Convention, unless the context otherwise requires, the meaning shall be as per the tax laws of the respective contracting state relating to the taxes subject to the Convention.

This Convention establishes a framework to facilitate fair tax practices and avoid fiscal evasion between the United Kingdom and Canada, fostering transparent and cooperative tax relations between the two countries.

Article 4: Fiscal Domicile

"Resident of a Contracting State" means any person liable to tax in that State due to domicile, residence, place of management, incorporation, or similar criteria. This includes the State, its subdivisions, local authorities, and their agencies. It does not include persons liable to tax only on income from sources within that State.

Fiscal Domicile UK-Canada Tax Convention 1

If an individual is a resident of both Contracting States, their status will be determined as follows:

  • They are deemed a resident of the State where they have a permanent home. If they have homes in both States, they are a resident of the State with closer personal and economic relations (centre of vital interests).
  • If the centre of vital interests cannot be determined, or if no permanent home is available in either State, they are a resident of the State where they have a habitual abode.
  • If they have a habitual abode in both States or neither, they are a resident of the State of which they are a national.
  • If they are a national of both or neither State, the competent authorities will settle the question by mutual agreement.

For non-individuals, if a person is a resident of both Contracting States, the competent authorities will determine their residency by mutual agreement, considering the place of effective management, incorporation, and other relevant factors. If unresolved, they will agree on the application of the Convention to that person.

Article 5: Permanent Establishment

"Permanent establishment" means a fixed place of business where the enterprise's business is wholly or partly carried on.

It includes:

  • A place of management
  • A branch
  • An office
  • A factory
  • A workshop
  • A mine, quarry, or other place of natural resource extraction
  • A building site or construction/assembly project existing for more than 12 months.

However, It does not include:

  • Facilities solely for storage, display, or delivery of goods
  • Stock maintenance for storage, display, or delivery
  • Stock maintenance for processing by another enterprise
  • A fixed place of business for purchasing goods or collecting information
  • A fixed place of business for advertising, information supply, scientific research, or similar preparatory/auxiliary activities.

A person acting in a Contracting State on behalf of an enterprise of the other Contracting State who has and habitually exercises authority to conclude contracts is deemed a permanent establishment unless activities are limited to purchasing goods for the enterprise.

An enterprise will not be deemed to have a permanent establishment merely because it operates through a broker, general commission agent, or other independent agent acting in the ordinary course of business.

A resident company does not constitute a permanent establishment solely due to control by or over a company in the other Contracting State.

Article 6: Income from Immovable Property

Income from immovable property, including agriculture or forestry, may be taxed in the State where the property is located.

"Immovable property" is defined according to the law of the State where the property is situated and includes property accessory to immovable property, agriculture and forestry equipment, rights to landed property, usufruct of immovable property, and rights to payments for working natural resources. Ships, boats, and aircraft are not considered immovable property.

This applies to income from the direct use, letting, or use in other forms of immovable property and profits from its alienation.The provisions also apply to income from immovable property of an enterprise and used for professional services.

Article 7: Business Profits

Profits of an enterprise of a Contracting State are taxable only in that State unless the enterprise operates in the other Contracting State through a permanent establishment. Profits attributable to the permanent establishment may be taxed in the other State.

Business Profit UK-Canada Convention

Profits attributable to the permanent establishment are those it might be expected to make if it were a separate, independent enterprise under similar conditions, considering functions performed, assets used, and risks assumed.

If a Contracting State adjusts the profits attributable to a permanent establishment and taxes profits taxed in the other State, the other State shall adjust the tax charged to eliminate double taxation, consulting if necessary.

If profits include income or gains covered by other Articles, those provisions apply.

Article 8: Shipping and Air Transport

Profits from the operation of ships or aircraft in international traffic by an enterprise of a Contracting State are taxable only in that State.

Profits from carriage within the other Contracting State may be taxed there unless all or nearly all passengers or goods were taken on board outside that State.

Profits from the use, maintenance, or rental of containers used in international traffic are taxable only in the enterprise's State.

This applies to profits from participation in pools, joint businesses, or international operating agencies.

Article 9: Associated Enterprises

If enterprises are related and conditions differ from those between independent enterprises, profits that would have accrued may be included and taxed by a Contracting State.

If a Contracting State taxes profits adjusted in the other State, the other State shall adjust the tax to eliminate double taxation, consulting if necessary.

Primary adjustments to profits must be made within time limits, generally within eight years from the taxable year.

Provisions do not apply in cases of fraud, wilful default, or non-fulfilment due to careless or deliberate behaviour.

Article 10: Dividends

Dividend Includes income from shares, mining shares, founders' shares, and other profit-participating rights. Dividends beneficially owned by pension plans are exempt if certain conditions are met.

Dividends paid by a company resident in one Contracting State to a resident of the other Contracting State may be taxed in both the State of the dividend payer and the State of the recipient.

If the beneficial owner of the dividends is a resident of the other Contracting State, the tax charged shall not exceed:

  • 5% of the gross amount if the beneficial owner is a company controlling at least 10% of the voting power in the paying company
  • 15% of the gross amount in other cases

Provisions do not apply if the dividends are effectively connected with a permanent establishment or fixed base in the other State. A State cannot impose tax on dividends paid by a company resident only in the other Contracting State unless the dividends are paid to a resident or are connected with a permanent establishment in the first State.

The article will not apply if the main purpose of creating or assigning shares was to take advantage of this provision.

Article 11: Interest

Taxation in Both States: Interest arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in both States.

Tax Limits: If the beneficial owner of the interest is a resident of the other Contracting State, the tax charged shall not exceed 10% of the gross amount.

tax percentage UK-Canada Convention

Exemptions: Interest paid with respect to certain loans or guarantees by export development agencies of the respective states may only be taxable in the State of the recipient.

Definition of Interest: Interest Includes income from debt claims, government securities, bonds, debentures, and similar income, excluding dividends.

Permanent Establishment Connection: Provisions do not apply if the interest is effectively connected with a permanent establishment or fixed base in the other State.

Deemed Source: Interest is deemed to arise in the State where the payer is a resident.

Excess Payments: If the interest exceeds what would have been agreed upon by independent parties due to a special relationship, the provisions apply only to the amount that would have been agreed upon independently.

Anti-Avoidance: Provisions will not apply if the main purpose of creating or assigning the debt-claim was to take advantage of this provision.

Article 12: Royalties

Royalties includes payments for the use of copyrights, patents, trademarks, designs, models, plans, secret formulas or processes, and similar items, excluding income dealt with under other articles. Royalties arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in both States.

If the beneficial owner of the royalties is a resident of the other Contracting State, the tax charged shall not exceed 10% of the gross amount. Certain copyright royalties and payments for the use of patents, information, and computer software may be taxable only in the State of the recipient.

Provisions do not apply if the royalties are effectively connected with a permanent establishment or fixed base in the other State. Royalties are deemed to arise in the State where the payer is a resident.

If the royalties exceed what would have been agreed upon by independent parties due to a special relationship, the provisions apply only to the amount that would have been agreed upon independently.

Provisions will not apply if the main purpose of creating or assigning the rights was to take advantage of this provision.

Article 13: Capital Gains

Gains derived by a resident of one Contracting State from the alienation of immovable property situated in the other Contracting State may be taxed in the State where the property is located.

Gains from the alienation of movable property that forms part of the business property of a permanent establishment or a fixed base in the other Contracting State may be taxed in that other State.

Gains from the alienation of ships or aircraft operated in international traffic or movable property related to such operations are taxable only in the State of the operator's residence.

Gains from the alienation of rights, licenses, or privileges to explore for or exploit petroleum, natural gas, or related hydrocarbons situated in a Contracting State, or rights to assets produced by such activities, may be taxed in that State.

Gains from the alienation of shares (other than those on an approved stock exchange) deriving their value principally from immovable property in a Contracting State or interests in a partnership or trust primarily owning such property or rights may be taxed in that State. This does not apply if the alienator owned less than 10% of the shares or interest in the partnership or trust immediately before the alienation.

Capital gains UK-Canada Tax convention

"Approved stock exchange" means an exchange prescribed for Canadian Income Tax Act purposes or a recognised exchange per UK Corporation Tax Acts. "Immovable property" excludes property used in business other than rental property.

Gains from the alienation of property not covered above are taxable only in the resident State of the alienator.

The State of former residence can tax gains from property if the alienator was a resident at any time during the fiscal year of alienation or within the preceding six years.

If an individual ceases to be a resident of one State and is taxed on deemed gains, and later becomes a resident of the other State, the new State can tax gains only to the extent they did not accrue while the individual was a resident of the former State. However, this does not apply to gains that could have been taxed by the new State if realised earlier.

Article 14: Professional Services

"Professional services" include independent scientific, literary, artistic, educational, teaching activities, and services provided by physicians, lawyers, engineers, architects, dentists, and accountants.

Income from professional services or independent activities derived by a resident of one Contracting State is taxable only in that State unless the person has a fixed base in the other State for performing those activities. In that case, the income attributable to the fixed base may be taxed in the other State.

Article 15: Dependent Personal Services

Salaries, wages, and similar remuneration derived by a resident of one Contracting State from employment are taxable only in that State unless the employment is exercised in the other State. If exercised in the other State, the income may be taxed there.

Remuneration for employment exercised in the other State is taxable only in the resident State if:

  • The recipient is present in the other State for 183 days or less in any 12-month period
  • The remuneration is paid by an employer who is not a resident of the other State
  • The remuneration is not borne by a permanent establishment or fixed base in the other State

Remuneration for employment on a ship or aircraft operated in international traffic by a resident of a Contracting State is taxable in the resident State.

Director's remuneration is treated as if it were employment income, with the same taxation rules applying.

Article 16: Artistes and Athletes

Income derived by entertainers (e.g., theatre, motion picture, radio or TV artists, musicians) and athletes from their personal activities may be taxed in the State where the activities are performed.

If income from personal activities of entertainers or athletes accrues to another person, it may still be taxed in the State where the activities are performed.

Exceptions:

  • Income from activities supported by public funds
  • Income to a non-profit organisation with no part benefiting any proprietor, member, or shareholder
  • Services provided to a non-profit organisation

Article 17: Pensions and Annuities

Pension Includes payments under superannuation, pension, retirement plans, Armed Forces retirement pay, war veterans' pensions and allowances, sickness, accident, or disability plans, and social security legislation.

Periodic pension payments arising in one State and paid to a resident of the other State who is the beneficial owner are taxable only in the resident State.

Retirement plan UK-Canada Tax convention

Annuity refers to the Periodic payments in return for consideration, excluding payments under superannuation, pension, retirement plans, or income-averaging annuity contracts.

Annuities arising in one State and paid to a resident of the other State may be taxed in both states, but the source state's tax cannot exceed 10% of the taxable portion.

Alimony and similar payments arising in one State and paid to a resident of the other State who is the beneficial owner are taxable only in the recipient's State.

Article 18: Government Service

Remuneration Paid by a state or its political subdivisions or local authorities for services rendered to that State are taxable only in that State.

If services are rendered in the other State and the recipient is a resident and national of that State or did not become a resident solely for the purpose of the services, it is taxable only in that other State.

This Article does not apply to services connected to trade or business carried on by a state or its subdivisions or authorities.

Article 19: Students

Payments received by a student, apprentice, or business trainee who was a resident of one State before visiting the other State for education or training are not taxed in the visiting State if the payments come from outside the visiting State.

Article 20: Estates and Trusts

Income from a Canadian estate or trust received by a UK resident who is the beneficial owner may be taxed in Canada, with the tax not exceeding 15% of the gross amount.

The tax limitation does not apply if the recipient has a permanent establishment or fixed base in Canada and the trust income is connected with it. In such case the provisions of Article 7 or Article 14 of this convention shall apply.

Trusts Excludes arrangements where contributions to the trust are deductible for Canadian tax purposes.

Article 20A: Other Income

Income beneficially owned by a resident of one State and not covered by other articles is taxable only in the resident State.

The general rule does not apply if the income is effectively connected with a permanent establishment or fixed base in the other State. In such case the provisions of Article 7 or Article 14 of this convention shall apply.

Income not covered by other articles and arising in the Other contracting State may also be taxed in that other State.

Article 21: Elimination of Double Taxation

Income, profits, and capital gains taxed in one State under the Convention are deemed to arise from sources in that State.

Canada

Canadian law allows for the deduction of UK tax on UK-sourced income, profits, or gains from Canadian tax payable on the same income.

When a UK resident company pays a dividend to a Canadian resident company that controls at least 10% of the UK company, the Canadian tax credit includes the UK tax paid by the UK company on its profits from which the dividend is paid.

If income is exempt from Canadian tax due to the Convention, Canada can consider this income for calculating tax on other income.

United Kingdom

UK law allows a credit against UK tax for Canadian tax paid on Canadian-sourced income, profits, or gains, excluding dividends (tax payable on profits out of which the dividend is paid).

Dividends from a Canadian resident company to a UK resident company are exempt from UK tax, subject to UK law conditions.

For non-exempt dividends, a credit is given for Canadian tax paid by the Canadian company on its profits out of which the dividend is paid.

Profits of a Canadian permanent establishment of a UK company are exempt from UK tax, subject to UK law conditions.

Article 22: Non-Discrimination

Profits attributable to permanent establishments after deducting business losses, all other taxes on those profits, profits reinvested in the State, and a specific monetary threshold.

Nationals of one contracting state cannot be subjected to more burdensome taxation in the other contracting state than the nationals of the latter State under similar conditions.

Taxation on a permanent establishment of a company from one State in the other State should not be more burdensome than for domestic companies with similar activities.

A contracting state may impose additional tax on earnings from permanent establishments of a resident company of the other contracting state, not exceeding 5% of such earnings not previously subjected to this tax.

Article 23: Mutual Agreement Procedure

A person subjected to taxation not in accordance with the Convention can apply to their State's competent authority within three years of the first notification of such action.

Mutual Agreement UK-Canada Tax convention

If justified, the competent authorities of both states will try to resolve the case by mutual agreement, which will be implemented regardless of domestic time limits.

Adjustments to income taxed by the other State must be made within eight years of the taxable period, except in cases of fraud or default.

Competent authorities will resolve interpretive or application difficulties through mutual agreement and can communicate directly for this purpose.

If mutual agreement is not reached within three years, unresolved issues will be submitted to arbitration, binding both states unless a directly affected person rejects the decision. Arbitration applies to issues specified in the Convention and any subsequently agreed issues.

Article 24: Exchange of Information

Competent authorities will exchange information relevant for applying the Convention or enforcing domestic tax laws, unrestricted by Articles 1 and 2.

Information received must be kept secret and used only for specified purposes, including judicial decisions and public court proceedings.

A state is not obliged to:

  • Undertake measures against its or the other State's laws or administrative practices
  • Provide information not obtainable under its or the other State's laws
  • Disclose trade secrets or information contrary to public policy

States must use their information-gathering measures to provide requested information, even if not needed for their own tax purposes.

States cannot refuse information solely because financial institutions hold it or relate to ownership interests.

Authorised representatives of a state may enter the other State to interview individuals or examine records with consent, following mutually agreed procedures.

Article 24A: Assistance in the Collection of Taxes

Revenue claims include all taxes, interest, penalties, and collection costs owed to a state or its political subdivisions, not contrary to the Convention.

States will assist each other in collecting revenue claims, unrestricted by Articles 1 and 2. Competent authorities will agree on application methods.

An enforceable revenue claim in one State, if requested, will be collected by the other State as if it were its own. Revenue claims collected by one State for the other do not receive any special priority under the collecting State's laws.

The existence, validity, or amount of a revenue claim cannot be challenged in the courts or administrative bodies of the assisting State. If a revenue claim ceases to be enforceable, the requesting State must notify the assisting State, which may suspend or withdraw the request.

Assistance is not required if:

  • It conflicts with the State's laws or practices.
  • It is contrary to public policy.
  • The other State has not pursued all reasonable collection measures.
  • The administrative burden is disproportionate to the benefit.
  • The taxation is considered contrary to generally accepted principles.

Article 25: Diplomatic and Consular Officials

The Convention does not affect fiscal privileges of diplomatic or consular officials under international law or special agreements.

The Convention does not apply to international organisations, their organs, officials, or third-state diplomatic missions not treated as residents for tax purposes in either contracting state.

Article 26: Extension

The Convention can be extended to territories for which a contracting state is responsible, with modifications and conditions agreed upon. Termination of the Convention also terminates its application to any extended territories unless otherwise agreed.

Article 27: Miscellaneous Rules

The Convention does not restrict any exclusions, exemptions, deductions, credits, or allowances under domestic laws. Relief from tax under the Convention applies only to income taxed in the other contracting state.

States retain the right to tax residents on their share of income or capital gains from partnerships, trusts, or controlled foreign affiliates. Competent authorities may communicate directly for applying the Convention.

Contributions to a pension arrangement in one State by an individual working in the other State are treated similarly for tax purposes, subject to conditions.

Article 27A: Miscellaneous Rules Applicable to Certain Offshore Activities

This article applies despite any other provisions of the Convention. A resident of one Contracting State conducting activities in the other Contracting State related to the seabed, subsoil, and natural resources is deemed to have a permanent establishment there.

exploration or Exploitation of natural resources UK-Canada Tax Convention

This provision does not apply if the activities last 30 days or less within a 12-month period. For this purpose, activities by associated enterprises are combined. Enterprises are associated if one controls the other or both are under common control.

Income from employment related to the exploration or exploitation of natural resources can be taxed by the State where these activities are conducted offshore.

Article 28: Entry Into Force

The Convention becomes effective when both the UK and Canada complete all necessary legal formalities, applying:

In Canada:

  •  From 1 January 1976 for taxes withheld at source.
  • For other taxes, from the 1976 tax year onward.

In the United Kingdom: 

  • For certain dividends, from the year beginning 6 April 1973.
  • For income tax and capital gains tax, from the year beginning 6 April 1976.
  • For corporation tax, from the financial year starting 1 April 1976.
  • For petroleum revenue tax, from the chargeable period starting 1 January 1976.
  • For development land tax, from 1 August 1976.

The governments will inform each other in writing when the last required legal step is completed, confirming the effective date. The prior agreement will cease to be effective as per the new Convention's terms.

If the old agreement provides more favorable tax relief, it continues to apply for periods before the new Convention's effective date. The prior agreement terminates entirely once the new Convention takes effect. The termination does not revive any earlier agreements.

Applications for tax relief under the new Convention must be made within one year of the calendar year end in which the Convention comes into force, notwithstanding domestic time limits.

Article 29: Termination

The Convention remains in effect indefinitely. Either government can terminate it with notice given by 30 June of any year after 1980.

The Effect of Termination shall be as under:

In Canada:

  • For taxes withheld at source, from 1 January of the following year.
  • For other taxes, for any tax year ending in or after the following year.

In the United Kingdom:

  • For income tax and capital gains tax, from the year beginning 6 April of the following year.
  • For corporation tax, from the financial year starting 1 April of the following year.
  • For petroleum revenue tax, from the chargeable period starting 1 January of the following year.
  • For development land tax, from 1 April of the following year.

Interpretative Protocol

The Interpretative Protocol amending the Convention between the Government of Canada and the Government of the United Kingdom provides specific interpretations and clarifications that are integral to the Convention. Here are the key provisions and their interpretations:

1. United Kingdom Limited Liability Partnerships (LLPs)

For the purpose of applying the Convention's benefits to income or gains derived through a UK LLP, such income or gains are considered to belong to the LLP members. This is conditional on the income or gains being treated, under UK tax laws, as belonging to a UK resident.

The LLP must be recognised as fiscally transparent under UK tax laws. This provision does not limit a Contracting State's right to tax its residents. The competent authorities of both Contracting States may consult on how to apply this paragraph.

2. Definition of "Instrumentality" in Article 4

The term "instrumentality" includes any person wholly owned, directly or indirectly, by a Contracting State or its political subdivisions or local authorities.

3. Arm's Length Principle in Article 11

Canada's Definition:

This is determined by subsection 251(1) of the Income Tax Act, which defines whether persons are considered to be dealing at arm's length.

United Kingdom's Definition:

Persons are not dealing at arm's length if:

  • One person controls another as defined in sections 450 or 1124 of the Corporation Tax Act 2010.
  • Persons are associates or connected as per sections 448 or 1122 of the Corporation Tax Act 2010.
  • Conditions imposed between persons do not reflect ordinary commercial dealing between independent entities acting in their separate interests.

4. Signatures

The Interpretative Protocol is signed in duplicate in London on 21 July 2014, in both English and French, with each language version being equally authentic.

These interpretations ensure clarity in the application of the Convention, particularly concerning LLPs, the definition of instrumentalities, and the arm's length principle, thereby aiding in the consistent application of the tax treaty provisions between the UK and Canada.

Conclusion

The treaty aims to provide clarity and reduce the tax burden for individuals and businesses operating in both the UK and Canada, fostering cross-border economic activities and investment. By establishing precise definitions and rules, the treaty aims to eliminate ambiguities regarding tax liabilities, ensuring that income and profits are appropriately taxed in the respective jurisdictions.

Need expert advice on UK-Canada Tax Convention?

Contact us today for efficient and hassle-free assistance.

Sanjay Gautam
Our Complete Guides
Related Posts

Confused where to start?

Schedule a free 15-minute discovery call by providing your contact details, mentioning your requirements, and selecting a convenient date for the call.

How our discovery call works:

Please wait while the page is loading
Current Progress
Current Progress

Complete Our Contact Form

Discovery Calls Scheduled

Receive a Tailored Proposal

Success message!
Warning message!
Error message!