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Canada: Canada signs tax treaty with Hong Kong


Bryan Bailey
Andrew Spiro
On November 11 2012, a new tax treaty was signed between Canada and Hong Kong. While the treaty will likely be welcomed as a platform for Chinese investment into Canada, there are some important differences between the treaty and some of Canada's other tax treaties.

The treaty will provide for reduced Canadian withholding rates on dividends, non-participating interest and royalties paid to a resident of Hong Kong. Unlike many Canadian treaties however, the treaty does not exempt patent or know-how royalties from Canadian withholding tax, nor does it reduce withholding rates on trust distributions.

The reduced withholding rates on dividends, interest and royalties are subject to specific anti-avoidance rules that deny treaty benefits if one of the main purposes of the structure through which such payments are made is to obtain the benefits of the treaty. This provision is generally not found in Canada's other tax treaties, and may be a response to Canadian courts' refusal in recent treaty-shopping decisions to find that a recipient of a payment was not the beneficial owner for treaty purposes.

The treaty permits Canada to tax gains realised by a resident of Hong Kong on a disposition of shares of Canadian corporations only where such shares derive more than 50% of their value from Canadian immovable property. Unlike many of Canada's European treaties, there is no requirement that the seller own a substantial interest in the corporation, nor is there an exclusion for property in which the corporation's business is carried on.

The treaty will enter into force when ratified by both Canada and Hong Kong. The treaty will apply for Canadian withholding tax purposes to payments made, and for other Canadian tax purposes to taxation years that begin, on or after January 1 of the year following ratification.

Bryan Bailey (bryan.bailey@blakes.com)
Tel: +1 416 863 2297
Andrew Spiro (andrew.spiro@blakes)
Tel: +1 416 863 3165
Blake, Cassels & Graydon
Website: www.blakes.com

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