Canada imposes a withholding tax at a rate of 25% on non-residents who receive from Canadian residents and certain non-Canadian residents, various types of income from property including certain dividends, royalties, management and administration fees, rent and interest payments. Generally, the Act provides that interest (which is not participating interest) paid to an arm’s length creditor is not subject to withholding tax. The rate of withholding tax may be reduced by a tax treaty entered into by Canada and the country in which the recipient is resident, if the recipient is entitled to the benefits of the treaty. For example, the rate of withholding tax is reduced to 15% (or 5% in certain circumstances) with respect to dividends under the Canada-United States Income Tax Convention (the “Treaty”) for U.S. residents who can benefit from the Treaty.
In addition, the Treaty stipulates that there is no withholding tax payable in respect of all interest payments (including non-arm’s length interest payments) which are not participating interest payments, as defined in the Treaty.
The Canadian resident payor of any amount subject to withholding tax is liable for withholding and remitting this tax on behalf of the non-resident recipient. In addition, certain payments to a non-resident person by another non-resident person whose business is carried on in Canada may be subject to Canadian withholding taxes to the extent that the payments are deductible in computing the payor’s taxable income earned in Canada.
Payments made by a Canadian subsidiary for products purchased from its non-resident parent company will generally not be subject to Canadian withholding tax, provided that the products are purchased under terms and conditions that are comparable to arm’s length transactions. If the inter-company prices diverge from arm’s length prices, any discrepancies could be subject to Canadian withholding taxes and may also give rise to other Canadian income tax consequences (please see “Transfer Pricing Rules” below).
Additional posts from the blog
Last week the Canadian Government introduced amendments to the Investment Canada Act (ICA) to implement its revised policy towards state-owned enterprises (SOEs) which it announced in December last year. At that time, while it approved the acquisition by Chinese SOE, CNOOC, of Canadian oil and gas company, Nexen, the Government announced its intention to prohibit acquisitions of control of Canadian oil sands businesses by SOEs except on an exceptional basis. It also stated that joint ventures and minority investments were welcome. In addition, the government indicated it would closely monitor SOE acquisitions in other sectors of the economy and would distinguish between SOE and non-SOE investments when setting the ICA review threshold. (See Focus on Foreign Investment Review, December 2012)
The Autorité des marchés financiers Proposes An Alternative Approach to Securities Regulators Intervention in Defensive Tactics
On March 14, 2013, the Autorité des marchés financiers (“AMF”) published for comments a consultation paper (the “AMF Proposal”) pertaining to defensive tactics in response to take-over bids. This consultation is taking place concurrently with the one launched the same day by the Canadian Securities Administrator (“CSA”) with the release of proposed National Instrument 62-105 Security Holder Rights Plans and proposed Companion Policy 62-105CP Security Holder Rights Plans (collectively, “62-105”). Unlike the CSA’s 62-105, the AMF Proposal addresses all defensive tacticsii, not only security holders rights plans.
The Canadian Securities Administrators published for comment a proposed new regulatory framework for rights plans under proposed National Instrument 62-105 Security Holder Rights Plans and proposed Companion Policy 62-105CP Security Holder Rights Plans (collectively, “62-105”). If adopted, 62-105 would provide issuers with a game changing tool to respond to hostile take-over bids, where a target board will be able to use a rights plan as leverage to negotiate with a potential bidder.