The Double Taxation Relief (Taxes on Income) (Canada) Order 2003

Explanatory Note

(This note is not part of the Order)

The Protocol scheduled to this Order makes certain alterations to the Convention set out in the Schedule to the Double Taxation Relief (Taxes on Income)(Canada) Order 1980 as amended by the Schedule to the Double Taxation Relief (Taxes on Income)(Canada)(No.2) Order 1980 as further amended by the Schedule to the Double Taxation Relief (Taxes on Income)(Canada) Order 1985.

Article 1 of the Order provides for its citation.

Article 2 makes a declaration as to the effect and content of the arrangements set out in the Protocol contained in Part I of the Schedule to the Order, and that it is expedient that those arrangements should have effect.

Part 1 of the Schedule to the Order contains the Protocol further amending the Convention, and references to Article numbers cited below refer to the Articles of the Convention which are the subject of amendment.

The Protocol expands the term “person” to include a trust, but not to include a partnership. The Protocol also amends the term “national” in relation to the United Kingdom (Article 3).

The Protocol amends the rules for determining taxable profits when a company in one country is associated with a company in the other (Article 9).

The Protocol amends the rate of tax imposed in the country of source on dividends beneficially owned by a resident of the other country. The rate imposed is not to exceed 5 per cent. of the gross amount of the dividends when the beneficial owner is a company which controls, directly or indirectly, at least 10 per cent. of the voting power in the company paying the dividends. In all other cases the rate shall not exceed 15 per cent. of the gross amount of the dividends (Article 10). The Protocol also removes the entitlement to the payment of tax credits on dividends, whose value had fallen to nil following changes to UK domestic law.

Amendments are made to the Articles dealing with dividends, interest and royalties to provide effective measures against the abuse of these Articles (Articles 10, 11 and 12).

There are further exemptions from source state taxation in relation to trade debts: interest arising in one country and beneficially owned by a resident of the other country is to be taxable only in the other country (Article 11). The types of royalties which may be paid free of withholding tax is extended (Article 12).

The Protocol modifies the treatment of gains from the alienation of certain property and provides effective measures to counter abuse (Article 13).

Amendments are made to the Article dealing with the taxation of pensions to counter a potential abuse in relation to lump sum pension payments (Article 17).

The Protocol inserts a new Article to deal with other income not specified in the Convention (Article 20A).

The Protocol amends the provisions for the elimination of double taxation in relation to Canada (Article 21).

Other changes are made to the Articles dealing with Non-discrimination, Exchange of information (Articles 22 and 24) and Miscellaneous rules, particularly in relation to the treatment of contributions to a pension arrangement (Article 27).

The Exchange of Notes set out in Part II of the Schedule to the Order clarifies the intended interpretation of particular aspects of the Protocol.

The Protocol will enter into force when both countries have notified each other of the completion of their respective legislative procedures. The Protocol will take effect in the United Kingdom on or after 1st April in respect of corporation tax and on or after 6th April in respect of income tax and capital gains tax in the calendar year next following the date on which it enters into force. It will take effect in Canada in respect of tax withheld at source and in respect of other Canadian tax on or after 1st January in the calendar year next following the date on which the Protocol enters into force. The date of entry into force will in due course be published in the London, Edinburgh and Belfast Gazettes.