CANADIAN TAXATION
OF GERMAN INVESTORS
December 2011, BDO Canada LLP
Canadian Taxation of German Investors
Table of contents
Introduction...................................................................................................................................5
A brief overview of Canadian taxation.......................................................................................6
Residence: the basis of taxation..................................................................................................6
Taxation of non-residents............................................................................................................6
Choosing a structure for your investment................................................................................ 8
General Canadian tax rules........................................................................................................16
Portfolio investments.................................................................................................................19
Canadian and German tax treatment......................................................................................19
Capital gains.................................................................................................................................19
Reporting requirements.............................................................................................................19
Investing in real estate............................................................................................................... 20
Real estate development ......................................................................................................... 20
Rental properties........................................................................................................................ 22
Filing requirements.................................................................................................................... 26
Manufacturing operations......................................................................................................... 26
Investment tax credits............................................................................................................... 26
Accelerated capital cost allowance..........................................................................................27
Available-for-use rules................................................................................................................27
Research and development........................................................................................................27
Tax considerations in financing................................................................................................ 28
Thin capitalization rules............................................................................................................ 28
Using a Canadian holding company........................................................................................ 28
Other taxes.................................................................................................................................. 29
Payroll taxes................................................................................................................................ 29
Land transfer taxes..................................................................................................................... 30
Goods and Services Tax / Provincial Sales Tax....................................................................... 30
Repatriation of funds................................................................................................................. 32
Branch assets.............................................................................................................................. 32
Interest......................................................................................................................................... 32
Dividends..................................................................................................................................... 33
Management fees....................................................................................................................... 33
Royalties...................................................................................................................................... 34
Loans to the investor ................................................................................................................ 34
Return of capital......................................................................................................................... 34
Wind-up....................................................................................................................................... 35
Other matters............................................................................................................................. 36
Investment Canada Act............................................................................................................. 36
Filing requirements.................................................................................................................... 36
Summary of Canada/Germany taxation................................................................................. 38
BDO services in Canada............................................................................................................40
3
Canadian Taxation of German Investors
5
Introduction
For many years, Canada has been a favourite choice for international investors. Its free market
economy, stable social and political environment, solid currency and close relations with the
United States make Canada a perfect choice for investors looking for secure investments, good
returns and the potential for capital appreciation. German investors have been among some of
the most enthusiastic, with German investment in Canada a significant force in the economy.
BDO is proud of the long-standing relationships it has developed over the years with a wide
range of German investors in Canada. Through close contact and thorough knowledge of their
German clients’ businesses, our German speaking partners are able to provide them the same
high level of personal service that our Canadian clients value so much. This booklet, prepared in
both German and English, is part of our commitment to you and your colleagues, to assist you
in understanding the impact of Canadian taxes on your investments.
As with any developed country, taxation is a major factor in determining profitability of
investments. The commentary in this booklet explains the basic elements of Canada’s tax
system and some of the more important considerations applicable to German investors.
When reading it, there are three important points to remember.
First, our objective here is to provide you with information of a general nature only —
an overview of the tax issues you should consider when deciding on your investment in
Canada. It is not intended to make you an expert on Canadian taxation. Canada’s tax system is
extremely complex, with many detailed technical provisions that have evolved over the years.
We could not hope to explain all tax considerations that may impact your situation. Therefore,
when planning your investment, consult with your BDO Canadian tax advisor at an early stage,
to ensure all important issues are examined and that any potential planning is considered
before you make your investment.
Second, you should bear in mind that the overall tax results of the transactions you enter into
will depend on the interaction of both the Canadian and German tax systems, and the effects
of the Canada-Germany Tax Treaty. In cross-border situations, the primary responsibility
for ensuring both sides are taken into account usually rests with the investor’s home country
advisor, that is your German tax advisor, who will be more familiar with your overall personal
financial situation. At BDO, we have years of experience in advising German investors and
working closely with their German advisors to ensure the best possible overall results.
Finally, any investor must be aware that regardless of the country involved, tax laws are
constantly changing. This booklet is based on Canadian laws that will be in effect as at
December 31, 2011. Any budgets, legislation or press releases announced subsequent to this
date could change the rules we have outlined here.
We hope you find this booklet useful. If you have any questions about its contents or would like
additional copies, please do not hesitate to contact your BDO representative. We look forward
to assisting you in making your investment in Canada a profitable one.
6
Canadian Taxation of German Investors
A brief overview of Canadian taxation
Canada has three levels of government which levy taxes: the federal government, ten provincial
(and three territorial) and municipal governments. Only the federal and provincial governments
(including the territories) levy income taxes.
The tax liability arising from your investment in Canada will depend on a number of factors,
including residence, the province in which you invest, the legal entity used to make the
investment, and the nature of the income it generates.
Residence: The basis of taxation
Like many countries (including Germany), Canada taxes on the basis of residence.
Tax legislation does not specifically define residence, although it does include several rules
under which an individual may be “deemed” to be resident. But in general, residence is
determined by common law principles developed over many years. Under these rules, an
individual is generally considered to be resident if he has a “continuing state of relationship”
with Canada as evidenced by a dwelling held for year-round use, the presence of a spouse or
other family members in Canada, or the maintenance of personal property or other social ties
in Canada, such as bank accounts, furniture, club memberships, and other ties.
A corporation is considered resident in Canada if it was either incorporated in Canada or its
mind and management are in Canada. A German incorporated company whose mind and
management are in Canada will have its residence status determined by the competent authorities under the Canada-Germany Tax Treaty.
Residents of Canada, whether individuals or corporations, are subject to Canadian tax on their
worldwide income, regardless of where it is earned. Non-residents are only subject to income
earned from Canadian sources. Therefore, unless you plan on taking up Canadian residence in
the course of making an investment, you need not be concerned that investing in Canada will
subject your other sources of income to Canadian taxation.
Taxation of non-residents
Non-residents are subject to income tax on the following Canadian-source items:
1.
Income from employment in Canada
2. Income from “carrying on business” in Canada. The concept of carrying on business in
Canada is quite broad. It includes soliciting orders or offering anything for sale in Canada,
whether or not there is an actual physical presence
Canadian Taxation of German Investors
7
3. Capital gains from the disposition of Taxable Canadian Property, including, among other things:
•
Real property situated in Canada (including Canadian resource and timber
resource properties)
•
Assets used in a business carried on in Canada
•
Shares of private companies whether or not resident in Canada (or an interest in a partnership
or trust) if at any time during the 60-month period that ends at the time of the disposition,
more than 50% of the fair market value of the shares was derived directly or indirectly
from real or immovable property situated in Canada (including Canadian resources and
timber resources properties) or options in respect of real or immovable property
•
Shares of public companies (or units in a mutual fund) if the taxpayer together with any
non-arm’s length persons owns 25% or more of the issued shares of any class of the capital
stock of the corporation (or 25% or more of the units of the trust) and if at any time during
the 60-month period that ends at the time of the disposition, more than 50% of the fair
market value was derived directly or indirectly from real or immovable property situated in
Canada as described above
Canada also levies a 25% withholding tax on passive income, such as interest paid to non-arm’s
length non-residents, dividends, rents, royalties and pensions derived from sources in Canada.
Interest paid to arm’s length non-residents is not subject to any Canadian withholding tax.
The Canada-Germany Tax Treaty overrides these general rules for German residents in several
respects.
First, only business income earned by a German resident through a permanent establishment
(PE) in Canada will be subject to Canadian tax. A PE is a fixed place of business, such as a
branch, office or factory, and includes a dependent agent or employee who has the authority
to conclude contracts. Business income earned by making direct sales into Canada without a
PE is exempt under the treaty. Similar relief is included in most of Canada’s other tax treaties.
Non-resident corporations that are carrying on a business in Canada are required to file a return
with the Canada Revenue Agency (CRA), if income earned is exempt from Canadian tax under a
tax treaty.
Second, the treaty restricts Canada to taxing only capital gains derived from the disposition of
a direct or indirect ownership in Canadian real estate or assets used in a business (see section
entitled Capital gains below). However, the disposition of shares of a German corporation (and
other foreign corporations owned by German residents) are exempt from Canadian tax under
the treaty even if the value of these corporations is derived primarily from Canadian real estate.
No treaty protection is available for German trusts or partnerships.
8
Canadian Taxation of German Investors
Dispositions of shares that are considered “treaty-protected property” (property any income or
gain from the disposition of which is exempt from taxation under a tax treaty) will not be subject
to the Canadian withholding or reporting requirements that historically may have applied.
For example, the disposition by a German resident of shares of a German company owning
Canadian real estate will not be subject to any reporting requirements, except in cases where
the vendor and purchaser are related, the purchaser must send a notification to the CRA within
30 days and provide the following information:
•
Name and address of the non-resident person
•
Description of the property sufficient to identify it
•
Amount paid or payable, as the case may be, by the purchaser of the property
•
Name of the country with which Canada has concluded a tax treaty under which
the property is a treaty-protected property
Form T2062C, Notification of an Acquisition of Treaty-Protected Property From a Non-Resident Vendor, is used for this purpose.
The treaty reduces the withholding tax rate on most investment income. The exception is
rental income from real property, which remains subject to the 25% rate. Withholding taxes
under the treaty include a 5% withholding tax on dividends paid to a company that controls at
least 10% of the voting power of the dividend payer (a 15% withholding tax applies to all other
dividend payments). There is a 10% withholding tax on interest paid to non-arm’s length nonresidents and royalty payments, subject to exemptions for certain interest, copyright royalties
and royalties in respect of computer software, patents and know-how.
The treaty also modifies the tax treatment of employment income, but this subject is beyond
the scope of this booklet.
Choosing a structure for your investment
There are no legal restrictions on the form of business organization you may use in making your
investment. The choice will depend on factors such as the nature of the investment, the tax
treatment (both in Canada and in Germany) and the investor’s personal situation and objectives.
There are however, some general considerations which may impact the decision.
Direct investment by German individual
If you directly invest in assets that generate passive investment income, such as interest and
dividends, you will only be subject to withholding tax at the reduced treaty rates (see Portfolio
investments).
If you purchase or start up a business with a permanent establishment in Canada, your business
income will be subject to income tax under the same progressive federal tax rate structure that
applies to Canadian residents. Rates range from 15% to 29%. The business income will also be
subject to provincial taxes. As these tax rates vary by province, the applicable rate will depend
Canadian Taxation of German Investors
9
on where the permanent establishment is located. The combined effect of these taxes produce
rates that range from approximately 19% to approximately 50% depending on the level of
income and the province where the permanent establishment is located.
For German purposes, the income from your Canadian business will be excluded from taxable
income. However, the amount of any Canadian business income will be taken into account in
determining your German tax rate.
If you sell assets used in your business, 50% of any capital gains realized will be subject to
Canadian tax (see Capital gains below). This is in contrast to the German treatment of such
gains on German business assets, which are in general fully included in income. As for business
income, the Canadian capital gains will not be further taxed in Germany.
German resident individuals with taxable income earned in Canada that is not earned in
a province are not subject to provincial taxes. They are subject to the same federal tax rate
structure that applies to Canadian residents, plus an additional federal tax of 48% of the basic
federal tax. This is intended to put non-residents on an equal footing with residents who pay
provincial tax. The combined effect of these taxes produce rates that range from 22.2% to
42.92% depending on the level of income.
There is an important consequence of direct investment by an individual. Under Canadian law,
when an individual dies, he is deemed to dispose of all assets at fair market value. A separate
inheritance tax (Erbschaftsteuer) as in Germany does not exist. This may give rise to capital
gains and an income tax liability on death. For this reason, some non-residents choose to hold
significant investments or investments that are expected to appreciate in value through a nonresident corporation. While this strategy may not work for non-residents in general due to the
capital gains rules (see Capital gains below), German residents can continue to use German or
other foreign corporations to eliminate the Canadian tax consequences arising on death due to
provisions in the treaty.
Investment through a Canadian corporation
a. General information
A Canadian corporation is resident for tax purposes, and is therefore subject to tax on its
worldwide income from all sources. If you make your investment through a Canadian
corporation, you would not normally use it to make other non-Canadian investments since
you would be exposing this income to Canadian tax.
A Canadian corporation can be either a public or private corporation. A public corporation is
a corporation which is either listed on a prescribed stock exchange in Canada, or has fulfilled
prescribed conditions under which it has elected or been designated by the tax authorities to
be a public corporation. In this respect it is very similar to a joint stock corporation
(Aktiengesellschaft) in Germany, and is generally only used if you intend to finance your
investment by raising funds on Canadian markets.
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Canadian Taxation of German Investors
A private corporation is a corporation that is not a public corporation and is not controlled in
any way by one or more public corporations. It is similar to a German GmbH in that it is usually
preferred for closely held businesses.
Both types of corporations can be formed under either federal or provincial jurisdiction. The
choice of which to use generally will depend on the different requirements for financial disclosure, residency requirements for directors and the location of the principal business activities.
A federal corporation (incorporated under the Canada Business Corporations Act) generally can
carry on business in any province, while provincially incorporated corporations (e.g. under the
Ontario Business Corporations Act) must obtain an extra-provincial licence and register to do
business in other provinces.
b. Tax rates
All corporations are subject to the same federal and provincial tax rates, regardless of whether
they are public or private, or the jurisdiction in which they are incorporated (see the table below). The provincial rates that apply depend on the jurisdiction in which the income is earned.
Income earned through permanent establishments in more than one jurisdiction is allocated
amongst the jurisdictions according to a formula that takes into account the gross revenues
and salaries attributable to each establishment. Note: Several provinces provide reduced rates
for manufacturing income of corporations.
Manufacturing income
Other business income
15.00
15.001
5.00
14.00
Prince Edward Island
16.00
16.00
Nova Scotia
16.00
16.00
New Brunswick
10.00
10.00
Quebec
11.90
11.90
Ontario
10.00
11.50
Manitoba
12.00
12.00
Saskatchewan
10.00
12.00
Alberta
10.00
10.00
British Columbia
10.00
10.00
Northwest Territories
11.50
11.50
Nunavut
12.00
12.00
2.50
15.00
Federal:
Provincial:
Newfoundland
Yukon
[Note: The above rates may not apply to certain types of industries where special provisions override (e.g. resource companies, financial
institutions, insurance corporations, and others).]
1.
The general federal tax rate on business income is reduced to 15% from 16.5 on January 1, 2012.
Canadian Taxation of German Investors
11
Most provinces have their corporate taxes levied by the federal government on the federal
corporate tax return. Quebec and Alberta collect their own taxes and require their own
calculations of taxable income, though these usually follow the federal rules.
A Canadian-controlled private corporation (CCPC) is a special type of private Canadian
corporation that is not controlled, directly or indirectly in any manner whatever, by one or
more non-resident persons, by one or more public corporations or by any combination thereof.
A Small Business Deduction is a reduction in both federal and provincial tax that is available to
CCPCs on their active business income up to a set threshold – the small business limit.
The small business limit is currently $500,000 federally and in all provinces except Manitoba
and Nova Scotia where it is $400,000. The corporate tax rate on income up to the federal
small business limit is 19% or less in all jurisdictions, which is much lower than the general
corporate rates. Previously, it was possible to structure arrangements with 50-50 non-resident/
Canadian ownership, with the non-resident essentially in control. Anti-avoidance rules now
prevent any arrangements that provide factual control to non-residents. In our experience,
most Germans are unwilling to structure their investments as CCPCs.
After-tax income of a Canadian corporation can be paid out to its German shareholders in the
form of dividends, in which case withholding tax will apply. There may also be German tax on
the dividends, depending on the owner of the shares being an individual (business or not) or a
corporation. See Repatriation of funds below for further details.
c. Using a Canadian holding company
There are a number of situations in which the use of a Canadian holding company may provide
tax benefits. Such a company may be used to hold assets separately from other Canadian
corporations in which the business activity is undertaken. Assets such as cash can be removed
from the operating company to a holding company on a tax-free basis, since intercorporate
dividends between two Canadian corporations are not taxed in Canada. Also, taxpayers often
hold business assets such as land and buildings in a holding corporation and lease them to the
operating company to protect them from business risk. This is similar to the German concept of
“Betriebsaufspaltung”.
Using a Canadian corporation may provide other advantages for both German individuals and
corporations in repatriating their original investment without selling it. A shareholder of a
Canadian corporation is entitled to extract the paid-up capital of the corporation without tax
consequences. See Tax considerations in financing below.
12
Canadian Taxation of German Investors
Investment through a partnership
A partnership is an arrangement whereby two or more persons combine some or all of their resources,
skills or industry, in a business undertaking with a view to making a profit to be shared by all
members of the partnership.
The most common forms of partnership are general and limited partnerships. In a general partnership
(similar to a German “Offene Handelsgesellschaft”), the members are not only jointly liable
(liable in equal shares) for the debts of the partnership, but are also severally liable
(each member liable for the full amount).
A limited partnership (similar to a German “Kommanditgesellschaft”) is composed of at least
one general partner, who conducts and manages the business carried on by the partnership, along
with one or more limited partners. A limited partner is normally liable to the partnership or its
creditors only to the extent of the capital he has agreed to contribute, and no more. He may share
in profits according to a partnership agreement but may take no part in the management of the firm.
A member of a partnership may be either an individual or a corporation. Under Canadian rules,
net income for tax purposes is calculated at the partnership level. Each partner’s share of the
different types of income of the partnership then flows out to him to be taxed in his hands
(similar to the German concept of “Einheitliche und gesonderte Gewinnfeststellung”).
For income tax purposes, the portion of a limited partner’s share of business losses which may
be used to reduce his income from other sources is limited to the partner’s share of the capital
of the partnership (“at-risk” amount). A similar rule has existed in German tax law since 1980
(”Verluste bei beschränkter Haftung”).
Branch of a German corporation
A German corporation establishing a Canadian branch will be carrying on business through a
permanent establishment for tax purposes. As such, it will be subject to corporate tax at the
rates set out in the table on page 10.
Under the Canada-Germany Tax Treaty, the corporation’s Canadian business income will be
determined under the separate accounting method, with the branch treated as a separate
business entity. Transactions between the branch and its head office or other non-Canadian
branches must be carried out on an arm’s length basis.
Canadian Taxation of German Investors
13
The after-tax profits of a branch that are available for repatriation and that are not reinvested
in Canada are subject to an additional “branch tax” of 25% (reduced to 5% under Article 10
of the treaty). This tax attempts to equalize the total tax burden of branches and subsidiaries:
profits of a branch can be withdrawn without further taxation whereas profits of a subsidiary
can only be repatriated by way of dividends subject to withholding tax. Under the CanadaGermany Tax Treaty, the first $500,000 of a branch’s income is exempt. Subsidiaries do not
receive a similar exemption when repatriating profits.
Canadian branch profits and losses are not included in income for German tax purposes.
Once a branch becomes profitable and has used up the $500,000 branch profits tax
exemption, the branch operation can be transferred to a Canadian corporation on a tax-free
basis using special “rollover” provisions in the Canadian tax rules.
Also, if your Canadian investment is in corporate form, there will be a 15% Canadian
withholding tax on dividends paid (there is also a 5% withholding tax on dividends paid to
a company that controls at least 10% of the voting power of the dividend payer). Holding it
through a German corporation will mean that 95% of any dividends from the Canadian
corporation will be exempt of German corporate income tax and the solidarity surcharge,
regardless of the percentage of ownership and the holding period. Depending on the
percentage of ownership and the nature of business of the Canadian corporation, German
trade tax may have to be paid on the dividend.
If the investment is held directly by a German resident individual and is not part of a business
carried on in Germany, the dividend would be subject to a flat income tax of 25%
(“Abgeltungssteuer”) plus the solidarity surcharge. The Abgeltungssteuer is similar to a
withholding tax and enables the taxpayer to not include the corresponding income on the
annual tax return.
If the investment is held directly by a German resident individual and is part of a business carried
on in Germany, 60% of the dividend would be taxable in Germany. German trade tax may have
to be paid on the dividend in this case (see above) as well as the solidarity surcharge.
Taxes on the dividend withheld in Canada can be claimed as a foreign tax credit. If the
Abgeltungssteuer applies, the tax credit can only be claimed by filing a tax return.
Finally, a branch (as opposed to a Canadian corporation) is currently not subject to the thin
capitalization rules. The Advisory Panel on Canada’s System of International Taxation
recommended that the scope of the thin capitalization rules be extended to branches of
non-resident corporations. However, there have not been any changes made to the legislation
in respect of this.
The table on the following page compares the combined German and Canadian tax
consequences of earning $100,000 of business income through various alternative structures
available to a German individual or corporate investor, in 2012
14
Canadian Taxation of German Investors
GERMAN INDIVIDUAL INVESTOR
Amounts stated in Canadian Dollars
Direct
Through
Canadian
corporation
Through
German
corporation
Taxable income
$100,000
$100,000
$100,000
N/A
15,000
15,000
Provincial tax
N/A
11,500
11,500
Branch tax3
N/A
N/A
3,675
Total corporate tax
N/A
26,500
30,175
Total after tax
N/A
73,500
69,825
73,500
N/A
CANADIAN TAX
Corporate tax
Federal tax1
2
Dividend to non-resident
Withholding tax4 5
N/A
11,025
N/A
Personal tax
29,277
N/A
N/A
Net after all Canadian taxes
70,723
62,475
69,825
6
GERMAN TAX
Corporate tax
N/A
N/A
NIL
Personal tax
NIL7
8,3619
18,416
$70,723
$54,114
$51,409
NET RETURN
- for German Individual investor
- for German corporate investor
Notes to table:
1.
Federal corporate tax is calculated for the 2012 calendar year.
2. Corporate rates, for 2012, for the Province of Ontario
are used here.
3. 5% for German corporations (reduced from a statutory 25%
rate) for profits not reinvested in Canada and exceeding
C$500,000, on a cumulative basis.
4. Withholding tax of 15% on dividends to German individual
investors (reduced from a statutory rate of 25%).
5. Withholding tax of 5% on dividends to German corporate
investors (reduced from a statutory rate of 25%).
6. German resident individual subject to both federal and Ontario
income tax at 2012 rates and estimated income thresholds,
assuming permanent establishment of business is in Ontario,
and German investor has no other Canadian income.
7.
The Canadian income itself is not subject to further German
taxation. However, the tax rate applicable to German or other
income not excluded from German taxation may be affected.
8. 5% of foreign dividends are deemed to be non-deductible
expenses, attracting corporate tax in Germany at a rate of
15.83% (including solidarity surcharge at 5.5%). The remaining
95% of foreign dividends received by a German corporation
are tax-free in Germany, regardless of the percentage of ownership.
Assumes that German trade tax at 14% applies.
Canadian Taxation of German Investors
15
GERMAN INDIVIDUAL INVESTOR
GERMAN CORPORATE INVESTOR
Amounts stated
in Canadian
Dollars
Through Canadian subsidiary of
German corporation
Direct — branch
of German
corporation
Through
Canadian
subsidiary
Taxable income
$100,000
$100,000
$100,000
15,000
15,000
15,000
Provincial tax
11,500
11,500
11,500
Branch tax3
N/A
3,675
N/A
Total corporate
tax
26,500
30,175
26,500
Total after tax
73,500
69,825
73,500
Dividend to
non-resident
73,500
N/A
73,500
Withholding
tax4 5
3,675
N/A
3,675
Personal tax6
N/A
N/A
N/A
Net after all
Canadian taxes
69,825
69,825
69,825
Corporate tax
1,0968
NIL
1,0968
Personal tax
18,12710
N/A
N/A
69,825
68,729
CANADIAN TAX
Corporate tax
Federal tax1
2
GERMAN TAX
NET RETURN
$50,602
- for German
Individual investor
- for German
corporate investor
Notes to table continued:
9. Assumes the shares in the Canadian corporation are not part
of a business carried on in Germany. A German flat personal
income tax rate of 26.375% is used here and includes the
solidarity surcharge (5.5%). A credit for Canadian withholding
taxes paid is applied here, assuming the claim is made in the
individual’s personal income tax return.
10. Assumes the shares in the German corporation are not part of a
business carried on in Germany. A German flat personal income
tax rate of 26.375% is used here and includes the solidarity
surcharge (5.5%).
16
Canadian Taxation of German Investors
General Canadian tax rules
The following commentary outlines general Canadian tax rules that apply to most types of income
and expenses. In the sections that follow, we’ll examine additional rules that apply to more
specific types of investments, such as portfolio investments, real estate and manufacturing operations.
Individuals are taxed on a calendar year basis, but may choose a different fiscal period for their
business. If a non-calendar fiscal year is selected, income is adjusted on a prorata basis to reflect
an estimate of income on a calendar year basis. Corporations are taxed on a fiscal year basis.
Generally, the starting point for calculating taxable income is the accounting income of the
entity, determined in accordance with normal commercial practices. However, there are a
number of specific rules which adjust accounting income to income for tax purposes, the most
important of which are outlined below.
a. Business deductions — Generally, two conditions must be met in order for an expense to be
deductible for Canadian tax purposes. First, it must be incurred for the purpose of earning business
or property income. The connection between the expense and the income earned need not be
direct, but the expense must contribute in some way to the income earning process. Second,
the expense must be reasonable in the circumstances. Outlays of a personal or living expense
nature are not allowed.
Most expenses recognized for accounting purposes will meet these conditions. However,
certain expenses are specifically denied, regardless of the purpose for which they were incurred.
Club dues and membership fees for sporting or recreational clubs, and the expenses of ownership,
use or maintenance of a camp, lodge, yacht or golf course or similar facility are not deductible.
Also, 50% of all business meals and entertainment expenses are disallowed.
b. Tax depreciation — Under Canadian tax rules, tax depreciation is referred to as “Capital Cost
Allowance” (CCA). The costs of capital assets are added to pools according to the class of asset
and its use, with each class having its own CCA rate. Most classes are depreciated on a declining
balance basis, although a few, such as leasehold improvements, are written off on a straight
line basis over some measure of the life of the asset determined by specific rules. When an asset
is sold, the proceeds of disposition up to the original capital cost of the asset are deducted from
the pool balance.
At the end of each fiscal year, if assets in the pool are still on-hand, the balance in the pool is
multiplied by the applicable rate to determine the maximum CCA that may be claimed.
Taxpayers may claim any amount up to the maximum. The amount claimed is deducted from
the pool and the balance is carried forward to be deducted in future years.
Canadian Taxation of German Investors
17
For most classes of assets, the cost of acquisitions in the year less the proceeds of any dispositions are only counted as one-half in the year of acquisition (the half-year rule; do not confuse
this with the “half-year rule” formerly existing in Germany for the depreciation of newly acquired
assets). If the pool balance becomes negative (due to proceeds of disposition exceeding the
pool balance), the amount is taken into income as “recapture” of depreciation. If the pool has a
positive balance but no assets remain, the balance may be written off in the year as a terminal loss.
c. Election to capitalize the cost of borrowed money — Instead of deducting items, such as
borrowing costs and interest, a taxpayer may elect to add them to the cost of the depreciable
property in respect of which the expenses were incurred. This is advantageous when a business
is in the start-up period and revenues are small or non-existent. Rather than adding to business
losses which may expire before sufficient profits have been generated, such costs may be effectively
deferred and later claimed as capital cost allowance.
d. Capital gains — A capital gain arises when the proceeds of disposition of a capital asset
exceed its original cost and selling expenses. Only 50% of a capital gain (the taxable capital
gain) is included in income. Only 50% of a capital loss (the allowable capital loss) is deductible, and only against capital gains. Capital losses may be carried back three years and forward
indefinitely.
Under the Canada-Germany Tax Treaty, gains from the sale of immovable property, the sale of
business assets, the sale of interests in real estate companies, as well as ships and aircraft, are
generally taxable in Canada if the property is located in Canada. Other gains realized by German
residents are taxable in Germany to the extent they are taxable under German domestic law.
For this purpose, real estate companies are defined as corporations whose value is based
principally on real property situated in Canada (including resource properties), as well as
investments in partnerships or trusts and estates which meet the same criteria. Investments in
other real estate companies are counted as part of immovable property for this purpose.
For investments in corporations, Canadian tax applies only if the investment is 10% of the
shares or more.
Based on these rules contained in the treaty, German investors who hold Canadian real estate
or resource properties through Canadian corporations will normally be taxable in Canada on
any gain from the sale of shares of the Canadian companies.
If shares of a Canadian corporation are held by a German corporation, 95% of the gain on the
disposition of the shares of the Canadian company is tax-exempt in Germany, regardless of the
holding period and percentage of ownership; 5% are considered as non-deductible expenses.
Losses on disposition are not deductible. Additionally, the non-deductible expenses are subject
to the solidarity surcharge and trade tax.
If an individual resident in Germany realizes a gain or loss on the sale of shares in a corporation
which are not part of a business carried on in Germany, the gain or loss is taxable in Germany
at 60%, if the percentage of ownership was 1% or more at any time during the past five years
18
Canadian Taxation of German Investors
prior to the sale. Certain restrictions on the deductibility of losses apply.
Additionally, the gain is subject to the solidarity surcharge and trade tax.
If an individual resident in Germany realizes a gain or a loss on the sale of shares in a corporation
which are part of a business carried on in Germany the tax implications are similar, regardless
of the percentage of ownership.
Gains from the sale of shares in a Canadian corporation held by a resident of Germany which are
not part of a business carried on in Germany and where the percentage of ownership was less
than 1% are subject to a flat income tax rate of 25% (Abgeltungssteuer) plus the solidarity surcharge.
Any Canadian tax on a gain on the sale is credited to the extent that German tax is payable
upon filing of a German tax return.
Losses from the disposition of shares in Canadian corporations incurred by an individual resident
of Germany can be applied to gains realized in the same year or carried forward and may be
deducted from future gains.
e. Losses — Operating losses may occur where a business is in the start-up phase or in other
circumstances. Such losses can generally be carried back three years and forward twenty years
to be applied against income and therefore reduce taxes payable in those years. Where control
of a corporation has changed deductibility of such losses may be restricted.
Note: Rental losses of non-residents, which are losses from property, cannot be carried forward
or back to other years, even if the non-resident subsequently becomes a Canadian resident.
f. Inadequate consideration — Canadian laws contain specific provisions which deal with
receipts from or payments to non-residents who are not dealing at arm’s length with a taxpayer
carrying on business in Canada. In general terms, these laws require such payments to be the
same as those which would be received or paid had the non-resident been dealing with the
Canadian taxpayer on an arm’s length basis.
g. General Anti-avoidance Rule (GAAR) — Similar to German tax law, Canadian tax law contains
a general anti-avoidance rule which is aimed at so-called “avoidance transactions” (in Germany:
“Gestaltungsmissbrauch”). These are transactions which result in a significant reduction,
avoidance or deferral of tax and which cannot reasonably be considered to have been carried out
primarily for non-tax purposes. Where such transactions are considered to offend the object and
spirit of the tax law, they can be ignored for tax purposes and their tax consequences re-determined
as is reasonable in the circumstances. This measure has resulted in significant uncertainty in tax
planning. Tax advisors should be consulted before undertaking any tax planning steps.
Canadian Taxation of German Investors
19
Portfolio investments
The simplest way to invest in Canada or in the Canadian dollar is to make portfolio investments
in securities that are publicly traded on Canadian stock exchanges. By “portfolio investments”,
we mean situations where the investor owns less than a 10% interest.
The investor’s return is either in the form of interest or dividends paid on the shares, or as a
capital gain when the investment is sold.
Canadian and German tax treatment
Dividends paid by Canadian corporations to German residents (whether individuals or corporations)
are subject to 15% withholding tax, reduced from 25% under the Canada-Germany Tax Treaty.
As previously mentioned dividends paid to a company that controls at least 10% of the voting
power of the dividend payer are subject to a 5% withholding tax.
Canadian legislation imposes a withholding tax of 25% (which is reduced to 10% under the
Canada Germany Tax Treaty) on certain types of interest paid or credited by a person resident
in Canada to a non-resident person. Prior to 2008, withholding tax applied to many arm’s length
payments of interest as well as non-arm’s length payments of interest, subject to specific
exceptions listed in the provision. Effective January 1, 2008, withholding tax for interest
payments (other than participating debt interest) made by Canadian residents to arm’s length
non-residents was eliminated. For both, individual and corporate recipients, the amount of
interest will be grossed-up for the tax withheld for German tax purposes. However, a tax credit
against German tax is given for the Canadian tax withheld, resulting in the German resident paying essentially the full German tax on the income. If no credit is available (for example, if no
German taxes are otherwise payable due to losses), an application can be filed for the tax to be
deducted as an expense.
For details on the German tax treatment of dividends received by individual and corporate residents
of Germany, please refer to the comments made in section Branch of a German corporation.
Capital gains
Capital gains on the sale of portfolio investments in Canadian securities will generally be free of
Canadian tax. However, as noted previously, you may be subject to German tax on these gains,
depending on factors such as whether the investments have been directly held by an individual
or a corporation or if the percentage of ownership was 1% or less.
Reporting requirements
Historically, the CRA’s administrative policy was that a payor was required to be in possession
of a signed statement from the holder of the security certifying that he is resident of the treaty
country for the purpose of determining whether a payment to a payee is entitled to a treatyreduced rate of non-resident withholding tax.
To help payors establish the appropriate treaty withholding rates, the CRA has introduced new
20
Canadian Taxation of German Investors
forms, including Form NR301, Declaration of Eligibility for Benefits under a Tax Treaty for a
Non-Resident Taxpayer. The new forms are not mandatory and the CRA has indicated that a
payor may obtain equivalent information to that requested in the forms, in lieu of the forms
themselves. Form NR301 is to be completed by non-resident payees including individuals,
and corporations. Form NR301 requires certification as to the payee’s country of residence
for treaty purposes and a description of the type of income for which the payee is making the
declaration. The new form is generally valid until the earlier of three years from the end of the
calendar year in which the form is executed, and when there is a change in the payee’s eligibility
for treaty benefits. These forms are filed with the payor, and not the CRA, (except if the forms
are in respect of a disposition of property rather than a payment of income).
All corporations paying interest or dividends are required by law to annually prepare
information returns showing the amount paid to and the address of each recipient.
These returns are filed with the federal government, with individual information slips going to
the recipients or their nominees.
Investing in real estate
Real estate is one of the most popular Canadian investments for non-residents. Real estate
investments can provide superior returns and with a strong Canadian economy, appreciation in
value ensures security of the investment.
For tax purposes, real property is defined to include land and buildings. The tax treatment of
real property varies depending on the nature of the investment. For example, if property was
acquired for resale at a profit, it will be treated as inventory of the taxpayer and any gain on
sale will be fully taxable. On the other hand, if the property was acquired and used for rental
purposes, it will be treated as investment property. Property acquired to be used as part of a
business will be treated as a business asset.
Real estate development
Taxpayers who are in the business of buying, developing and selling real property usually have
the gains from such endeavours taxed as business income. If property is developed as a longterm rental property, a gain on sale may be taxed as a capital gain. Over the years, Canadian
tax laws in this area have been uncertain, particularly when it comes time to recognize receipts
or deductions in computing the income from such a business.
Sale of real property inventory
When property is sold in the course of a business, the sale price is sometimes receivable over
a period of years. In these cases, it is possible to defer the tax on the profit from the sale by
claiming a reserve if the proceeds are due after the end of the year the sale is made. The reserve
can be claimed for at most three years, and is available to non-residents as long as they are
carrying on business in Canada. However, if a non-resident sold all inventory during a year and
ceased carrying on business, he would be denied a reserve and would have to pay tax on the
profit even if all proceeds had not yet been received.
Canadian Taxation of German Investors
21
Deductions
The following commentary outlines the Canadian tax treatment of the more common expenses
associated with real estate development for both individuals and corporations. In some cases,
special rules apply to “principal business corporations”. These are corporations whose business
is primarily the leasing, renting, sale or development of their real property, to or for persons
with whom they deal at arm’s length.
Interest and property taxes
Interest and property taxes on vacant land held by a taxpayer primarily for resale or development
are only deductible to the extent of any net income from the property. Any amounts not
allowed as a deduction are added to the adjusted cost base of the land, thereby reducing business
income only when the property is sold. If an amount is deductible, it cannot be capitalized.
Principal business corporations may deduct an additional amount of interest and property
taxes up to their “base level deduction”, which is calculated by multiplying $1,000,000 times
the prescribed interest rate. The prescribed interest rate is a short-term rate on government
securities which is announced quarterly and used for various purposes under Canadian tax law.
If two or more corporations are “associated” (that is, under common control and ownership),
they must agree to share the benefits of the base level deduction.
Soft costs
“Soft costs” include certain promotion expenses, legal and accounting fees, and mortgage fees,
as well as interest expense and property taxes incurred during the period of construction of a
building. Generally, these costs must be allocated to the cost of the building. If the property
is held for resale, these costs will be recognized when the property is sold. If the property is
held to earn rental income as a long term investment, the cost is amortized over a period of
time through capital cost allowance claims. Deductions for soft costs on rental buildings under
construction are allowed to the extent of any rental income earned on the building.
Servicing costs
These include outlays such as the costs of roads, sewers, water-mains, street lighting, sidewalks,
hydro installation charges, and the cost of recreation facilities. They also include development
costs such as various legal, planning, engineering, mortgage and survey fees. In general terms,
all such amounts are usually treated as part of the cost of inventory.
Expenses of representation
Amounts paid by a taxpayer in the year for expenses incurred in making any representation to a
government may be deducted by the taxpayer in computing income from a business.
22
Canadian Taxation of German Investors
Rental properties
For tax purposes, rental properties include any real estate acquired for the purpose of earning
income from renting or leasing the property. They range from residential accommodation such
as houses and apartment buildings, to commercial real estate such as shopping plazas, factories
and office buildings.
Rental income
The tax consequences of earning rental income in Canada will vary, depending on whether the
taxpayer is a German individual, or a Canadian or German corporation. The nature of the
operation will determine whether the income is considered to be income from property or
income from business. This distinction is important since property income and business income
earned by non-residents are subject to different rules.
Property held by a corporation
There is a general presumption under Canadian law that a corporation engaged in the activities
for which it was formed is carrying on business. Therefore, rental income is often treated as
business income for corporations. However, the final determination would depend on the facts
and circumstances of each case, and would hinge on the level of involvement and management
required by the German directors/shareholders, and the extent and diversity of other
operations and activities of the corporation. In some cases, rental income earned by a CCPC
is deemed to be property income to prevent such corporations from claiming the special low
tax rates on business income up to certain specified income thresholds. However, these rules
would generally not apply to a private corporation owned or controlled by German investors.
Rental income earned through a Canadian corporation controlled by German investors would
generally be taxed as business income or in a manner similar to business income, as described
earlier.
If the rental income earned by a German corporation is income from carrying on a business,
the rental property would be a Canadian permanent establishment and the corporation would
be taxed on the income attributable to it. There would be no withholding tax on gross (or
net) rents provided that the payor receives authorization from the CRA to do so (this would
normally have to be arranged by the corporation). However, the corporation would be liable
for monthly federal and provincial income tax installments (based on prior year’s taxes), and
subject to 5% branch tax on repatriated profits in excess of $500,000.
Taking the position that rental income is business income is advantageous where significant
rental expenses are incurred. If net income is low, the corporate tax installments required
would be minimal. Business income treatment is also preferable if losses are incurred as business losses can be carried over to other years while property income losses cannot.
Alternatively, if the rental income of a German corporation is treated as property income, the
gross rents would be subject to 25% withholding at source.
Canadian Taxation of German Investors
23
A German corporation, along with an agent resident in Canada, can elect annually to have the
withholding made on the net rental income (before depreciation), provided a tax return is filed
within six months after the particular taxation year under election. Under such an election, the
effective tax position of the corporation becomes the same as if the rental income had been
treated as business income, except for a potentially different pattern of monthly tax payments
(that is withholdings, instead of installments) and the fact that rental losses cannot be carried
forward or back to offset rental income of other taxation years.
Taking the position that the rental income is property income is generally preferable where the
corporation has relatively small rental expenses since a 25% tax on gross income may be less
than normal corporate rates (25% to 31% depending on the province) on net income. In this
case, the corporation would not elect to have withholding tax apply on net income.
Property held by an individual
A German individual owning rental property in Canada will be subject to 25% withholding tax
on the gross rents. There is no rate reduction under the Canada-Germany Tax Treaty. However,
as for German corporations, the individual, along with a rental agent resident in Canada, may
elect each year to file a tax return in Canada within six months and pay Canadian tax on the
net rental income, after claiming expenses and tax depreciation. In the event such an election is
made each year, the agent who receives rent on behalf of the non-resident is obliged to withhold
tax only on the net rental income (before depreciation).
If no election is made, the non-resident individual may still file a Canadian tax return within
two years after the particular year and pay tax on the net income. This latter situation will
require the agent to withhold on the gross rent rather than the net rent.
Upon filing of a Canadian tax return, the withholding tax withheld during the year is treated as
an installment and any excess is refunded.
As a rule of thumb, the undertaking to file a Canadian tax return would not be made if the
withholding tax was less than the applicable Canadian tax. On the other hand, if the net income
was nil or low, it would be worthwhile to make such an undertaking.
In either case where the individual elects to use the net basis, he will be required to file a return
and pay tax on any recapture of depreciation previously claimed and any capital gain in the
year the property is sold (see below).
Expenses
Purchase
When you purchase a rental property, you must allocate the purchase price between the land
and building. This is important since the cost allocated to the building may be deducted from
rental income over time as CCA while the portion allocated to land cannot be deducted.
Special rules allow the tax authorities to adjust unreasonable allocations.
24
Canadian Taxation of German Investors
Capital cost allowance
The portion of the purchase price allocated to the building, or the cost of constructing the
building is deducted under the capital cost allowance rules discussed previously.
Generally speaking, rental buildings are written off at a maximum rate of 4% per year (5% for
buildings acquired prior to 1988) on a diminishing balance basis. There are higher rates (6%
and 10% p.a.) for newly constructed non-residential buildings. Only one-half the normal rate is
available in the year of acquisition.
In addition to the building, rental properties may contain other assets such as stoves,
refrigerators, dehumidifiers and other appliances and furnishings. These can usually be written
off at a maximum rate of 20% per year on a diminishing balance basis (10% in the year of
acquisition). Parking lots can be written off at a rate of 8% (4% in the year of acquisition).
Subsequent to 1971, several measures were introduced to restrict the use of rental properties
as tax shelters. The major restriction prevents taxpayers from claiming CCA to either create or
increase a rental loss. This does not apply to principal business corporations. Also, each rental
property costing more than $50,000 must be placed in a separate CCA class, thus preventing
the deferral of recapture on sale by replacing the property.
Interest and property tax
Interest and property taxes may be deducted when incurred against rental income. On the
other hand, a taxpayer may under certain conditions elect to capitalize the interest incurred on
the depreciable property rather than deduct it. The interest then forms part of the capital cost
which is written-off at the CCA rate for the depreciable property. This should be considered in
situations where losses have or will be realized and possibly not claimed before they expire.
Business losses can be carried forward twenty years and carried back three years. In the case
of losses where the rental income is income from property, no carryover is allowed for nonresidents.
Other expenses
Other outlays which are made to earn income from the rental property may be deducted in
arriving at net rental income. These include salaries, maintenance, telephone, bookkeeping,
and others. Major expenditures which give the property an enduring life will be capitalized and
written-off over a number of years.
Landscaping is generally fully deductible in the year incurred. Amounts incurred to investigate
the suitability of a site for a rental property or to make a utilities service connection to a rental
property may also be deductible provided the rental activity is considered to be a business.
Disposition of rental property
The disposition of a rental property may give rise to tax in two ways. First, the sale proceeds
(up to the original cost of the asset) must be deducted from the CCA pool, and a negative
Canadian Taxation of German Investors
25
balance results in recapture of CCA. Secondly, the amount by which the proceeds exceed the
original cost and selling expenses represents a capital gain, of which 50% is taxable. It is not
possible to incur a capital loss on depreciable property.
Recaptured depreciation
An investor who acquires a rental property will often claim the maximum CCA permitted. To
the extent the property does not come down in value, the depreciation previously claimed will
be recaptured and be subject to tax, unless there are other assets in the same asset pool or, in
certain situations, another asset is acquired to shelter the taxation.
Recapture is treated as rental income. In most cases, it is taxed in the year it arises regardless
of when the proceeds of disposition are received. However, taxation may be deferred if the
disposition was due to expropriation, theft, or destruction and the asset is replaced within two
years from the year of disposition.
Capital gains
As noted previously, the sale of a capital asset receives favourable tax treatment: only 50% of
the amount is subject to taxation. Whether or not a particular asset is considered to be capital
in nature depends on a number of facts and circumstances. The following criteria are some of
those used to determine whether the sale of rental property or any investment in real property,
is a capital or income transaction:
1.
Intention of vendor at time of acquisition: Where a property is acquired with the intention
of later selling it for a profit, the gain will be treated as regular income. The fact that the
owner leased or rented it out during the period of ownership would not change the treatment
2. Relation of transaction to taxpayer’s business or occupation: The fact that the vendor’s regular
business or employment involves dealing in real estate may indicate that the transaction
was of an income nature, and not a capital property
3. Number and frequency of transactions: If the vendor has a number of sales of similar assets, the
gains from dispositions of such property are more likely to be treated as regular income
4. Length of time property held: If the vendor holds the property for a short period of time,
any gain realized on its sale will likely be treated as regular income
Note: These rules generally apply to sales of other non-real estate assets as well.
It is possible to claim a reserve to defer the taxation of a capital gain for up to five years where
the proceeds of disposition are not due until a subsequent taxation year. However, this reserve
is not available to a taxpayer who is non-resident either at the end of the taxation year or at
any time in the immediately following year.
In the case of a private corporation, the untaxed 50% of the capital gain may be paid out
tax-free as a capital dividend. Capital dividends paid to non-residents are subject to the same
withholding tax treatment as regular taxable dividends.
26
Canadian Taxation of German Investors
Filing requirements
The CRA must be notified prior to the disposition of a rental property (or any taxable Canadian
property) by a non-resident. The vendor must remit the estimated Canadian tax on the
disposition: 25% of the capital gain plus the estimated tax on any recapture. He will receive
a certificate proving these requirements have been met. As rental property other than land is
depreciable property, two separate applications for a certificate must be filed, one which covers
the possibility of a capital gain on the disposition of the land and building, and one which covers
the possibility of recapture on the disposition of the building.
The purchaser is required to withhold 25% of any proceeds of a capital property not covered
by a certificate (50% for depreciable property). Failure to take these steps could result in the
purchaser being held liable for the non-resident’s Canadian tax. Where the vendor has paid
an estimate of the tax (or posted security for the tax) or where there is no gain, the certificate
limit issued by the Minister will normally be equal to the proceeds of disposition.
The onus is on the vendor to apply to the CRA for a certificate within ten days of the transaction
so that the withholding from the purchase price may be reduced. Failure to do so will result in
a penalty to the vendor of a minimum of $100, and a maximum of $2,500 for failure to file the
form, but, likely of greater consequence, where the certificate is not applied for, the purchaser
will be obligated to withhold and remit 25% of the purchase price of capital property (50% for
depreciable property).
Manufacturing operations
As noted previously, the income of a corporation from manufacturing and processing operations is
eligible for reduced rates of corporate tax in some provinces. These reduced rates apply whether
or not the corporation is non-resident. Individuals earning manufacturing income would be
subject to the usual personal tax rates. However, in most situations, manufacturing operations
would be held in a corporation for normal business reasons.
The general Canadian tax rules discussed above apply to manufacturing income. The following
rules are particularly relevant for this type of income, although they may apply in other situations
as well.
Investment Tax Credits
Taxpayers who invest in certain assets or incur certain expenditures may be eligible for Investment
Tax Credits (ITCs). These credits are calculated as a percentage of the cost of the asset or
expenditure and are deducted from federal tax payable or, for some taxpayers, partially or
totally refunded.
The most widely available credit pertains to scientific research and experimental development
expenditures (SR&ED). It is calculated at 20% of gross expenditures (including capital
acquisitions), and is creditable against 100% of federal tax. Any ITCs not claimed in a year can
be carried back three years or forward 20 years.
Canadian Taxation of German Investors
27
For CCPCs, the credit can be as high as 35% and can be refundable. The higher rate and refund
is available on the first $3,000,000 of eligible expenses incurred by the CCPC (or the associated
group, if your corporation is associated with other corporations). This limit is phased out where
a CCPC associated group’s taxable income exceeds $500,000 or taxable capital exceeds $10
million in the prior year. In addition to the federal tax incentives, many of the provinces have
their own R&D tax incentives.
Accelerated capital cost allowance
To encourage taxpayers to invest in certain depreciable assets, a quicker write off period is allowed
on some assets used in a specific activity. For example, manufacturing assets are generally
written off at a rate of 30%. Machinery and equipment acquired by a taxpayer, after March
18, 2007 and before 2012, primarily for use in Canada for the manufacturing or processing of
goods for sale or lease may also be eligible for a temporary accelerated CCA rate of 50% on a
straight line basis (subject to the application of the “half-year rule”).
This rule is similar to the German concept of “Sonderabschreibungen” which essentially reduces
the write off period of certain capital assets.
The Canadian 2011 federal budget proposed to extend this temporary incentive, for two years,
to eligible machinery and equipment acquired before 2014. (Machinery and equipment acquired
by a taxpayer after 2013 will be written off at a rate of 30%).
Certain computer equipment including general-purpose electronic data processing equipment and
systems software and related ancillary equipment are also eligible for the accelerated CCA rate.
Available-for-use rules
Businesses which acquire property are restricted from claiming CCA and investment tax credits
until the time that is the earlier of the year the property is used for its intended purpose and 24
months from the time it was acquired. The half-year CCA rule will not apply to property that
becomes depreciable because of the 24-month rule. Property that becomes available for use
within the two year limit will still be subject to the half-year rule.
There are specific rules for determining when property is considered to be “available-for-use”.
Their purpose is to ensure better matching of income and expenses and they are consistent
with the tax depreciation rules of most industrial countries.
Research and development (R&D)
Under present Canadian tax law, 100% of current and capital expenditures for R&D may be
written off in the year they are incurred, net of the investment tax credit on expenditures in
respect of R&D (as discussed above). The 100% write-off and investment tax credits are not
available for buildings acquired for use in R&D activities.
As mentioned previously, investment tax credits earned are refundable in cash to certain taxpayers
who are unable to fully utilize the credits to reduce their federal tax liability. Investment tax
28
Canadian Taxation of German Investors
credits on current research and development expenditures earned at the 35% rate (i.e. qualifying
CCPCs) are fully refundable. Any other credits are refundable at a 40% rate.
Tax considerations in financing
Thin capitalization rules
The taxes on income earned by Canadian corporations can be quite high. Non-residents might
prefer to finance their Canadian corporations by way of debt rather than shares. The non-resident
would receive interest income, which is a deductible expense for the Canadian corporation,
rather than dividend income, which is not deductible. As a result, any excess profit which would
have been subject to high rates of tax would be converted to interest subject to tax at a lower
withholding tax rate (10% for non-arm’s length German lenders) which is usually creditable
against the recipient’s own taxes.
Canadian law restricts this practice by disallowing part of the interest as an expense if certain
conditions prevail. Generally speaking, if loans from a non-resident shareholder and related
persons (who together hold at least 25% of the corporation’s shares of any class) exceed two
times the non-resident’s share of the Canadian corporation’s paid-up capital and surplus, and
total retained earnings, a portion of the interest expense charged by the non-resident will be
disallowed as an expense of the Canadian corporation. The entire amount of interest paid, regardless
of whether it was allowed as an expense or not, will be subject to non-resident withholding tax.
Editor’s note: the 2012 budget proposes to change the debt/equity ratio to 1.5 times, effective
2013 and to treat disallowed interest expense as a dividend.
Using a Canadian holding company
In some cases, it may make sense to finance your Canadian investment through a Canadian
holding company. One of the main advantages to using a Canadian holding company to acquire
an operating company is the ability to return the original capital investment tax-free, through a
reduction in paid-up capital.
The paid-up capital of a corporation is basically the amount originally contributed to the
corporation on the issuance of shares. This is typically an amount far less than the market price
paid by someone who subsequently purchases the shares, particularly where the corporation
has been successful. If a German individual or corporation first capitalizes a Canadian holding
company to acquire an operating company, they will be able to have the operating company
pay dividends to the holding company and use the funds to return the holding company’s
paid-up capital tax-free. If the operating company had been acquired directly, only its paid-up
capital could be returned tax-free.
For example, let’s say a German investor is considering purchasing a Canadian corporation for
$10,000,000. The paid-up capital of the company is $1,000,000, with $9,000,000 of accumulated
retained earnings.
If the German purchases the corporation directly from the owner, his shares will have a cost
Canadian Taxation of German Investors
29
base of $10,000,000, but he will only be able to extract $1,000,000 tax-free from the corporation
on a return of capital. If instead he had used the $10,000,000 to capitalize a Canadian holding
company, the operating company could pay dividends (tax-free) to the holding company which
could then use the funds to return capital to the German investor.
Such a structure may also help avoid Canada’s thin capitalization rules. The paid-up capital
owned by non-residents in the holding company, which is the amount against which the level
of debt is measured, will be much greater.
A Canadian corporation can always return the capital received on the issue of shares (paid-up
capital) regardless of how much accumulated retained earnings it has. However, the amount
that can be returned is the amount received by the corporation on issue, not the amount paid
by a shareholder for the shares to a third party.
Other taxes
Payroll taxes
The following jurisdictions levy a payroll tax on employers, payable on the salaries and wages
paid to individuals employed in that jurisdiction. Payroll taxes are deductible for income tax
purposes.
Jurisdiction
Payroll tax rates (%)
Newfoundland
2.0
Quebec
2.7 – 4.26
1
2
0.98 – 1.95
Ontario3
0 – 4.3
Manitoba
4
N.W.T./Nunavut
5
1.
2.0
Tax is only charged on payrolls over $1,200,000.
2. The rate of tax is 2.7% for payrolls up to $1 million and 4.26% for payrolls $5 million and above (graduated rates apply for payrolls
between the two thresholds). Certain exemptions may apply.
3. The rate of tax is 0.98% for payrolls under $200,000 and 1.95% for payrolls over $400,000 (graduated rates apply for payrolls between
the thresholds). First $400,000 of taxable payroll of an eligible employer (not associated) and of an associated group of eligible employers
is exempt.
4. Payroll of $0 to $1.25 million, no tax; from $1.25 million to $2.5 million, 4.3% of payroll over $1.25 million; over $2.5 million, 2.15% of
total payroll.
5. Tax paid by employees as a payroll deduction.
30
Canadian Taxation of German Investors
Land transfer taxes
Several provinces levy land transfer taxes similar to the German “Grunderwerbsteuer” levied by
German states. These taxes are levied on the selling price of land at the time of a sale transaction
and are generally paid when registering the change of title.
For instance, on the acquisition of certified unrestricted land zoned for residential, commercial or
industrial use, Ontario levies a land transfer tax of 0.5% of the first $55,000, 1% of any remaining
consideration paid for the land up to and including $250,000, and 1.5% on any amounts exceeding
$250,000. Where the land being conveyed contains one or two single family residences, an
additional tax equal to 0.5% is imposed on the amount of consideration exceeding $400,000.
In addition, a municipality within a province may also impose a municipal land transfer tax. For
instance, the city of Toronto, within the province of Ontario imposes a land transfer tax which
is based on graduated rates that is applied to purchases on all properties in the city of Toronto.
Goods and Services Tax / Provincial Sales Tax
Canada has adopted the Goods and Services Tax (GST), which is a value-added tax on consumption
of both goods and services supplied in Canada. The tax is levied on most kinds of supplies of
goods, real estate (including rent from commercial property), intangible property and services,
whether through sales, rentals, leases, transfers, barters, exchanges or licensing arrangements.
At each stage of the production and distribution chain, the GST is applied to the transfer of taxable
supplies. Registered suppliers may claim credits for the GST which they paid on their purchases
(input tax credits). Consequently, for each reporting period, only the difference between the
GST collected on sales and the GST paid on purchases is remitted. Registration is required if the
level of taxable supplies exceeds $30,000 per annum. The GST rate is 5%.
In addition to the GST, some provinces impose a provincial sales tax (PST). Some provinces
have a Harmonized Sales Tax (HST) which is a combination of the federal GST and the PST into
a single value added sales tax. On July 1, 2010, the provinces of Ontario and British Columbia
(BC) joined Nova Scotia, New Brunswick and Newfoundland and Labrador and harmonized
their sales tax with the GST. In 2011, the HST in BC was overturned by a referendum and as
such BC will return to a PST/GST regime. Although there are some differences, the Quebec
Sales Tax (QST) essentially functions in a manner similar to the GST/HST.
Canadian Taxation of German Investors
Jusrisdiction1
Sales tax rates
Combined rates
Federal
5.00%
See below
British Columbia3
7.00
12.00
Saskatchewan
5.00
10.00
Manitoba
7.00
12.00
Ontario
2
31
Provincial:
8.00
13.00
Quebec4 5
9.50
14.975
Newfoundland
8.00
13.00
New Brunswick
8.00
13.00
Nova Scotia
10.00
15.00
Prince Edward Island4
10.00
15.50
1.
3
Alberta, Nunavut, the Yukon and the Northwest Territories do not impose a sales tax.
2. The GST rate decreased from 6% to 5% effective January 1, 2008.
3. Effective July 1, 2010 Ontario and B.C.’s sales tax system are harmonized with the 5% GST to produce a combined federal/provincial rate
of 13% in Ontario and 12% in B.C. A referendum in B.C. has overturned the HST, and BC will transition to the previous PST system.
4. Quebec and PEI levy sales tax on taxable goods (and services where applicable) on the actual cost including GST. Consequently, the
combined tax rate in Quebec is 14.975% and 15.5% in PEI. All other provinces calculate PST independent of GST.
5. On September 30, 2011 Canada and Quebec signed an agreement regarding the harmonization of the QST with the GST. The agreement
reflects a commitment by both parties to negotiate the terms of the harmonization.
Real estate
Most transactions involving commercial real estate and new residential properties are subject
to GST/HST. However, different rules apply depending on the circumstances and status of the
vendor and purchaser and the nature of the property sold. Since this is a complicated area,
prospective purchasers or vendors of real estate should seek specific advice well in advance of
the purchase or sale.
Business income
Whether a German investor is required to register with the CRA depends on whether the
investor is carrying on business in Canada for tax purposes. It should be noted that under the
Canada-Germany Tax Treaty a German investor will not be taxed on business income in Canada
if the investor does not have a permanent establishment in Canada, as defined in the treaty.
However, this does not affect the non-resident’s requirement to collect GST/HST on taxable
supplies made in Canada. It is important to review the GST/HST implications of any investment
or business arrangement in Canada.
32
Canadian Taxation of German Investors
Repatriation of funds
Canada places no currency restrictions on the repatriation of capital or earnings from a Canadian
business to foreign investors. However, such transactions may have tax consequences, in both
Canada and Germany. Throughout this publication, we have referred to some of these issues as
they arose. Here’s a brief summary of the main methods of repatriating capital and earnings,
and the tax rules that apply.
Branch assets
As previously mentioned, the business profits of a branch are taxed in Canada at the normal
rates applicable to either individuals or corporations. For individuals, the after-tax income
is then available for repatriation without further Canadian or German tax consequences.
However, the amount of the foreign branch income is taken into account in determining the
individual’s German tax rate.
For corporations, the after-tax income is subject to the 5% Canadian branch tax, but no further
German tax.
The amount subject to branch tax is the earnings of the branch, less the following:
•
Business losses in previous years
•
The Canadian taxes on the profits (other than the branch tax)
•
The profits reinvested in Canada
•
A basic one-time deduction of $500,000 or its equivalent in Euros
From the above notes, you can see that any funds repatriated to Germany result in a reduction
of the profits reinvested in Canada and therefore increase the branch tax.
Interest
Where a non-resident chooses to finance his investment in Canada by way of loans, he will
receive his return in the form of interest payments. The interest payments will be deductible to
the Canadian corporation, provided the loan was used to earn income from business or property,
the rate is reasonable in the circumstances and the company is not thinly capitalized.
The interest payments will be subject to Canada’s 25% withholding tax, reduced to 10% under
the treaty for payments to non-arm’s length German residents (interest payments to arm’s length
recipients are not subject to withholding tax). Therefore, the profits of the corporation that are used
to pay the interest will have been returned to the German investor after bearing only 10% tax.
The German investor, whether an individual or corporation, will usually include the interest in
income for German tax purposes gross of the Canadian tax withheld. Note that a flat income
tax of 25% (plus solidarity surcharge) will apply, where the investor is an individual holding
less than 10% of the shares in the corporation paying interest. However, the German investor
will be entitled to a foreign tax credit against German taxes paid, resulting in the return on
Canadian Taxation of German Investors
33
the investment bearing roughly the same tax as if it had been earned directly in Germany. If
no credit is possible, the tax can be deducted as an expense, in essence only reporting the net
amount received.
Where the German investor (individual or corporation) operates in Canada through a branch,
he is deemed to be a Canadian resident to the extent the branch manufactures or processes
in Canada or extracts natural resources. Therefore, any interest paid to non-arm’s length
non-resident lenders which is allocated by the German investor to the branch and deducted
for Canadian tax purposes will be subject to Canadian withholding tax at the rate applicable to
residents of the country of the lender.
Dividends
Where a German resident’s investment in Canada is undertaken by capitalizing or purchasing
a Canadian corporation, his return will be in the form of dividends. The Canada-Germany Tax
Treaty reduces the general withholding tax rate from 25% to 15% for dividends paid to German
residents. The withholding tax is reduced to 5% if the beneficial owner is a company that controls
at least 10 per cent of the voting power in the company paying the dividends.
Any dividends an individual receives from a Canadian corporation will either be subject to the flat
income tax rate of 25% or be included in income at a rate of 60% for German tax purposes gross
of the tax withheld, with a tax credit against the German tax liability. The taxation depends on
wether or not the shares are part of a business carried on in Germany.
95% of any dividends received by a German corporation are tax-free in Germany, regardless
of percentage ownership or holding period. If the dividend is distributed further to a German
individual shareholder, it will either be subject to the flat income tax rate of 25% or be included in
income at a rate of 60% (see above comments).
Management fees
It’s common for a foreign parent company or individual investor to provide management or other
services to a Canadian corporation. Where such a corporation pays management fees to the nonresident, the amounts would normally be subject to withholding tax, unless they represent the
reimbursement of specific expenses. However, under the Canada-Germany Tax Treaty, management
fees received by a German resident from a Canadian corporation will not be taxable in Canada
(and therefore not subject to the withholding tax) if the management fees are business profits for
the German resident and the German resident does not have a permanent establishment in Canada.
Management fees are deductible by the Canadian corporation if they are incurred for the purpose
of earning income, are reasonable in the circumstances and are well documented. Therefore,
management fees represent a means of repatriating earnings from a Canadian corporation free of
any income or withholding tax, provided the amounts can be justified.
A German corporation receiving management fees will incur corporate tax of 15% plus the
solidarity surcharge, as well as the applicable trade tax (approximately 14%).
34
Canadian Taxation of German Investors
Royalties
If a German investor provides a Canadian corporation with intellectual property, such as the
right to use patents or copyrights, any royalties paid to the German resident are subject to
a 10% withholding tax (reduced from 25% under the treaty). The amounts paid will be fully
deductible for Canadian tax purposes.
Royalty income received by a German resident must be included in income for German tax
purposes.
Under the Canada-Germany Tax Treaty, copyright royalties and other like payments in respect
of the production or reproduction of any literary, dramatic, musical or artistic work (but not
including royalties in respect of motion picture films nor royalties in respect of works on film or
videotape or other means of reproduction for use in connection with television broadcasting)
will be exempt from withholding tax. As well, royalties for the use of or the right to use, computer
software or any patent or for information concerning industrial, commercial or scientific
experience (but not including any such royalty provided in connection with a rental or franchise
agreement) will also be exempt from withholding tax.
Loans to the investor
In view of the withholding and other tax consequences of payments from a Canadian corporation,
a German investor may be tempted to just have the corporation loan him the funds instead.
Under Canadian tax rules, a loan to a shareholder must be included in income unless it meets
one of the specific exemptions and reasonable repayment terms are entered into at the time
the loan is made or the amount owing is repaid within one year after the end of the taxation
year of the Canadian company. Note: A non-resident investor will generally not qualify for one
of these exemptions. If the shareholder is non-resident, the loan is deemed to be a dividend for
withholding tax purposes. If the loan is repaid after one year, the non-resident can apply for a
refund of withholding tax.
There are also tax consequences to the corporation. Where a non-resident owes an amount
to a corporation resident in Canada and the amount remains outstanding for one year or
longer without interest at a reasonable rate being included in the corporation’s income, the
corporation will have a deemed interest income inclusion. This income inclusion is generally
the excess of interest at a prescribed rate over interest already included in income in respect
of the amount owing. Note that this provision will not apply if the loan is made to a controlled
foreign affiliate which uses the funds to earn income from an active business. In addition,
the provision will not apply if the amount owing is subject to non-resident withholding
tax. However, this exemption will not apply if the non-resident withholding tax is ultimately
refunded. Furthermore, charging interest will not eliminate the withholding tax on a deemed
dividend discussed above.
Return of capital
As noted previously, one of the main advantages to using a Canadian holding company to
Canadian Taxation of German Investors
35
acquire an operating company is the ability to return the original capital investment tax-free.
A Canadian corporation can always return the capital received on the issue of shares (paid-up
capital) regardless of how much accumulated retained earnings it has. However, the amount
that can be returned is the amount received by the corporation on issue of the shares, not the
amount paid by a shareholder for the shares from a third party.
Wind-up
The final repatriation of funds occurs when an investor decides to dispose of his investment or
otherwise wind it up.
If an investor operates a branch, the procedure is fairly straight-forward. All assets are sold
for whatever is negotiated and a final tax return is filed. Tax may be payable depending on the
nature of the property sold and whether or not a profit is realized on such a sale. In any event,
if the assets to be disposed of include Taxable Canadian Property that are not “treaty-protected
property” Canadian law requires the non-resident vendor to advise Canadian tax authorities
of the proposal to sell such property, in advance, to remit a specified percentage of the gain, if
any, at that time and to apply for a certificate from the tax authorities. The remittance of tax
is creditable against the tax calculated on the final tax return. Any gains on sales are subject to
the branch profits tax if the investor is a corporation. As with the disposition of rental properties
described above, the onus is on the vendor to apply to the CRA for a certificate within 10 days
of the transaction so that any withholding from the purchase price may be reduced. Failure
to apply for a certificate will result in a penalty to the vendor of a minimum of $100, and a
maximum of $2,500 for failure to file the form, and, where the certificate is not applied for, the
purchaser will be obligated to withhold and remit 25% of the purchase price of capital property
(50% for depreciable property).
In the event the Canadian business is carried on through a subsidiary corporation, it may either
be liquidated by selling the assets or the shares themselves may be sold. If the Canadian
corporation is liquidated, it must file a final tax return upon liquidation and pay tax on any
income realized. In addition, the net funds remaining after such a liquidation will be deemed to
be a dividend to the extent of the excess received over the legal paid-up capital. As a result, the
appropriate withholding tax will apply and must be remitted to the Canadian tax authorities.
If shares are sold or deemed to be disposed of, the non-resident must advise the Canadian
government of the proposed disposition to sell, where the shares are Taxable Canadian Property.
However, for a German investor, this is unlikely to be the case unless the assets of the
corporation consist primarily of real estate. The gain on the sale of shares of a Canadian subsidiary
by a German individual is taxable in Germany either at the flat income tax rate (25%) or at the
individual tax rate applied to 60% of the gain. In both cases, a solidarity surcharge is charged.
If the shares are sold to another corporation resident in Canada which is not at arm’s length
with the investor, any non-share consideration received in excess of the paid-up capital of the
shares sold will be deemed to be a dividend and subject to withholding tax.
36
Canadian Taxation of German Investors
Other matters
Investment Canada Act
The Investment Canada Act requires non-residents to obtain approval for certain business ventures
in Canada. Business ventures which are subject to this scrutiny are acquisitions of businesses and
the commencement of new enterprises. A German investor may be required to file either a notification or
an application for review of the investment unless a specific exemption applies.
Where the German investment involves the direct acquisition of a Canadian business with an
asset value equal to or in excess of an annual threshold (it is expected that the amount will be
$330 million for the year 2012), the investor is required to complete an Application for Review.
An indirect acquisition from a German investor however does not require the same review. In
such a case, the German investor must file a notification describing the transaction, no later
than thirty days after the implementation of the investment.
In cases where there is an acquisition of a Canadian business that is a cultural business the
threshold is $5 million for a direct acquisition and over $50 million for an indirect acquisition;
the $5 million threshold will apply however for an indirect acquisition if the asset value of the
Canadian business being acquired exceeds 50% of the asset value of the global transaction.
Filing requirements
As noted previously, tax laws require non-residents to notify the tax authorities prior to selling
Taxable Canadian Property to anyone in an effort to ensure non-residents disposing of taxable
Canadian property pay the tax due on such dispositions. Canadian tax law provides a system
whereby an amount in respect of the tax must be remitted by the non-resident vendor in advance
of the disposition, or remitted by the purchaser on the vendor’s behalf after the disposition.
Non-residents proposing to dispose of taxable Canadian property (other than “treaty-protected
property”) are provided the option to send a notice to CRA prior to the disposition. On Form T2062,
the non-resident will, among other things, specify the adjusted cost base of the taxable Canadian
property being disposed of at the time of sending the notice, and will specify the estimated
amount of his proceeds of disposition or the fair market value of the property at the time of the
proposed disposition, and the non-resident will also specify if the disposition is by way of gift
or is between non-arm’s length parties. Form T2062A is to be used to report the disposition
of depreciable property to report recapture of capital cost allowance or terminal loss. If both
forms T2062 and T2062A are required for a disposition, the forms must be filed together.
After a payment by the non-resident to CRA of an amount equal to 25% of the anticipated gain
plus the estimated tax on any recapture, a certificate, Form T2064 will be issued to the non-resident
vendor and the purchaser, detailing the amount of the estimated proceeds of disposition. The
amount that is paid to CRA is applied against the non-resident’s tax as ultimately assessed. In
place of this payment, CRA may permit the non-resident vendor to furnish acceptable security.
Another option available to the non-resident is substantially similar to the first, except that it
Canadian Taxation of German Investors
37
requires the non-resident person to provide notice in Form T2062 within the ten-day period
following the disposition, and to pay the same amount (calculated using the same percentages
of the anticipated gain), in return for the issuance of the certificate. In this case also, CRA may
accept suitable security instead of payment.
It should be noted that if the certificate is not obtained under either of these methods other
rules will apply. In this event, the purchaser must, within 30 days after the end of the month in
which he or she acquired the property, pay to the Minister a tax equal to 25% of the amount
paid for the property, (50% if the property is depreciable property, land inventory or certain
resource property). If the actual proceeds of disposition exceed the certificate limit (in cases
where the certificate has been obtained), the purchaser must, within the same limitation
period, pay the Minister a tax equal to 25% of the excess of the proceeds of disposition over
the certificate limit (and 50% of the excess in cases of depreciable property, land inventory and
certain resource property).
In either of these cases, the purchaser’s payment will be applied against the tax owing by the
non-resident in respect of the disposition, and is recoverable by the purchaser from the non-resident.
After March 4, 2010, shares in Canadian companies that did not primarily hold Canadian real
estate are no longer taxable Canadian property in most cases and thus do not fall under the
withholding and reporting requirements described upon sale any longer.
Canadian income tax returns must be filed by corporations within six months of their year-end
date and by individuals on or before April 30 of the year following their taxable calendar year. If
the individual is carrying on business, the filing deadline is extended to June 15. Tax returns for
trusts and estates are due within 90 days of their year-end date. A non-resident electing to file
a return for rental income (see section entitled Rental properties in the chapter on Investing in
real estate) has until six months after the end of the taxation year. A non-resident corporation
carrying on business in Canada without a permanent establishment in Canada, and therefore
not taxable in Canada due to the provisions of a bilateral tax treaty, is required to file a return
with the CRA within six months of their year-end to report information concerning claims for
treaty-based exemptions.
Corporations are also required to report to the CRA details of transactions with non-arm’s
length non-residents. The CRA prescribed Form T106 must be filed by corporations within six
months of their year-end date. Whether a taxpayer and a non-resident are non-arm’s length is
a question of fact. Taxpayers must have contemporaneous documentation available at the filing
due date of Form T106 with respect to the transactions reported on this form, or significant
penalties could be applied.
Also, investments made by Canadian residents outside Canada are required to be reported to
the CRA. Exemptions apply for smaller investments. This could affect German investors using
a Canadian corporation. For example, if the Canadian corporation invested in shares of a U.S.
corporation, the investment may be reportable depending on its size. The form to be prepared
will depend on the nature of the investment.
38
Canadian Taxation of German Investors
Summary of Canada/Germany taxation
Type of income in Canada
Taxation in Canada
Interest payments to non-arm’s length nonresidents
10% withholding tax6
Interest payments to arm’s length nonresidents
No withholding tax
Dividends paid to German individuals
15% withholding tax
Dividends paid to German corporations
(“Kapitalgesellschaften”)
15% withholding tax
Royalties
10% (or 0%) withholding tax6
Business profits arising in a Canadian branch
Taxed at regular rates
Rental income
25% on gross (unless the recipient elects to
be taxed on net income)
Capital gains from the sale of real property
50% taxed at regular rates
Capital gains from sale of 10% or more of
the shares of real estate companies
50% taxed at regular rates
Capital gains from sale of branch assets
50% taxed at regular rates
Capital gains from sale of shares of active
company or real estate company with less
than 10 % ownership
Tax free
5% withholding tax if dividends are paid to
a company that controls at least 10% of the
voting power of the dividend payer
All other capital gains
Tax-free
Income from independent personal services
derived from a Canadian branch5
Taxed at regular rates
Income from dependent personal services if
employment is exercised in Canada5
Taxed at regular rates
Directors’ fees (if services are rendered in
Canada)5
Taxed at regular rates
Pensions, annuities and similar payments
15% (or less if the regular Canadian income
tax rate is lower)
Income of artists and athletes
Taxed at regular rates
1.
2.
For individuals, income is taken into account in
determining German tax rate.
For individuals, gain may be taxable if subject to
certain speculation time limits under German law.
3.
4.
5.
Assumes shares are held by individual.
For corporations, taxed at regular German rate.
If services rendered outside Canada, no
Canadian tax.
6.
10% withholding tax on interest and royalty payments,
subject to exemptions for certain interest, copyright
royalties and royalties in respect of computer
software, patents and know-how.
Canadian Taxation of German Investors
39
Summary of Canada/Germany taxation continued
Type of income in Canada
Taxation in Germany
Interest payments to non-arm’s length nonresidents
Included in German income (Canadian tax
allowed as tax credit)
Interest payments to arm’s length nonresidents
Included in German income
Dividends paid to German individuals
Either personal tax rate applied to 60% of
dividend or 25% flat tax (Canadian tax
allowed as tax credit)
Dividends paid to German corporations
(“Kapitalgesellschaften”)
95% tax-exempt; 5% considered
non-deductible (trade tax may apply)
Royalties
Included in German income (Canadian tax
allowed as tax credit)
Business profits arising in a Canadian branch
Exemption1
Rental income
Exemption1
Capital gains from the sale of real property
Exemption2
Capital gains from sale of 10% or more of
the shares of real estate companies
60% income inclusion (Canadian tax allowed
as tax credit; trade tax may apply)3
Capital gains from sale of branch assets
Exemption1
Capital gains from sale of shares of active
company or real estate company with less
than 10 % ownership
Either personal tax rate applied to 60% of
dividend or 25% flat tax. Trade tax may apply3
All other capital gains
Taxed in accordance with German law4
Income from independent personal services
derived from a Canadian branch5
Exemption1
Income from dependent personal services if
employment is exercised in Canada5
Exemption1
Directors’ fees (if services are rendered in
Canada)5
Included in German income (Canadian tax
allowed as tax credit)
Pensions, annuities and similar payments
Included in German income (Canadian tax
allowed as tax credit)
Income of artists and athletes
Included in German income (Canadian tax
allowed as tax credit)
BDO services in Canada
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of entrepreneurial businesses in Canada and internationally. With over 100 offices
across the country, we offer a complete range of professional services including:
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For general information on the Canadian business environment and other
considerations in carrying on business in Canada, please see Doing Business in
Canada, a publication of BDO.
Bruce Ball, FCA
National Tax Partner
BDO Canada LLP
36 Toronto Street
Toronto ON M5C 2C5
Tel: +1 416 369 3096
Fax: +1 416 367 3912
H. Martin Hoeschele, CA
Partner, Toronto Office
Country-Coordinating Partner for
Germany, Austria and Switzerland
BDO Canada LLP
P.O. Box 32
200 Bay Street
Toronto ON M5J 2J8
Tel: +1 416 865 0200
Fax: +1 416 865 0887
germaninfo@bdo.ca
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