Australia and Canada treaty - key points
The 'Convention between Australia and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income' was signed on 21 May 1980. This convention was amended by a Protocol which was signed on 23 January 2002. The following is a summary of the key features of the amendments made to the convention by the Protocol.
Date of effect (of the Protocol)
For withholding taxes, the Protocol has effect in relation to payments made on or after 1 January 2003.
For other taxes covered, the Protocol has effect in respect of income, profits or gains of years of income beginning on or after 1 July 2003 (in Australia) and 1 January 2003 (in Canada).
The Protocol updates the list of taxes covered by the treaty. In the case of Australia, the Protocol deletes the undistributed profits tax and includes a specific reference to Australia's petroleum resource rent tax.
The Protocol inserts a new provision into the Business Profits Article to ensure that profits derived by a non-resident beneficiary through a permanent establishment of a trust can be taxed in the country where the permanent establishment is located.
Branch profits tax
In line with Canada's reservation to the OECD Model, the Protocol inserts a provision into the treaty allowing for the imposition of a branch profits tax. The Protocol reduces the maximum amount of Canadian branch profits taxation from 15% to 5%. The Protocol also reduces the maximum amount of Australian branch profits taxation from 15% to 5%. Australia, however, does not currently impose a branch profits tax.
The Protocol does not alter the general maximum rate of dividend withholding tax of 15%. However, the maximum rate of dividend withholding tax is reduced to 5% for non-portfolio dividends1 to the extent they are franked (in the case of Australia);2 and to the extent they are not paid by Canadian non-resident-owned investment corporations.
The Protocol reduces the maximum rate of interest withholding tax from 15% to 10%.3
The Protocol does not alter the existing rate of source country taxation on royalties, which remains at 10%.
Payments for the use of spectrum licences are not dealt with in the Royalties Article. These payments continue to be covered by subsection 3(11A) of the International Tax Agreements Act 1953 and are, therefore, taxed as business profits under Article 7 of the treaty.
The Protocol adds a new paragraph to the Royalties Article to ensure that payments for use of computer software4 will not be treated as royalties where the right to use the source code is limited to such use as is necessary to enable the user to operate the software program. In such cases, Article 7 of the treaty will apply.
The Protocol inserts a new Alienation of Property Article which deals with the taxation of gains from the alienation of property. In accordance with Australia's current treaty practice, the new Article includes a source country sweep-up provision that allows the source country to tax capital gains not otherwise dealt with in the Article.
A new rule is also included to remove double taxation of capital gains in the case of assets held by departing residents by aligning the taxing point in both the departed country and the new country of residence. Taxpayers are offered an election under the provision that will ensure appropriate relief is provided in the country the individual is leaving for foreign tax that may have accrued in the new country of residence.
The Protocol inserts source rules into the treaty that are consistent with current Australian treaty practice.
Partnerships and trusts
The Protocol adds a new Article 26A (Various Interests of Canadian Residents) to the treaty. This Article clarifies that Canada may tax income of Canadian residents relating to partnerships, trusts or controlled foreign affiliates in which the resident has an interest. This is consistent with Canadian tax treaty practice to preserve of the operation of its Controlled Foreign Corporation (CFC) rules in its double tax treaties.
An equivalent provision is not necessary for Australian purposes because Australia considers that its anti-abuse measures, including its CFC regime, already achieve the intent of Article 26A. In particular, Australia considers there is no conflict between its CFC rules and Articles 7 and 10(3) of the treaty.
What to read/do next
Further information relating to this and other Australian Tax Treaties can be found on the Treasury Website
Visit the International tax agreements homepage
1 In the case of Australia, this requires the company hold directly at least 10% of the voting power of the company paying the dividends. In the case of Canada, this requires the company control directly or indirectly at least 10% of the voting power in the company paying the dividends.
2 However, Australia's domestic law does not subject fully franked dividends to withholding tax and as such, Canadian shareholders will receive these dividends free of any withholding tax whilst this remains a feature of the Australian domestic law.
3 Note, however, Australia's domestic law interest withholding tax rate is only 10%.
4 In accordance with its Observation to the Commentary to Article 12 of the OECD Model, Canadian tax treaty practice in relation to computer software is to treat as royalties payments under contracts that require the source code in the computer program to be kept confidential.