What does limitation on benefits mean on a withholding certification?
It means the payer is asking you to state which eligibility test in the treaty your entity satisfies, not merely that it is resident in the treaty country. Residence alone is not enough. The limitation on benefits article is written to keep treaty rates away from conduit entities, so it sets out conditions built on ownership, public listing, an active trade or business and base erosion, and asks the claimant to fit one of them. Ticking a box without knowing which test the entity meets is a claim you cannot support later. The test should be identified and documented before the first payment, because after a denial you are proving eligibility for a year that has closed.
Can a holding company claim treaty benefits?
Sometimes, and the limitation on benefits article is where that is answered. A holding company with no activity of its own is close to the shape the article was written to exclude, so it does not qualify simply by being incorporated and resident in the treaty country. It has to satisfy one of the conditions: who owns it, whether it or a parent is publicly listed, whether it carries on an active trade or business, and whether too much of its income leaves the treaty country as deductible payments. Where none of those is met there is a discretionary route to the authority, and that is an application rather than an entitlement.
Is limitation on benefits the same as the principal purpose test?
No, although a treaty can contain both. Limitation on benefits works through objective conditions: ownership, listing, active business, base erosion. You either fit one of them or you do not, and the answer does not turn on why the entity exists. A principal purpose test asks about purpose instead, and can deny a benefit to an entity that satisfies every objective condition. The two are therefore cumulative rather than alternative. A file that establishes which limitation test the entity meets has answered one question, and should not be assumed to have answered the other.
What is the base erosion test in a treaty?
It is the condition that looks at what leaves the entity rather than at what it owns. An entity can be held by the right people in the right country and still function as a conduit if most of its income is paid out of the treaty country as deductible amounts, such as interest, royalties or service charges, to people who could not have claimed the treaty rate themselves. The base erosion condition is written to catch that. In practice it means the test is not a one-off: ownership rarely changes, but payment patterns do, so an entity that satisfied the condition in one year can fail it in the next.
What happens if my company fails every limitation on benefits test?
The treaty rate is not available as of right, but the article normally provides a discretionary route: an application to the authority in the source country asking it to grant the benefit despite the failed conditions. That is a considered request supported by facts about why the entity exists and what it does, not a form that clears itself. Two things follow for planning. The application takes time, so it belongs ahead of the payment rather than after it. And if the answer is no, the payment bears the domestic rate, so that cash-flow consequence should be modelled before the structure is committed to.
Why did my customer withhold tax at the full rate?
Commonly because the certification you supplied did not establish eligibility under the limitation on benefits article, and it is the payer who carries the risk of applying a wrong rate. A payer who cannot see which test you meet will often withhold at the domestic rate and leave you to reclaim. Recovering it means proving, after the year has closed, the eligibility you could have documented in advance. The quicker route is usually to work out which condition the entity satisfies, put the supporting facts in the payer's hands, and correct the position for future payments while the claim for the earlier ones is prepared.
How is my RRSP taxed if I move to the United States?
The treaty lets a US resident defer US tax on the income accruing inside an RRSP or RRIF until it is distributed, which is what stops annual growth being taxed with no cash to pay it — but the position has to be taken and, historically, disclosed. On withdrawal Canada takes withholding as the source country and the United States taxes the distribution with a credit, complicated by the fact that the two systems can measure the taxable portion differently. Contributions and basis need tracking from the start. See treaty relief for RRSPs, 401(k)s and IRAs.
Do I pay tax when I inherit property abroad?
The inheritance itself is often not income to you, but three other things can create tax: the estate may owe tax where the deceased or the property was situated, some countries tax the recipient directly, and the gain from the date you inherit to the date you sell is yours. Reporting obligations can also attach to holding the asset. See inheriting property abroad.
