Is holding my investment through another country treaty shopping?
Not by itself. Treaty shopping describes routing income through a third country in order to reach a treaty rate that would not otherwise have been available. The label attaches to the reason for the structure rather than to the fact that a structure exists. Groups hold investments through intermediate companies for regulatory, financing and ordinary commercial reasons all the time. The questions an authority asks are what that entity does, why it was placed where it was, and whether obtaining the treaty rate was one of the principal reasons for the arrangement.
What do anti-abuse tests actually look for in a structure?
Two broad things, depending on which test the treaty carries. An eligibility test asks objective questions about the claimant: what kind of entity it is, who owns it, whether it carries on a real business. A purpose test asks why the arrangement was entered into, and denies the benefit where obtaining that benefit was a principal purpose, unless granting it would accord with the object of the treaty. The first can be answered from documents. The second has to be evidenced from the commercial history, which is why records made at the time matter far more than explanations offered later.
Does the treaty text I downloaded still say what it says?
Possibly not. The multilateral instrument modified many treaties at once, and the operative result is not always what a single published page shows. A rate or a condition you are relying on may have been overlaid by an anti-abuse provision that the underlying text does not mention. Before a position is taken, the text in force between those two particular countries has to be established as at the relevant date, including any modification. It is a routine step that gets skipped, and it is the step that decides which tests apply at all.
Can a genuine business still fail an anti-treaty-shopping test?
Yes, which is the uncomfortable part. A purpose test looks at the reasons for an arrangement, and a structure can be commercially real while the location of one entity within it was chosen for the treaty. A business that would have existed anyway does not automatically satisfy the test if the particular routing of the income would not. The useful protection is a record made at the time showing why each step was taken, because the test is applied years afterwards to decisions that nobody now remembers making.
Who decides whether the treaty rate applies, me or the payer?
In the first instance the payer, because the payer applies the rate and carries the consequence of getting it wrong. Payers are consequently cautious where an anti-abuse test is in play, and many will deduct at the domestic rate unless the file plainly supports the claim. Your own view of the structure is not what governs the deduction. Later, the authority in either country can examine the same claim on the same evidence, so the documentation given to the payer should be documentation you would be content to put in front of them.
What happens if the treaty benefit is denied after the money was paid?
The exposure usually lands on more than one party. The payer can be pursued for the tax it did not deduct, and will often have a contractual right to recover that amount from the recipient. The recipient loses the rate it planned around, and any onward arrangements priced on that rate are then wrong as well. Interest runs from the original payment date. That is why the test is worth answering before the first payment rather than in correspondence afterwards, by which point the choices have narrowed to negotiation and relief.
How do I report a foreign pension on a Canadian return?
Convert the gross pension to Canadian dollars, report it as foreign pension income, and claim the foreign tax withheld as a foreign tax credit — federal and provincial computed separately. If a treaty article exempts a portion, deduct that portion on the line provided for treaty-exempt income so the return shows both the receipt and the exemption. Keep the payer's annual statement and the foreign return, because the credit is only as good as the evidence of tax paid. See the foreign tax credit.
How much foreign income is tax-free in Canada?
None of it is tax-free for being foreign. A Canadian resident is taxed on worldwide income, so foreign salary, interest, dividends, rent and gains all go on the return, converted to Canadian dollars. What genuinely reduces the bill is the basic personal amount, the credit for foreign tax already paid, and any treaty article that exempts a specific type of income. The reporting thresholds people have in mind — the foreign property statement, for one — govern reporting, not exemption. See the foreign tax credit.
