Capital Gains and Assets in India - Canada Income Tax Convention -

QUESTION:

Hello,

I was born in India and acquired Canadian citizenship in 2007 after I married a Canadian citizen. I have recently taken up a job here. 

I possess some investments in form of land and stocks in public listed companies in India. I know that there is a treaty between India and Canada to avoid double taxation however I had a few points that needed clarification:

1.        How will capital gains earned in India be viewed by Income tax authorities in Canada? For instance, one may hold equity shares in a public listed company in India that one might sell but NOT pay any tax in India since they were long-term investments and therefore qualify for exemption under long-term capital gains here in India. However I am not sure how they will be treated in Canada. How will Canadian tax authorities view long-term capital gains from sale of shares in a public listed company in India?
 
2.        In my filing of income tax returns in Canada, will I need to declare my assets in India?
 
3.        How are gifts (of cash or assets) TO AND FROM BLOOD RELATIVES IN INDIA viewed by Canada Tax authorities? In India, such gifts between blood relatives are exempt from tax.
 
4.        How will any other form of income in India be taxed such as rentals from owned buildings, earnings from other investments like trading in land? I am trying to obtain a a broad overview of what I need to be aware of so I do not run into any trouble later.
 
Thanks,
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david ingram replies:

As a resident of Canada, you are taxable in Canada by Canada on any income you earn anywhere in the world.

Every asset you own in India should be valued as of the date you moved to Canada.  Since you are already a citizen, I am assuming that you moved here at least 3 years ago.  If you were mistaken about your citizenship and meant to say that you acquired PR (permanent residency) status when you married, then the date would be later.

1.   Any income in value on your Indian assets will be taxed on their sale on the difference in their value from the date you moved to Canada.  If you paid 30,000 rupees and it was worth 100,000 when you moved to Canada and you sell it later for 120,000 rupees, it may or may not be taxable because you have to convert the value of the 100,000 rupees when you came to Canadian Dollars and then convert the 120,000 when you sell  to Canadian Currency and if the value of the rupee had fallen  30% relative to the Canadian  dollar in that time, you would actually have a capital loss in Canada.  This  is what has happened to everyone with US dollar holdings from 2003 to 2008.

2.    If you have over $100,000  (at cost)  of Indian  assets in stock or land, you will have to fill in Canadian form T1135 to report the existence of the assets and any income.  Failure to file the form is penalized at $25.00 a day.

3.   If some stranger or a relative wants to give you money as a gift and no services were given or expected, the gift is tax free as far as Canada is concerned.

4.   interest, dividends, rents, agriculture and wages are all treated differently under the treaty and the tax act.

Some of the items are reproduced below - you can find the whole treaty (and should read it a dozen times) at

http://www.treaty-accord.gc.ca/ViewTreaty.asp?Treaty_ID=102409#top_of_page

ARTICLE 6

Income from Immovable Property

1.        Income from immovable property (including income from agriculture or forestry) may be taxed in the Contracting State in which such property is situated.

2.        For the purposes of this Agreement, the term “immovable property” shall be defined in accordance with the law and usage of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as immovable property.

3.        The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property.

4.        The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.

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ARTICLE 7

Business Profits

1.       The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to:

(a)      that permanent establishment, and;

(b)      sales of goods and merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected, through that permanent establishment.

2.       Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case, where the correct amount of profits attributed to a permanent establishment is incapable of determination or the ascertainment thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis provided that the result shall be in accordance with the principles laid down in this Article.
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ARTICLE 10

Dividends

1.        Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2.        However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed:

(a)      15 per cent of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends;

(b)      25 per cent of the gross amount of the dividends in all other cases.

3.        The provisions of paragraphs 1 and 2 shall not affect the taxation of the company on the profits out of which the dividends are paid.

4.        The term “dividends” as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company melding the distribution is a resident.

5.        The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

6.        Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

 

ARTICLE 11

Interest

1.        Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2.        However, such interest may also be taxed in the Contracting State in which it arises and according to the law of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 15 per cent of the gross amount of the interest.

3.        Notwithstanding the provisions of paragraph 2,

(a)      interest arising in a Contracting State and paid to a resident of the other Contracting State shall be exempt from tax in the first-mentioned State if:

(i)       the payer of the interest is the Government of that Contracting State or of a political subdivision or local authority thereof;

(ii)      the beneficial owner of the interest is the central bank of the other Contracting State; or

(iii)     the interest is paid to an agency or instrumentality (including a financial institution) which may be agreed upon in letters exchanged between the competent authorities of the Contracting States.

(b)      (i)      interest arising in India and paid to a resident of Canada shall be taxable only in Canada if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Export Development Corporation; or

           (ii)     interest arising in Canada and paid to a resident of India shall be taxable only in India if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Export-Import Bank of India (Exim Bank).

4.       The term “interest” as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises. However, the term “interest” does not include income dealt with in Article 8 or in Article 10.

5.       The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

6.        Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

7.        Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement.

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ARTICLE 13

Capital Gains

1.        Gains from the alienation of ships or aircraft operated in international traffic by an enterprise of a Contracting State and movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State.

2.        Gains from the alienation of any property, other than those referred to in paragraph 1 may be taxed in both Contracting States.