Hong Kong - Canada Tax Treaty in Force 

publication 

October 2013

Tax Bulletin

The income tax treaty between Hong Kong and Canada (the "Treaty") first signed on November 11, 2012 has now been formally ratified and is in force as of October 29, 2013.

The Treaty will apply (i) for most Canadian purposes, for amounts paid or taxation years beginning on or after January 1, 2014, and (ii) for Hong Kong purposes, for any year of assessment beginning on or after April 1, 2014. Broadly speaking, the Treaty will encourage cross-border business and investment, allow businesses and investors to better determine their cross-border tax profile, and provide protection against tax discrimination and potential double taxation.

For Canadian companies, benefits of the Treaty will include the ability to repatriate after-tax active business profits from Hong Kong to Canada as "exempt surplus" free of Canadian tax.

For residents of Hong Kong, benefits of the Treaty will include: 

  • A Treaty-reduced withholding tax rate of only 5% for cross-border dividends paid by a Canadian-resident corporation, if the Hong Kong dividend recipient is a company that controls at least 10% of the votes of the dividend payer (otherwise the dividend will normally be subject to a 15% Treaty rate of withholding)

  • Treaty-reduced withholding tax rates for interest payments (a Treaty withholding rate of 10% will generally apply in circumstances where the payment does not otherwise qualify for Canada's 0% withholding rate on interest paid to arm's length parties), and for royalty payments (10%)

  • Residency tie-breaker rules that may help international business principals who have family or business connections in both Canada and Hong Kong

The Treaty rate of 5% on cross-border dividends compares favourably to other tax treaties (the corresponding rate under Canada's tax treaty with China is 10%, for example), and can be beneficial for Chinese investment in Canada through a Hong Kong company, or for Canadian outbound investment through a Hong Kong company. The use of a Hong Kong company as an intermediary is intuitive given Hong Kong's position as a financial gateway and the potential tax advantages, but the Hong Kong company must have sufficient substance, and the potential application of anti-avoidance principles mandates obtaining professional advice in advance.

With its Hong Kong office, McMillan LLP is well-positioned as a gateway for Hong Kong and Chinese companies looking to access the North American markets, and for Canadian companies looking to access Hong Kong and China. Our tax team has the depth and experience to help you achieve your goals. 

by Peter Botz, Christine Man, Michael Friedman and Stephen D. Wortley

about McMillan LLP

McMillan is a leading Canadian business law firm committed to client service and professional excellence for over 100 years. With recognized expertise and acknowledged leadership in major business sectors, McMillan provides definitive Canadian legal advice to businesses, financial institutions, governments and private individuals in Canada, the United States and internationally. The firm has offices in Vancouver, Calgary, Toronto, Ottawa, Montréal and Hong Kong. McMillan stands as a truly modern and ambitious law firm with a broad range of expertise offering effective, innovative solutions to Canadian and international clients.

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2013