Residency, filing deadlines, interest and penalties
17 What Are the Main Purposes of International Tax Treaties?
Jasmine Dhesi
What is a Tax Treaty?
A tax treaty is an agreement between two countries to settle tax issues such as double taxation and tax evasion. A tax treaty usually outlines the taxes that are to be paid and helps decide in which country a person is considered resident. Every tax treaty is different and it is important to familiarize yourself with the details of the specific treaty Canada has with the country you are interested in.
Issues Resolved by a Tax Treaty
Tax treaties may impact Canadians choosing to work, study, or invest abroad. Without a treaty, an individual could face ‘double-taxation’ on their earnings (i.e. taxation in two countries on the same source of income). If the country where the income is generated and the country of residence enter into a tax treaty, the two countries can decide how the income should be taxed to prevent the same income being taxed twice (or by providing a foreign tax credit on income taxed in a foreign country).
Entering a tax treaty also helps address tax evasion, which is the non-payment or underpayment of tax owed. Tax evasion can be done in ways such as declaring inaccurate income, hiding income, or claiming expenses and tax credits you are not entitled to. Tax evasion is considered a crime, and therefore you may be subject to other penalties by law.
Example:
| With tax treaty | If you are a Canadian resident and worked in the U.S. for part of the year, you may have to pay tax on that income in the U.S. and Canada; however, because of the tax treaty between the two countries you would receive a foreign tax credit for tax paid in the U.S., affectively eliminating double taxation |
| Without tax treaty | If you are a Canadian resident and worked in Costa Rica for part of the year, you may have to pay tax on that income in Costa Rica and Canada. In this situation because these two countries do not have a tax treaty, you will not get a foreign tax credit, and double taxation will not be eliminated. |
In addition to addressing the tax issues above tax treaties can also be used to deal with other issues between countries including things like withholding taxes, cross border trading etc.
In recent years, tax treaties have increasingly emphasized the automatic exchange of financial information between countries as a tool to combat tax evasion. Under the Common Reporting Standard (CRS), which Canada adopted in 2018, financial institutions in participating countries must report account information of foreign residents to their local tax authorities, who then share this data with the relevant countries. As of 2024, this system has expanded, enabling tax authorities, including the CRA, to access more detailed information on cross-border financial activities. This exchange allows for more effective enforcement and helps ensure taxpayers are accurately reporting foreign income. Non-compliance with foreign income reporting can lead to significant penalties in Canada.
Interactive Activity
Author Jasmine Dhesi (January 2019)
Author Hugo But (February 2020)
References and Resources:
September 2024
Feedback/Errata