Canada and Japan have a long-standing trade relationship, with Japan being one of Canada`s largest export markets. In an effort to further strengthen this relationship, the two countries signed a tax agreement in 1986, which aimed to eliminate double taxation and prevent tax evasion.
The agreement covers a range of taxes, including income tax, corporation tax, and capital gains tax. Under the agreement, taxpayers who earn income in one country and are resident in the other are entitled to claim a tax credit for any taxes paid in the source country. This is intended to avoid the situation where the same income is taxed twice, once in each country.
One of the key provisions of the agreement is the reduction of withholding tax on dividends, interest, and royalties. Withholding tax is a tax levied on income paid to non-residents, and the amount withheld is usually a percentage of the gross payment. Under the Canada-Japan tax agreement, withholding tax rates are reduced or eliminated, depending on the type of income and the recipient`s country of residence.
For example, the withholding tax rate on dividends paid by a Canadian company to a Japanese resident is reduced from 25% to 10%, provided the Japanese resident owns at least 10% of the voting shares of the Canadian company. Similarly, the withholding tax rate on interest paid by a Canadian resident to a Japanese resident is reduced from 25% to 10%, and there is no withholding tax on royalties paid between the two countries.
The tax agreement also includes provisions to prevent tax evasion. For example, the agreement allows for the exchange of information between the tax authorities of the two countries, which helps to identify cases of non-compliance and tax fraud. The agreement also includes a provision for mutual agreement procedures, which enables the two countries to resolve any disputes that arise from the interpretation or application of the agreement.
Overall, the Canada-Japan tax agreement is an important element of the trade relationship between the two countries. By providing a framework for the fair and efficient taxation of cross-border transactions, the agreement helps to promote economic growth and investment. As trade between Canada and Japan continues to grow, the importance of the tax agreement will only increase.