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Tax treaties and Limitation on Relief clause

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WorldCitizen99

Mentor Group Gold Premium
Feb 12, 2022
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Mexico
#1
I have been working on a way of stripping the assets inside my Cdn corp at the lowest tax rate possible (and in a timely fashion. I don't want to wait 10 yrs to do it either), and then declaring non-residency from Canada.
The best solution so far seems to be to contribute the corporate cash to a pension plan, which shelters it from the departure tax, and then receive periodic pension payments at lower WHT rates using a tax treaty. The default WHT rate is 25% but one can often get 15% with a treaty country.

If you are resident in a country that Canada has a tax treaty with, and if your pension payments are periodic and not lump sum, most of the time you will pay 15% withholding tax to Canada before they send the payment overseas. Payments to UK is the only instance where WHT is 0% (but you will pay dearly when the money is remitted to the UK). For popular retirement destinations like Thailand and Philippines, it is 25%.

I was hoping that if you were a non-dom UK tax resident, and didn't remit your pension income to the UK, that you would have a tax-free situation.
However.....

So far in all of the Cdn tax treaties I've read, there is a paragraph called Limitation of Relief (usu Article 22), or Article 27 (2) in the UK treaty, saying to the effect that Canada will only provide the treaty rate of 15% (or 0%) for income that is remitted to the other country. For income that is not remitted, I conclude that you would pay the default 25% WHT rate.

So while the 0% WHT rate for Uk tax residents looks really juicy, I believe you would actually pay 25% WHT on the Canadian end for unremitted income and local UK rates of 45% (for the bracket I'm interested in) on remitted income....terrible rates.

So using the following principles, I'm looking for a way to make the total tax rate 15% max:
A)pick a treaty country (otherwise u automatically pay 25% WHT)
B)Make sure the treaty rate is 15%
C)make sure the country you will become tax resident in taxes pensions at less than 15% AND gives full tax credits for tax paid to Canada
This seems to be the only way you will achieve a 15% rate. You want to remit all of the income otherwise you will pay 25%
D)make sure the country has a good tax regime for non-pension income also, i.e. investment income

So far the countries that seem to fit these req's are Cyprus and Bulgaria.
Cyprus residents pay 0 or 5% on foreign pensions. You don't run into trouble with non-dom remittance schemes bc the baseline tax rate is low, unlike with the UK or Ireland where the Limitation of Relief clause seems to cancel eligibility for treaty benefits. Bulgarian residents will pay 10% and credit foreign tax paid to Canada.

Along the same lines, if you set up a 1 or 2 year 'term certain' annuity, you will pay a treaty rate of 10% in Bulgaria, Croatia, Latvia, Lithuania, Estonia, Hungary, Slovenia and UK. I have very little experience with annuities but if you made a 1-yr term (and it wasn't too expensive to set up), then you could get your money out at 10% if you went to Bulgaria.

I left UAE out bc apparently their tax treaty is extremely difficult to apply for Cdns.

Any thoughts from the more experienced members here?
 
#3
CyprusLawyer101 said:
How would distribution of assets upon liquidation be treated ?
Click to expand...
The assets are already in cash or easily-convertible to cash. They would be put into a special type of retirement fund that serves as a pension plan. Is that what you meant?

Since you are an authority on Cyprus, would you be able to confirm if the 5% income tax you would normally pay (for foreign pension payment above 3460 Euros) would be fully credited by Cyprus bc 15% had already been paid to Canada?
 
#4
WorldCitizen99 said:
The assets are already in cash or easily-convertible to cash. They would be put into a special type of retirement fund that serves as a pension plan. Is that what you meant?

Since you are an authority on Cyprus, would you be able to confirm if the 5% income tax you would normally pay (for foreign pension payment above 3460 Euros) would be fully credited by Cyprus bc 15% had already been paid to Canada?
Click to expand...
Yes , eitherway cash or assets? Are they being taxed upon liquidation and distribution?

The credit on pension income you are suggesting, is it a unilateral credit or its through a treaty ?
 
#5
If there was a capital gain upon liquidation, that would be taxable
The placing of funds into the pension plan is a non-taxable event

Re: the credit - I am reading that in a tax summary sheet from one of the Big 4 accounting firms -
https://www2.deloitte.com/content/d...uments/Tax/dttl-tax-cyprushighlights-2023.pdfPage 4 under Foreign Tax Relief - it says unilateral credit

Going through the tax treaty, I'm not sure if it is included in that

CyprusLawyer101 said:
Yes , eitherway cash or assets? Are they being taxed upon liquidation and distribution?

The credit on pension income you are suggesting, is it a unilateral credit or its through a treaty ?
Click to expand...
OK not sure if you mean liquidation of the assets in order to make them into cash that is then placed in the pension, or liquidation of assets in the pension fund investment account (which are not taxable - they accrue tax-free and are only taxable upon distribution via a pension payment)
 
#6
WorldCitizen99 said:
If there was a capital gain upon liquidation, that would be taxable
The placing of funds into the pension plan is a non-taxable event

Re: the credit - I am reading that in a tax summary sheet from one of the Big 4 accounting firms -
https://www2.deloitte.com/content/d...uments/Tax/dttl-tax-cyprushighlights-2023.pdfPage 4 under Foreign Tax Relief - it says unilateral credit

Going through the tax treaty, I'm not sure if it is included in that


OK not sure if you mean liquidation of the assets in order to make them into cash that is then placed in the pension, or liquidation of assets in the pension fund investment account (which are not taxable - they accrue tax-free and are only taxable upon distribution via a pension payment)
Click to expand...
I fail to see what you are saying in the document you have provided.
In the Treaty, taxing rights are granted to the State of residence of the individual.

You mention 15% tax in Canada. Do you mean this tax is applied to pension income?
 
#7
The pension is set up in Canada and let's say for this example I became tax resident in Cyprus and I was receiving the equivalent of a 10.000 Euro periodic pension payment
Canada would withhold 15% from the payment - so 8.500 would be remitted to Cyprus
My understanding is that Cyprus would tax it as foreign pension income at 5% but because I had already paid 15% tax on it in Canada, Cyprus would credit me the 5% so my tax liability in Cyprus would be nil.
Is that correct?

CyprusLawyer101 said:
I fail to see what you are saying in the document you have provided.
In the Treaty, taxing rights are granted to the State of residence of the individual.

You mention 15% tax in Canada. Do you mean this tax is applied to pension income?
Click to expand...
In reviewing the treaty it says in Article 18:

Pensions arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such pensions may also be taxed in the first-mentioned Contracting State but only to the extent that the total amount thereof paid in any taxation year to a resident of the other Contracting State exceeds ten thousand Canadian dollars ($10,000) or its equivalent in Cyprus pounds. However, in the case of periodic pension payments, the tax so charged shall not exceed the lesser of
  1. 15 per cent of the gross amount of the payment,
Doesn't that imply that it can be taxed in Canada first (as withholding tax according to the treaty rate of 15%) and then taxed again by Cyrpus once it is remitted to Cyprus?
 
#8
WorldCitizen99 said:
The pension is set up in Canada and let's say for this example I became tax resident in Cyprus and I was receiving the equivalent of a 10.000 Euro periodic pension payment
Canada would withhold 15% from the payment - so 8.500 would be remitted to Cyprus
My understanding is that Cyprus would tax it as foreign pension income at 5% but because I had already paid 15% tax on it in Canada, Cyprus would credit me the 5% so my tax liability in Cyprus would be nil.
Is that correct?


In reviewing the treaty it says in Article 18:

Pensions arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such pensions may also be taxed in the first-mentioned Contracting State but only to the extent that the total amount thereof paid in any taxation year to a resident of the other Contracting State exceeds ten thousand Canadian dollars ($10,000) or its equivalent in Cyprus pounds. However, in the case of periodic pension payments, the tax so charged shall not exceed the lesser of
  1. 15 per cent of the gross amount of the payment,
Doesn't that imply that it can be taxed in Canada first (as withholding tax according to the treaty rate of 15%) and then taxed again by Cyrpus once it is remitted to Cyprus?
Click to expand...
It does imply that it can, but not necessarily that it does. You should examine your local rules.
 
#9
Haha OK I have a meeting with my accountant in a few weeks so I'll verify but I'm thinking there is no chance in hell that the Canadian tax authorities wouldn't extract the maximum amount of tax dollars that they're entitled to.
 
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