Canada's New Tax Treaty with Israel Now in Force

Canada's New Tax Treaty with Israel Now in Force

The new Canada-Israel tax treaty entered into force on December 21, 2016.

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Among other provisions, the new treaty adds a "one of the main purposes" test as an anti-treaty shopping measure to the treaty articles on dividends, interest, royalties and capital gains. Regarding the taxation of capital gains, there is a "one-year holding period test" to determine whether shares or partnership and trust interests derive more than 50% of their value directly or indirectly from immovable property.

The treaty was first signed on September 21, 2016.

Withholding tax changes
Under the new treaty, withholding tax will generally be limited to

  • 15% for payments of dividends (or 5% for dividends paid to a company that holds directly (or indirectly) at least 25% of the capital of the company that paid the dividends) 
  • 10% for payments of interest and royalties.

Anti-treaty shopping measure
The purpose tests for interest, dividends and royalties deny the benefit of reduced withholding tax under the treaty where one of the main purposes of the creation or assignment of the shares, indebtedness or right to royalties is to access the reduced withholding tax. The treaty also includes a "one of the main purpose" test that relates to capital gains.

Entry into force
The treaty will have effect in Canada for tax withheld at source on amounts paid or credited to non-residents on or after January 1, 2017. For other taxes, the treaty will have effect for taxation years beginning on or after January 1, 2017.

For more information, contact your KPMG adviser.

Information is current to January 17, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

© 2017 KPMG LLP, a Canada limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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