8.2.1 Taxation of Income From Transportation under Canadian Domestic Law

A Canadian resident is subject to tax on its income from worldwide sources, including income from international transportation of goods and passengers.

If a non-resident is engaged in a transportation business in Canada, receives rents for the use in Canada of transportation or other equipment, or disposes of such equipment and other assets used in carrying on business in Canada, the non-resident may be liable to Canadian income tax in respect of taxable income earned in Canada.

8.2.1[a] Taxation of International Shipping Companies under Canadian Law

A non-resident’s income earned in Canada from the operation of a ship or aircraft in international traffic is not subject to tax in Canada, provided that the State where the non-resident is resident grants substantially similar relief to Canadian residents.

The international shipping company regime exempts from Canadian taxation the income earned by a non-resident in the course of operating a ship or aircraft in Canada, other than income earned for the transportation of goods or passengers between two points in Canada.

The international shipping company exemption applies only if the State where a non-resident has its tax residence grants substantially similar relief for the year to Canadian residents.

For the purpose of the international shipping company exemption, the major issue is whether income earned by a non-resident is “from the operation of ship or aircraft” in international traffic.

Certain income earned in the course of international transportation may not constitute income from the operation of a ship or aircraft.

The income from a bare-boat charter constitutes rental or royalty income for the use of property and, when sourced in Canada, is dealt with under part XIII of the act.

Income from the operation of a ship or aircraft does not include capital gains from the disposition of a ship or aircraft, even when used in international traffic. However, such gains realized by a non-resident international shipping company may only be subject to tax in Canada where a particular ship or aircraft was a taxable Canadian property because it was used in carrying on business in Canada by a non-resident.

Income from international transportation earned from a non-resident’s carrying on business in Canada will be subject to regular rules dealing with a non-resident’s taxable income earned in Canada.

The transportation of goods or passengers between two points in Canada would generally be subject to tax in Canada, provided that such activities constitute carrying on business in Canada.

Where a non-resident receives income both from exempt international traffic and from other cross-border or inland transportation, the non-resident will have to allocate its income between these two sources in accordance with allocation principles in the Act.

8.2.1[b] Rents and Royalties Received in the Course of International Transportation Business

Generally, the rents or royalties paid by a Canadian resident to non-resident for the use of property in Canada, including ships, trucks, or other personal property used in the course of transportation business in Canada, will be subject to a 25 per cent withholding tax under Part XIII of the Act.

The Act also provides a broad withholding tax exemption for the rents and royalties paid to an arm’s length non-resident for the use of aircraft, certain personal property attached to aircraft and spare parts, as well as certain navigation equipment and software. The exemption applies regardless of whether an aircraft is operated in international traffic or solely in Canada.

The withholding tax exemption does not apply to the payments for the use of a ship or other transportation equipment in Canada.

8.2.1 [c] Disposition of Transportation Equipment and Other Assets

A capital gain from the disposition of a ship, aircraft, motor vehicles or other personal property used by a non-resident in the course of international transportation may not be subject to tax in Canada unless particular transportation property was “taxable Canadian property”.

As a general rule the disposition by a non-resident of any property used or held by the non-resident in the course of international transportation in Canada, such as railroad cars, motor vehicles or containers, may result in a capital gain subject to income tax in Canada.

A disposition of taxable Canadian property by a non-resident may attract certain reporting and withholding tax requirements which will have to be complied with by a purchaser, including a non-resident purchaser, and a seller.

The Act provides an exemption for the ships and aircraft used principally in international traffic and personal property pertaining to the operation of such ships or aircraft and deems such properties not to be “taxable Canadian property”, provided that the State in which the non-resident is resident grants substantially similar relief for the year to a person resident in Canada.

References:

Advisor’s Guide to Canada – U.S. Tax Treaty

By:  Vitaly Timokhov, Raymond Montero, David Kerzner

Published by: Thomson Carswell

Tags: International tax, Canada U.S. Tax treaty, Income from real property, treaty articles, Canadian domestic law, rental income, royalty income, business income, source based taxation, taxation of investments, partnership taxation issues, finance of real property, capital gains.