The earliest the treaty is likely to be ratified by the Hong Kong legislature is 2013, meaning that its provisions could become effective by April 1, 2014 at the earliest. In the unlikely event that the Hong Kong legislature ratifies the treaty before December 31 this year, the treaty would become effective on April 1, 2013.
Previously, residents of Hong Kong investing or conduction in Canada were subject to Canadian corporate tax rates of up to 3 percent, a Canadian withholding tax of 25 percent on dividends, interest and royalties and Hong Kong corporate taxes of 16.5 percent.
In order to avoid paying double taxes, Hong Kong residents who wanted to invest in Canada were setting up their companies in countries that have signed double-tax avoidance treaties with Canada. After ratification, the tax treaty that Chan and Fast signed will allow Hong Kong residents to invest directly in Canada without incurring double taxation.
Once the treaty is implemented, business income earned by a Hong Kong resident in Canada will only be taxed in Canada, to the extent that such income is earned through a "permanent establishment" in Canada. A Hong Kong resident will generally have a permanent establishment in Canada if he, she or it has a physical business presence in Canada, such as an office, store or other location.
In addition, according to the terms of the treaty, the Canadian withholding tax payable by Hong Kong residents on interest and moralities will be reduced from 25 percent to 10 percent. The withholding tax payable by Hong Kong residents on Canadian dividends will be reduced from 25 percent to 5 percent if the receiver of the dividend holds a stake of at least 10 percent in the corporation paying out the dividend. If the receiver of the dividend holds less a stake of less than 10 percent in the corporation paying out the dividend, the withholding tax levied on them will be reduced from 25 percent to 15 percent.
The treaty also contains a provision on exchange of information that is aimed at preventing tax evasion, a provision stating that Hong Kong airlines' flights to Canada will be taxed at Hong Kong's corporation tax rate and not be taxed in Canada and a provision stating that profits from international shipping earned by Hong Kong residents in Canada will no longer be taxed.
Canada signed a similar double taxation avoidance and fiscal evasion prevention treaty with China in May 1986 that was updated in February this year, but that treaty does not cover Hong Kong.
