Israel – Canada Tax Treaty

Business Activity in Canada

Canada’s total GDP currently sits at around $2,371 billion, with an annualized growth of about 1.1 percent since 2019. Trade and commodity prices significantly contribute to Canada’s economic growth while real estate and manufacturing hold a large portion of the total GDP. Its leading exports include oil, gas, and automotive products with the United States being the primary export destination, followed by China, and Japan.

As a G7 nation, Canada is a leading global economy with strong trade connections, particularly through its membership in trade agreements like the United States-Mexico-Canada Agreement (USMCA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Canada’s free trade agreements (FTAs) play a big role in its economy, covering 61% of global GDP and giving access to 1.5 billion consumers. Key deals like the CPTPP have opened new markets in the Asia-Pacific region, boosting trade and economic growth. In 2021, Canada’s trade in goods and services hit a record $1.5 trillion, showing the strength and adaptability of its businesses in the global market.

The country has shown trends of increased prices in the real estate market due to lower interest rates and limited housing supply in some areas. As asking prices keep increasing, this can be a potential investment opportunity in the long run. With low interest rates, individuals can borrow more easily, increasing the demand for property.

Bilateral Agreements Between Canada and Israel

1. Double Taxation Agreement
2. Convention on Social Security
3. Canada – Israel Free Trade Agreement

Convention on the Prevention of Double Taxation

The agreement between the governments of Israel and Canada regarding the avoidance of double taxation was signed in 1975 and entered into force on January 1^st, 1976. An amended treaty was signed in 2016 and entered into force on December 31, 2016.

To read the agreement in English, click here.

Convention on Social Security

In 2003, Canada and Israel signed a convention on social security. The purpose of the convention is to regulate the social rights and obligations of individuals who relocate from Israel to Canada and vice versa.  The agreement does not include the province of Quebec.

To read the agreement in English click here.

Canada – Israel Free Trade Agreement

The Reciprocal Promotion and Protection of Investments (RPPI) was signed in 1997. The RPPI is an agreement between Israel and Canada that is designed to encourage and safeguard investments made by individuals and companies from each country in the territory of the other. These agreements typically include provisions related to non-discrimination, compensation for expropriation, dispute resolution, and the

To read the agreement in English click here.

Applicability of the MLI

Both Canada and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework.  Israel signed the MLI on the 7th of June 2017, with its provisions entering into force on the 1st of January 2019. Canada, too, affixed its signature to the MLI on the 7th of June 2017, and its provisions became effective as of the 1^st of December, 2019. 

Residency for Tax Purposes in Canada

Residence of an Individual

A person is considered a resident of Canada when he/she has significant, continuous associations with the nation, (a residence, a spouse, or dependents in Canada). Factors such as social/business relationships and personal possessions (memberships, driver’s licenses, or health insurance) are also taken into account.

Someone who lives in Canada for a period longer than 183 days during a year will be considered by Canadian tax law to be a resident for tax purposes for the entirety of that year, regardless of their typical residence.

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

A corporation is considered a Canadian resident for tax purposes if it is incorporated in Canada or if its central management and control are exercised in Canada.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Canada

The Canadian tax authority is called The Canada Revenue Agency (CRA).

Income Taxation: Federal Level: 15% – 33%; Provincial level: Income Tax Rates vary based on province

Taxation of Companies: Federal Level: 38%; Combined federal and provincial rate: 23% – 31%.

VAT: 5% – 15%

Capital Gains Tax: 50%

Withholding Tax

Inheritance Tax and Estate Tax in Canada

NA

Relocation to Canada

There are some tax benefits of moving to Canada called the “welcome to Canada” package. The benefits include, among others, a rebate on sales tax, a Canada child benefit, a Canada Carbon Rebate, and more for newcomers, the “90% rule” lowers the amount of tax that needs to be paid. If 90% of one’s income is from Canadian sources for the part of the year, they weren’t a resident of Canada, they can claim a federal non-refundable tax credit.

Relocation to Canada offers many other benefits as well such as free health care, world-class education, high quality of life, job opportunities, etc. Canada ranks in the top 15 happiest countries to live in. Canada is also one of the easiest countries to conduct business in as it has ranked in the top 3 of the G20 countries under this category.

Currently, Canada has the fourth largest Jewish community in the world, behind Israel, the United States, and France, with approximately 335,000 people.

Real Estate Taxation in Canada

In Canada, property tax is levied both at the federal and provincial levels. At the federal level, the tax is one percent of the taxable value of the property, taking into account the ownership percentage, and is paid annually. There are several exemptions from this tax, including residential property owned by a Canadian citizen or a corporation incorporated in Canada and more. At the provincial level, the tax rate varies among the provinces.

The property transfer tax, which is paid by the buyer upon purchase, generally ranges from 0.02% – to 3% depending on the value of the consideration.

Transfer of Funds from Israel to Canada

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met.  Our firm handles withholding tax matters with the Israeli Tax Authority.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax. 

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more. 

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us. 

For more information on money transfers abroad, click here. 

Types of Business Entities in Canada

The five most common types of business entities in Canada are sole proprietorships, corporations, and partnerships.

1. Sole proprietorships – this type of business entity is the most common way to start a business in Canada. In a sole proprietorship, there is an individual that owns the entity, the owner receives all the profits directly but also has unlimited liability. The income is taxed at the owner’s rate.
2. Corporations – corporations are legal entities that can own assets and take on debt independently of their owners. In this entity type, the owner’s liability is limited. Note that the cost of setting up a corporation is higher than that of any other business entity.
3. Partnerships – partnerships include two or more parties that choose to operate one business and share the profits and liabilities. Similarly to sole proprietorships, partnerships are also easy to form. The partnership itself doesn’t pay income taxes or file income tax returns, but rather each partner includes a part of the income or loss of the partnership in their income tax returns. There are a few types of partnerships, including limited partnerships and general partnerships. In a limited partnership, there are panthers with limited liability and also partners with unlimited liability. In contrast, in a general partnership, all partners have unlimited liability.
4. Cooperative (Co-op): A member-owned and democratically controlled business where profits are distributed among members. Cooperatives operate under specific legal frameworks and are governed by their members.
5. Joint Venture: A business arrangement where two or more parties agree to pool resources for a specific project or purpose. Each party maintains its own legal status and shares profits, losses, and responsibilities based on the terms of the joint venture agreement.

Incentive Laws in Canada

Canada provides a variety of tax incentives to support businesses and encourage investment in key sectors and regions. Foreign tax credits are available for Canadian residents with foreign income, allowing them to offset taxes paid to foreign governments against their Canadian taxes. These credits apply to business and non-business income separately on a country-by-country basis. Provinces also provide foreign tax credits but focus on non-business income taxes. Excess business income tax credits can be carried back three years or forward ten, while non-business credits cannot be carried over.

In specific regions like the Atlantic provinces, the Gaspé region, and the Atlantic offshore area, businesses benefit from a 10% federal investment tax credit (ITC) for capital investments in sectors like manufacturing, farming, and fishing. This ITC can reduce federal taxes for up to 20 years or be partially refunded for Canadian-controlled private corporations (CCPCs). Additional regional incentives include tax holidays for corporations in industries such as intellectual property in Quebec and aviation technology in Prince Edward Island.

Canada also encourages innovation and sustainability through industry-specific incentives. For example, the Scientific Research and Experimental Development (SR&ED) credit provides a 15% federal ITC for eligible research expenses, while CCPCs can claim a 35% refundable credit on qualifying expenditures. Environmental initiatives are supported with ITCs for clean technology, hydrogen production, and carbon capture projects, often ranging from 15% to 60% of eligible investments. These incentives aim to boost economic growth, encourage sustainable practices, and foster advancements in industries like energy, technology, and manufacturing.

Canada Double Tax Treaties