Canada: New Tax Convention Signed Between Canada And The State Of Israel


On September 21, 2016, a new income tax convention between the Government of Canada and the Government of the State of Israel (the "New Convention") was signed. The changes are intended to provide for greater access to capital and support Israeli and Canadian investments. The changes resemble recommendations made by the Organization for Economic Co-operation and Development ("OECD") in its 2014 Model Tax Convention.

Changes to Withholding Tax Rates



The withholding rates on cross-border dividends have been changed as follows:

  • a reduction from 15% to 5% for dividends paid to a company that is the beneficial owner of the dividends and holds directly or indirectly at least 25% of the capital of the company paying the dividends; and
  • the current withholding rate of 15% continues to apply for dividends paid in any other case.


The following dividend payments are exempt from withholding tax under the New Convention:

  • Pension Plans: Dividends paid to an organization that was constituted and is operating exclusively to administer or provide benefits under a pension plan. This exemption only applies if:
    • the organization is the beneficial owner of the shares on which the dividends are paid, holds those shares as an investment and is either generally exempt from tax in the other Sate or its income is not subject to tax in the other State;
    • the organization does not hold directly or indirectly more than 10% of the capital or 10% of the voting power of the company paying the dividends; and
    • each recognized pension plan provides benefits primarily to individuals who are resident in the other State.
  • Dividends to Israeli/Canadian Government or Central Bank: Dividends paid to a resident who is the Israeli or Canadian Government, any political subdivision or local authority thereof, or the Central Bank of Israel or Canada. This exemption only applies if the resident is the beneficial owner of the dividends and does not hold directly or indirectly more than 25% of the capital or 25% of the voting power of the company paying the dividends.

Branch Profits Tax

The maximum branch profits tax under the New Convention that can be imposed on a company resident in one country but operating through a Permanent Establishment of the other country (e.g. the withholding rate imposed by Canada on an Israeli company operating in Canada through a Permanent Establishment) has also been reduced to 5% (from 15%). The branch profits tax is treated similar to a dividend paid by a subsidiary to its parent company.

Real Estate Investment Fund (REIT) Distributions

The New Convention imposes a maximum withholding of 15% on gross distributions made by REITs resident in Israel to a Canadian resident. This maximum withholding only applies when the beneficial owner of the distributions is a resident of Canada and directly holds less than 10% of the capital of the REIT.

For greater certainty, the New Convention also states that this maximum withholding does not affect the taxation of the REIT in respect of the profits out of which the distributions are made.



The withholding rates on cross-border interest have been changed as follows:

  • a reduction from 15% to 10% if the beneficial owner of the interest is a resident of Israel or Canada; and
  • 5% for payments of interest where the beneficial owner of the interest is a financial institution that is dealing at arm's length with the payer. This 5% rate is only relevant to interest payments received from an Israeli borrower, since there is currently no withholding tax imposed under the Income Tax Act (Canada) on interest paid by a Canadian borrower to an arm's length lender.


Interest that arises under the following circumstances is exempt from withholding tax under the New Convention:

  • Pension Plans: Interest paid to an organization that was constituted and is operating exclusively to administer or provide benefits under a pension plan. This exemption applies subject to circumstances similar to those outlined above for withholding tax on dividend payments made to organizations administering pension plans.
  • Interest Beneficially Owned by Israeli/Canadian Government or Central Bank: Interest arising in Israel or Canada that is beneficially owned by a resident who is the Israeli or Canadian Government, any political subdivision or local authority thereof, or the Central Bank of Israel or Canada.
  • Interest Paid on Loans to Israeli/Canadian Government or Central Bank: Interest arising in Israel or Canada, and paid by the Israeli or Canadian Government, any political subdivision or local authority thereof, or the Central Bank of Israel or Canada in respect of indebtedness, if the interest is beneficially owned by a resident of the other State.



The withholding tax rate on royalties has been reduced from 15% to 10% if the beneficial owner of the royalties is a resident of Canada or Israel.


The following royalty payments are now exempt from withholding tax if the recipient is a resident of Israel or Canada and is the beneficial owner of the royalties:

  • royalties for the use of or the right to use, computer software, patents or for information concerning industrial, commercial or scientific experience (not including any such royalties provided in connection with a rental or franchise agreement).

Anti-Avoidance Rules Applicable to Withholding Rates

The New Convention contains various anti-avoidance provisions which could limit the treaty relief that is available. Specific anti-avoidance rules related to withholding on dividends, interest and royalties have been added to the New Convention. These provisions result in residents of Israel or Canada losing entitlement to treaty relief when transactions and relationships are designed with the intent of exploiting treaty withholding benefits as a main purpose.

Investments in Real Estate: Avoidance of Canadian Capital Gains Taxation

Israeli residents can no longer avoid Canadian capital gains taxation on the sale of shares of a corporation where the corporation holds Canadian real property indirectly through a subsidiary. Under the current rules, gains on the disposition of shares of a corporation are taxed where the property of that corporation was held as a direct investment in real property situated in Canada. The top tier corporation would not have been subject to Canadian taxation if the top tier corporation only held shares of a subsidiary corporation, even though the value of the subsidiary corporation was principally derived from Canadian real property. The New Convention will now tax gains from the disposition of shares where the shares derive more than 50 % of their value directly or indirectly from property situated in Canada during the specified time period.

Income From Employment: "Remuneration" Now Includes Stock Options

For the purposes of calculating income from employment under the New Convention, the meaning of "remuneration" has also been clarified to include stock-option benefits. The changes signify the intention of both States to clarify this point, and remove any ambiguity that stock option benefits would be included in the calculation of employment income taxed under the New Convention.


The New Convention has been drafted with a view to protecting both contracting states' tax base. It includes a more stringent corporate residency test in cases where the company is incorporated in one jurisdiction but has so called effective management in the other jurisdiction. This test will require Canadian and Israeli Competent Authorities to decide the residency of corporations and trusts through a mutual agreement. In the absence of such mutual agreement, that resident is not able to claim treaty relief.

Professional Services

The entire "Professional Services" Article that exists in the current Convention has been removed in the New Convention. Instead of this Article, the definition of "business" under the New Convention has been changed to include professional services. As a result, the profits of a professional services business are now subject to Article 7 — "Business Profits". This means such profits are only taxable in the country the professional services business is resident in, unless that business carries on business in the other country through a Permanent Establishment.

Permanent Establishments

As noted, a business enterprise that is resident in one country (e.g. Israel) will only be taxable in the other country (e.g. Canada) if that enterprise maintains a Permanent Establishment in the other Country. The following changes to the definition of a "Permanent Establishment" under the New Convention are made:

  • Construction Projects: Construction, building, or installation sites no longer constitute a Permanent Establishment if they last 12 months or less. Previously, a Permanent Establishment would exist if it continued for more than 6 months. As well, this article now provides relief if the project is classified as an "installation project"; and
  • Oil and Gas: While the prior definition included any places of natural resource extraction, the New Convention has been changed to specifically include an oil or gas well to the definition of a Permanent Establishment.

Information Exchange

The information exchange provisions of the New Convention have also been tightened to allow for more transparency. The provisions reflect the standard developed by the OECD for the exchange of information.

Coming Into Force: You Still Have Time

The New Convention is not currently in force, and requires that both Canada and Israel notify each other that the proper procedures required by their laws have been completed. Once the notification is made, source withholdings under the New Convention will become applicable to amounts paid or credited on or after the 1st day of January of the calendar year following the year in which the New Convention enters into force. For all other taxes, the New Convention becomes applicable on the first taxation year beginning on or after January 1st of the calendar year following the year in which the New Convention enters into force. When the New Convention comes into force, it will replace the current Convention that was signed in 1975. Israeli residents looking to implement transactions using the current Convention (such as the avoidance of real estate gains under the provisions of the current Convention) should do so prior to the coming into effect of the New Convention.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.