Dolar and Euro bills - The Italy-Canada Tax Treaty

The Italy-Canada Tax Treaty

The United States has income tax treaties with many foreign countries. The purpose of these treaties is the avoidance of double taxation with respect to taxes on income and preventing fiscal evasion. The Convention between Canada and Italy was signed in Ottawa on June 3, 2002. It entered into force in Italy with Law no. 42 in 2011. The Convention applies to everyone who is a resident in either of the Contracting States as well as to those taxes that are imposed on them by each Contracting State (referring either to Italy or Canada here); for example, an Italian citizen living and resident in Canada will pay taxes to Canada and not to Italy, and vice versa for a Canadian citizen living and resident in Italy. That said, if you happen to be a Canadian citizen living in Italy and earn incomes that come from both Canada and Italy then you will be taxed by both countries for the income earned in each country, respectively.

Bilateral Relations between Italy and Canada

Canada and Italy share the same view on important global and regional issues. They work closely across a range of multilateral institutions, including (but not limited to) the United Nations, NATO, the G7 and G20. Outside of those institutions, there are a lot of important business and science and technology delegations that exist between Canada and Italy. These have given momentum to innovative and helpful commercial opportunities which led to further and continued partnerships.

In recent years, both Canada and Italy have adopted new tools or have amended their existing ones in order to promote enhanced bilateral contacts, meaning, facilitating travel, business and official relations between their respective governments. These bilateral treaties deal with many different issues, from double taxation to airworthiness (relating to aircraft design and safety) as well as judicial cooperation. All bilateral treaties between Canada and Italy can easily be viewed online.

A new convention on double taxation entered into force in 2011. It is also retroactive, meaning that its provisions replace the previous ones. In 2017, Canada and Italy signed an agreement to recognize drivers’ licenses in both countries, making it easier for expats to adjust to life in either country.

The 1979 social security agreement (SSA) between Canada and Italy was revised in 2017; it helps residents who have lived or worked in Canada and/or Italy to qualify for pension benefits based on their relation to each country’s pension system, and we will look at this a little more later on. For example, an Italian citizen who has moved to and worked in Canada would be eligible to draw from Canadian Social Security. Similarly, a Canadian who has worked his life in Canada but decides to retire to Italy would be able to convert his pension from Canada to Italy, facilitating ease of access and currency exchange. The Agreement also allows for continuity of social security coverage if a person is sent by their employer to work temporarily in another country.

Foreign Tax Relief in Italy and Canada

Both Canada and Italy have negotiated international tax treaties with many countries to prevent double taxation. Individuals, under the Income Tax Act, are legally considered to be residents of Canada, or Italy, for the purposes of taxation if they are physically present in either country for 183 days or more during a tax year. If individuals are primarily residents in another country or another jurisdiction that has a tax treaty with Canada and, under the residency tie-breaker rules in that treaty, they are primarily resident in that other jurisdiction, then they will be deemed, under specific rules in the Income Tax Act, to be a non-resident of Canada for the purposes of taxation.

Both the Income Tax Act and the Québec Taxation Act provide two ways for the relief of double taxation:

  • A credit for foreign tax paid to the jurisdiction may be claimed against the Canadian tax return in order to reduce Canadian tax on foreign-sourced income that is included in the net income that is reported on that return, oftentimes to zero;
  • In specific circumstances, individuals may claim deductions against their own net income that is reported in their Canadian tax return on income taxes paid to the country or jurisdiction with respect to foreign-earned income that is included in that taxable income.

If an individual has any unused foreign tax credits that were incurred with respect to foreign business income, then they may be carried back 3 years and forward 10 years. However, any unused non-business taxes expire if they are not or cannot be fully claimed as foreign tax credits during the relevant tax year.

Foreign Pensions

Both Canada and Italy allow individuals who are temporarily working in either country to continue to participate in their qualifying foreign employer-sponsored pension plans and/or foreign Social Security. Under the terms of Canada’s tax treaties with some countries (e.g., the tax treaties with the Italy as well as with the US, Germany, France and the Netherlands) individuals might be able to claim a deduction on their Canadian tax returns (depending on the amount of earned income) for contributions made that year to foreign employer-sponsored pension plans. The same goes for non-refundable tax credits for contributions made to foreign Social Security plans in the country and/or jurisdiction where the individual was a resident before moving to any of the countries that are signatories of a similar treaty.

It is necessary however that the relevant forms are completed in order to identify the portion of those contributions made to eligible foreign plans during the tax year that they may be deducted, or claimed as a credit, from in calculating the contributor’s income tax and filed with the individual’s tax return.

MLI and the BEPS Project

MLI is the Multilateral (ML) Convention to Implement (I) Tax Treaty Related Measures to Prevent Base (B) Erosion (E) and Profit Shifting (PS), while BEPS is short for the latter, “base erosion and profit shifting.” It helps to fight against the abuse of tax treaties between countries, as can often happen through “transfer pricing.” The MLI is useful in the fight against BEPS as it implements the tax treaty-related measures that have been developed through the BEPS Project. It does so through existing tax treaties in a contemporary and efficient manner. The measures prevent treaty abuse while simultaneously improving dispute resolution, preventing artificial avoidance of permanent establishment status and neutralizing effects of hybrid mismatch arrangements, which are, according to the OECD, used to “exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term taxation deferral,” simply stated as attempting to avoid taxes in both countries.

For governments, The MLI offers real solutions to close the gaps that exist in current international tax rules by transposing results taken from the OECD/G20 BEPS Project into bilateral tax treaties all around the world, thus creating a uniform standard. It modifies how thousands of bilateral tax treaties that were created to eliminate double taxation are legally applied. In addition to that, the MLI also implements agreed minimum standards in an effort to counter treaty abuse while, as previously mentioned, improving dispute resolution mechanisms and providing some degree of flexibility to accommodate specific tax treaty policies. This means that, in theory, all countries who are signatories of these treaties are bound by the same rules, so if you understand how they work in Canada or in Italy, then you also understand how they apply in the rest of the world. This is a great improvement in terms of simplification.

tax documents and calculator - The Italy-Canada Tax Treaty

Below you will find some of the more important extracts from the OECD (in italics) regarding taxable income between Canada and Italy, with a brief explanation:

There shall be regarded as taxes on income all taxes imposed on total income, or on elements of income, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

Simply put, this means that taxes exist in different forms depending on the type of property: movable property can easily be transported from one place to another, without changing shape, capacity, quantity or quality; personal property is considered to be movable property while immovable property commonly refers to real estate (such as your house, factory, manufacturing plant, and so on).

The existing taxes to which the Convention shall apply are, in particular, in the case of Canada: the taxes on income imposed by the Government of Canada under the Income Tax Act (hereinafter referred to as “Canadian tax”); in the case of Italy: the individual income tax (imposta sul reddito delle persone fisiche); the corporate income tax (imposta sul reddito delle persone giuridiche); the regional tax on productive activities (imposta regionale sulle attivitá produttive), even when deducted at source; (hereinafter referred to as “Italian tax”).

Countries classify taxes in different ways, though they almost always separate corporate income tax from taxes on physical persons. Italy, like many other countries, imposes a regional tax on both citizens and companies as well.

The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes which have been made in their respective taxation laws.

This statement means that, in the case that either Italy, or Canada make changes to their respective tax laws, that they should duly notify the other regarding these changes since changes in Italy have an effect on Canadian citizens there, and vice versa.

The Convention shall not apply to taxes (even when deducted at source) payable on lottery winnings, on premiums other than those on securities, and on winnings from games of chance or skill, competitions and betting.

That is to say that if you are a Canadian citizen who happens to win the lottery in Italy then that income is taxable even in Canada because it is excluded from the tax treaty, and vice versa for Italian citizens who happen to win a lottery in Canada.

For the purposes of the Convention, the term resident of a Contracting State means any person who, under the laws of that State, is liable to taxation therein by reason of the person’s domicile, residence, place of management or any other criterion of a similar nature but does not include any person who is liable to tax in that State in respect only of income from sources in that State.

This is referring to the 183-day rule which determines your tax residence in a particular country. If you spend 183 days per year in Canada then that becomes your tax residence, and the same is true if you spend 183 days in Italy.

For the purposes of the Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term “permanent establishment” shall include especially: a place of management; a branch; an office; a factory; a workshop; a mine, an oil or gas well, a quarry or any other place of exploration for or exploitation of natural resources; a building site or construction or installation project only if it lasts for more than 12 months.

This one is fairly straightforward. Many companies choose to set up permanent establishments in countries in order to do business, but in order for it to be classified as such it must exist for at least one year.

Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State. The term “immovable property” shall have the meaning which it has for the purposes of the relevant tax law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry as well as rights to which the provisions of general law respecting landed property apply. Usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources shall also be deemed to be “immovable property.”

Moveable and immoveable properties remain the same as previously described. This is stating that regardless of your residence, if you earn income from another state, you must pay taxes to that state. For example, if you are a Canadian citizen living in Italy, but your income is coming from Canada, then you must pay taxes to Canada. The same goes for Italian citizens in Canada deriving income from an Italian source.

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

This essentially says the same as the previous paragraph, but is applying it to companies as well.

Those are the essentials regarding the Tax Treaty between Italy and Canada. If you have any questions, please do not hesitate to get in contact with us.

Would you like to learn about similar topics? Then read our related articles, such as, Capital Gains Tax in Italy, Italian tax brackets – 2022 update and Establishment of tax residence: investigative activities.

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