SCHEDULE 1(Section 2)Agreement Between the Government of Canada and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income

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Desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income;

Have agreed as follows:

I. Scope of the Agreement

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This Agreement shall apply to persons who are residents of one or both of the Parties.

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• 1 The existing taxes to which this Agreement shall apply are:

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• 2 This Agreement shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Parties shall notify each other of any significant changes that have been made in their taxation laws.

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• 1 For the purposes of this Agreement, unless the context otherwise requires:

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• 2 As regards the application of this Agreement at any time by a Party, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that Party for the purposes of the taxes to which this Agreement applies, any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party.

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• 1 For the purposes of this Agreement, the term resident of a Party means:

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• 2 Where by reason of the provisions of paragraph 1 an individual is a resident of both Parties, then the individual’s status shall be determined as follows:

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  • (d) if the individual has the right of abode in the Hong Kong Special Administrative Region and is also a national of Canada, or if the individual does not have the right of abode in the Hong Kong Special Administrative Region and is not a national of Canada, the competent authorities of the Parties shall settle the question by mutual agreement.

• 3 Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Parties, the competent authorities of the Parties shall by mutual agreement endeavour to settle the question and to determine the mode of application of this Agreement to that person. In the absence of mutual agreement, that person shall not be entitled to claim any relief or exemption from tax provided by this Agreement.

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• 1 For the purposes of this Agreement, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

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• 7 Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.

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• 2  Where a Party includes in the profits of an enterprise of that Party — and taxes accordingly — profits on which an enterprise of the other Party has been charged to tax in that other Party and the profits so included are profits which would have accrued to the enterprise of the first-mentioned Party if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other Party shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Agreement and the competent authorities of the Parties shall if necessary consult each other.

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• 6 Nothing in this Agreement shall be construed as preventing a Party from imposing on the earnings of a company attributable to a permanent establishment in that Party, or the earnings attributable to the alienation of immovable property situated in that Party by a company carrying on a trade in immovable property, a tax in addition to the tax that would be chargeable on the earnings of a company that is a resident of a Party. Any additional tax so imposed shall not exceed five per cent of the amount of those earnings that have not been subjected to such additional tax in previous taxation years. For the purpose of this provision, the term “earnings” means the earnings attributable to the alienation of such immovable property situated in a Party as may be taxed by that Party under the provisions of Article 6 (Income from Immovable Property) or of paragraph 1 of Article 13 (Capital Gains), and the profits, including any gains, attributable to a permanent establishment in a Party in a year and previous years, after deducting therefrom all taxes, other than the additional tax referred to herein, imposed on those profits in that Party.

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• 3 Notwithstanding the provisions of paragraph 2:

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  • (d) interest arising in a Party and paid to any wholly-owned agency or instrumentality of the other Party, political subdivision or local authority, shall be taxable only in that other Party. However, this provision shall only apply in circumstances as may be agreed from time to time between the competent authorities of the Parties; and

• 4 Subparagraph 3(e) shall not apply where all or any portion of the interest is paid or payable on an obligation that is contingent or dependent on the use of or production from property or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation.

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• 8 Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the laws of each Party, due regard being had to the other provisions of this Agreement.

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• 6 Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the laws of each Party, due regard being had to the other provisions of this Agreement.

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• 1 Subject to the provisions of paragraph 2, items of income of a resident of a Party, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that Party.

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• 1 Double taxation shall be avoided as follows:

  • (a) In the case of the Hong Kong Special Administrative Region, subject to the provisions of the laws of the Hong Kong Special Administrative Region relating to the allowance of a credit against Hong Kong Special Administrative Region tax of tax paid in a jurisdiction outside the Hong Kong Special Administrative Region (which shall not affect the general principle of this Article), Canadian tax paid under the laws of Canada and in accordance with this Agreement, whether directly or by deduction, in respect of income derived by a person who is a resident of the Hong Kong Special Administrative Region from sources in Canada, shall be allowed as a credit against Hong Kong Special Administrative Region tax payable in respect of that income, provided that the credit so allowed does not exceed the amount of Hong Kong Special Administrative Region tax computed in respect of that income in accordance with the tax laws of the Hong Kong Special Administrative Region.

  • (b) In the case of Canada,

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    • (ii) where, in accordance with any provision of this Agreement, income derived by a resident of Canada is exempt from tax in Canada, Canada may nevertheless, in calculating the amount of tax on other income, take into account the exempted income.

• 2 For the purposes of this Article, profits, income or gains of a resident of a Party which may be taxed in the other Party in accordance with this Agreement shall be deemed to arise from sources in that other Party.

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Article 23
Mutual Agreement Procedure

• 1 Where a person considers that the actions of one or both of the Parties result or will result for that person in taxation not in accordance with the provisions of this Agreement, that person may, irrespective of the remedies provided by the domestic law of those Parties, address to the competent authority of the Party of which that person is a resident an application in writing stating the grounds for claiming the revision of such taxation. To be admissible, the application must be submitted within three years from the first notification of the action resulting in taxation not in accordance with the provisions of this Agreement.

• 2 The competent authority referred to in paragraph 1 shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Party, with a view to the avoidance of taxation which is not in accordance with this Agreement. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Parties.

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• 4 The competent authorities of the Parties shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Agreement.

• 5 The competent authorities of the Parties may consult together for the elimination of double taxation in cases not provided for in this Agreement and may communicate with each other directly for the purpose of applying this Agreement.

• 6 If any difficulty or doubt arising as to the interpretation or application of this Agreement cannot be resolved by the competent authorities pursuant to the preceding paragraphs of this Article, the case may be submitted for arbitration if both competent authorities and the taxpayer agree and the taxpayer agrees in writing to be bound by the decision of the arbitration board. The decision of the arbitration board in a particular case shall be binding on both Parties with respect to that case. The procedure shall be established in an exchange of notes between the Parties.

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• 1 The competent authorities of the Parties shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement or to the administration or enforcement of the domestic laws of the Parties concerning taxes covered by this Agreement, insofar as the taxation thereunder is not contrary to this Agreement. The exchange of information is not restricted by Article 1 (Persons Covered).

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Nothing in this Agreement shall affect the fiscal privileges of members of government missions, including consular posts, under the general rules of international law or under the provisions of special agreements.

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• 1 The provisions of this Agreement shall not be construed to restrict in any manner any exemption, allowance, credit or other deduction accorded by the laws of a Party in the determination of the tax imposed by that Party.

• 2 Nothing in this Agreement shall prevent a Party from:

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• 3 The provisions of Articles 6 (Income from Immovable Property) to 20 (Other Income) of this Agreement shall not apply to any company, trust or other entity that is a resident of a Party and that is beneficially owned or controlled, directly or indirectly, by one or more persons who are not residents of that Party, if the amount of the tax imposed on the income or capital of the company, trust or other entity by that Party is substantially lower than the amount that would be imposed by that Party (after taking into account any reduction or offset of the amount of tax in any manner, including a refund, reimbursement, contribution, credit, or allowance to the company, trust or partnership, or to any other person) if all of the shares of the capital stock of the company or all of the interests in the trust or other entity, as the case may be, were beneficially owned by one or more individuals who were residents of that Party.

• 4 Where under any provision of this Agreement any income is relieved from tax in a Party and, under the law in force in the other Party a person, in respect of that income, is subject to tax by reference to the amount thereof that is remitted to or received in that other Party and not by reference to the full amount thereof, then the relief to be allowed under this Agreement in the first-mentioned Party shall apply only to so much of the income as is taxed in the other Party.

• 5 For the purposes of paragraph 3 of Article XXII (Consultation) of the General Agreement on Trade in Services, which is part of the Marrakesh Agreement Establishing the World Trade Organization, done at Marrakesh on 15 April 1994, the Parties agree that, notwithstanding that paragraph, any dispute between them as to whether a measure falls within the scope of this Agreement may be brought before the Council for Trade in Services, as provided by that paragraph, only with the consent of both Parties. Any doubt as to the interpretation of this paragraph shall be resolved under paragraph 4 of Article 23 (Mutual Agreement Procedure) or, failing agreement under that procedure, pursuant to any other procedure agreed to by both Parties.

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• 1 Each of the Parties shall notify the other in writing of the completion of the procedures required by its law for the bringing into force of this Agreement. This Agreement shall enter into force on the date of the later of these notifications.

• 2 This Agreement shall have effect:

  • (a) in the Hong Kong Special Administrative Region, in respect of Hong Kong Special Administrative Region tax, for any year of assessment beginning on or after the first day of April in the calendar year next following that in which this Agreement enters into force;

  • (b) in Canada:

    • (i) in respect of tax withheld at the source on amounts paid or credited to non-residents, on or after the first day of January in the calendar year next following that in which this Agreement enters into force, and

    • (ii) in respect of other Canadian tax, for taxation years beginning on or after the first day of January in the calendar year next following that in which this Agreement enters into force.

• 3 Notwithstanding paragraph 2 of this Article, Article 8 (Shipping and Air Transport), and paragraph 3 of Article 13 (Capital Gains) shall have effect from the date of entry into force of this Agreement.

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• 1 This Agreement shall remain in force until terminated by a Party. Either Party may terminate this Agreement by giving the other Party written notice of termination at least six months before the end of any calendar year. A notice of termination given less than six months before the end of a calendar year shall be deemed to have been given in the first six months of the next calendar year. In such event, this Agreement shall cease to have effect:

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  • 2 This Agreement shall terminate on the last date on which it has effect in accordance with paragraph 1, unless the Parties agree otherwise.

IN WITNESS WHEREOF the undersigned, duly authorized to that effect, have signed this Agreement.

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