Focus on the tax treaty between France and Canada and its impacts for French citizens residing in Canada
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The tax treaty aimed at avoiding double taxation and preventing tax evasion with respect to taxes on income between the French Government and the Government of Canada was signed on May 2, 1975, and was subsequently amended in 1987, 1995, and 2010 (the "Treaty") [1].
The objectives of this Convention are twofold. Firstly, both countries wish to promote their economic relations and cooperation in tax matters. Furthermore, they wish to eliminate double taxation in respect of certain taxes expressly covered by the Convention.
However, the Convention has provided a safeguard: the setup or strategies put in place by taxpayers, whether individuals or legal entities, must not have the sole and exclusive purpose of obtaining tax relief provided for by the Convention.
The French and Canadian taxes covered by the Convention are limitatively:
income tax, including in the case of a real estate sale;
corporate tax on companies registered in France or Canada; and
inheritance and gift tax (solely as far as France is concerned).
This article will help you better understand the tax impacts of your income between the two countries if you are an individual. If you are a business, we have also written an article to guide you.
The concept of tax residency: what are the criteria?
The essential notion within this Convention, as in any tax treaty, is that of tax residence. France operates on a bundle of indicators regarding the tax residence of a French citizen.
Thus, you will be deemed to have your tax domicile in France if :
your family home remains in France (spouse/children); and/or
if you carry on a non-accessory professional activity in France, whether as an employee or not ; and/or
if you have the center of your economic interests in France (investments of all kinds, registered office of a company, parent company) i.e. it is from France that you derive the major part of your income (in comparison with Canada).
And in the event of dual residence?
However, if you reside in Canada for more than 183 days, you are also a Canadian tax resident, which is when the Convention becomes of utmost importance to determine which country you depend on for tax purposes.
The Convention provides that in the event of dual tax residence, reference must be made to:
the taxpayer's permanent home ;
if the taxpayer has two habitual homes, it will then be necessary to look at their center of vital interests (most pronounced personal and economic ties) ;
if the taxpayer does not have a residence and does not habitually stay in either of the two countries, the tax residence will be that of their nationality.
As a reminder, the concept of tax residence is very important because if the French authorities deem that you are a tax resident in France, then all income and profits coming from Canada will be taxable in France.
Thus, this article will help you shed light on the Tax Convention if you are a French citizen with your tax residence in Canada.
French real estate income
The Treaty provides that income from real estate is taxed respectively in the country where the property is located.
Thus, even if you are a tax resident of Canada due to the aforementioned criteria, income from real estate located in France will be taxable in France. In this respect, even if you own shares in real estate companies rather than physical real property, as long as the ownership of these shares gives you the enjoyment of the property, you will be taxed in France.
Conversely, if the shares of a real estate company do not give you the right to enjoy the property, this income will not be considered real estate income and will be taxed as income from securities.
Dividends
If you have invested in shares/financial securities of French companies and you receive dividends, then this income will be taxable in Canada, but you will also be subject to withholding tax in France in an amount fluctuating between 5 and 15% of your income.
However, if you reside in Canada and receive dividends from a French company taxed in Canada that would give rise to a tax credit if you resided in France, the sum equivalent to this tax credit may be paid to you by the French tax authorities.
There is also an exception that can be found for all types of income covered by the Convention – if these dividends are linked to a professional activity carried out in France (industrial, commercial or independent profession), then in this case, the taxes on these dividends will only be payable in France.
Income from movable capital of any kind
If you are a tax resident of Canada and you receive interest from French claims, you are taxed on this income in Canada.
However, as with dividends, this interest will also be taxable in France (tax will be limited to 10% of the gross amount of interest), except in the case where it is linked to interest from public enterprises or States.
Similarly, if this income is linked to a professional activity carried out in France (industrial, commercial or even independent profession) then in this case, taxes on these dividends will only be payable in France.
Royalties
All remuneration derived from intellectual and/or industrial property rights (e.g., copyright, patent, manufacturing process, computer coding, etc.) will be paid in the beneficiary's country of residence. Here again, if you are a tax resident in Canada and receive remuneration from royalties originating in France, you would also be taxable in France, up to a limit of 10% of the gross income amount.
However, there are exceptions to this double taxation, which are strictly inspired by the Convention, including when the royalties arise from copyright, the use of or concession of computer software, patents, or even cultural motion picture films.
It should also be noted that if these dividends are linked to a professional activity carried out in France (industrial, commercial, or independent profession) then in this case, the taxes on these dividends will only be payable in France.
Capital gains
If you hold real estate in France, or shares, parts, or rights in a company whose assets consist mainly of real estate located in France, then the gains derived from the sale of such property or shares are taxable in France.
If you hold movable property through a permanent establishment (belonging to an enterprise of the other country) in a country, the alienation of the latter will be taxed in that country and not in the country of the main enterprise.
Independent professions
If you are a tax resident in Canada but continue to practice an independent profession in France, you continue to pay taxes on the income derived from this activity.
On the other hand, if you carry out your independent activity through a fixed base or a permanent establishment in the Emirates, then this income will be exempt from tax in France.
Employee income
If you are a tax resident of Canada and you receive income from employment in that country, then you are exempt from French taxes.
However, there is an exception: if you are employed by a Canadian company and you physically work in France, then France reserves the right to tax you on your Canadian-source income unless the following three conditions are cumulatively met:
you reside in France for less than 183 days during the tax year concerned; and
your employer is not a French resident; and
the cost of the remuneration is not borne in France (through a permanent establishment, for example)
French private sector pension
With regard to pensions and remuneration paid for salaried work prior to the change of tax residence to France (excluding work within the public service), these are in principle only taxable in the State from which they originate, in this case France.
For example, pensions paid in application of social security legislation in France are taxable in France, which is the case, for illustration, of voluntary insurance against the risk of old age.
Annuities originating from France are also taxable in France.
The wealth tax
If you are a tax resident of Canada but own non-professional real estate in France and the value of this property makes you liable for wealth tax in France, you will then have to pay it. Wealth derived from shares, units, or rights in a company consisting mainly of real estate located in France is also taxable in France.
Nevertheless, if you hold shares or corporate units entitling you to at least 25% of the profits of a Canadian company, the wealth derived from these shares and units will be taxable in Canada.
Exchange of Information
Both States have committed to share information that is not limited to the taxes covered by the Convention.
To learn more about what the Tax Convention provides for companies, you can refer to the article "Focus on the Tax Convention between France and Canada: its impacts for companies"
