Dividend Tax Rate Between India and Canada Under DTAA

Dividend Tax Rate Between India and Canada

The India-Canada Double Taxation Avoidance Agreement (DTAA), signed on January 11, 1996, and in force from May 6, 1997, provides specific withholding tax rates on dividend income under Article 10. These rates offer substantial relief from India's domestic withholding tax rate of 20% (plus applicable surcharge and 4% health and education cess) under Section 195 of the Income Tax Act, 1961, particularly for corporate shareholders with substantial holdings.

The India-Canada DTAA is an important treaty given the significant bilateral investment flows between the two countries, the large Indian diaspora in Canada, and the growing number of Canadian companies operating in India. Unlike the India-USA DTAA, the India-Canada treaty is a Covered Tax Agreement (CTA) under the Multilateral Instrument (MLI), meaning it has been modified by MLI provisions including the Principal Purpose Test (PPT) since the 2020-21 financial year.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 10 of the India-Canada DTAA establishes two withholding tax rates on dividends, based on the level of ownership by the beneficial owner:

15% Rate for Substantial Holdings

Under Article 10(2)(a), dividends paid to a company that controls directly or indirectly at least 10% of the voting power in the dividend-paying company are taxed at a maximum rate of 15% of the gross amount. This reduced rate is designed to encourage cross-border corporate investment between India and Canada and applies when a Canadian parent company receives dividends from its Indian subsidiary (or vice versa), provided the ownership threshold is met.

25% Rate for Portfolio Investors

Under Article 10(2)(b), all other dividends are taxed at a maximum rate of 25% of the gross amount. This applies to individual investors, portfolio investors, and any shareholder with less than 10% voting power. Notably, the 25% treaty rate is higher than India's domestic rate of 20% (before surcharge and cess), meaning portfolio investors may benefit more from India's domestic rate under Section 90(2) of the Income Tax Act.

Who Qualifies for the Reduced Rate

Claiming the reduced 15% DTAA rate on dividends requires satisfying several conditions under the India-Canada treaty:

Beneficial Ownership Test

The recipient must be the beneficial owner of the dividends. This means the recipient must have the right to use, enjoy, and dispose of the dividend income without being a mere agent, nominee, or conduit. The OECD commentary applies a substance over form approach to determine beneficial ownership. Intermediary entities with restricted powers over the income, such as conduit companies, are excluded from treaty benefits.

MLI Principal Purpose Test (PPT)

Since both India and Canada have ratified the MLI and the India-Canada DTAA is a Covered Tax Agreement, the Principal Purpose Test (PPT) under MLI Article 7 applies. Treaty benefits will be denied if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the arrangement or transaction. This is a significant anti-avoidance measure that supplements India's domestic GAAR provisions.

Tax Residency Requirement

The recipient must be a tax resident of Canada as defined under the treaty and must hold a valid Tax Residency Certificate (TRC) issued by the Canada Revenue Agency (CRA). Without a valid TRC, the Indian payer cannot apply the reduced withholding rate.

Dividend-Specific Treaty Provisions

Article 10 contains several provisions specific to dividend taxation under the India-Canada DTAA:

Source Country Taxation

Under Article 10(1), dividends paid by a company resident in one contracting state to a resident of the other state may be taxed in the state of residence. However, Article 10(2) preserves the source country's right to tax dividends, subject to rate ceilings. India retains the right to tax dividends paid by Indian companies to Canadian residents, but the withholding tax rate is capped at the treaty rates specified above.

Definition of Dividends

The term "dividends" under Article 10 includes income from shares, jouissance shares, mining shares, founders' shares, or other rights participating in profits (not being debt-claims), as well as income from other corporate rights that is subjected to the same taxation treatment as income from shares by the laws of the source country.

Business Connection Exception

Under Article 10(4), if the beneficial owner carries on business through a permanent establishment in the source country, and the shareholding generating the dividends is effectively connected with that PE, the dividends are taxed as business profits under Article 7 rather than under Article 10. This is important for Canadian companies with PE presence in India.

Anti-Avoidance in Capital Surplus Distributions

Article 10(5) provides that where a company is a resident of one state, the other state cannot impose any tax on dividends paid by that company except insofar as the dividends are paid to a resident of that other state, or the shareholding is effectively connected with a PE in that other state. This prevents extra-territorial taxation of dividends.

Documentation Required

To claim the reduced DTAA rate on dividends, the following documentation is mandatory:

Tax Residency Certificate (TRC)

The Canadian resident must obtain a Tax Residency Certificate from the Canada Revenue Agency (CRA). The TRC confirms that the recipient is a tax resident of Canada for the relevant period. Under Section 90(4) of the Indian Income Tax Act, the TRC is a mandatory prerequisite for claiming any DTAA benefit.

Form 10F

The non-resident must furnish Form 10F to the Indian payer, providing details such as status (individual, company, etc.), nationality, taxpayer identification number, and period of residential status. Form 10F must be filed electronically on India's Income Tax e-filing portal.

Self-Declaration and No-PE Certificate

A self-declaration confirming that the recipient does not have a permanent establishment in India and that the income is not attributable to a PE is typically required. This also includes a beneficial ownership declaration confirming the recipient's right to enjoy the income.

Withholding Procedure for Indian Payers

Indian companies paying dividends to Canadian residents must follow specific withholding procedures under Section 195 of the Income Tax Act:

Section 195 Compliance

Under Section 195, any person responsible for paying to a non-resident any sum chargeable to tax must deduct TDS at the rates in force. When the DTAA provides a lower rate, the payer can apply the treaty rate directly, provided the recipient has furnished the TRC, Form 10F, and other required documents.

Form 15CA and Form 15CB

For remittances exceeding INR 5 lakh in a financial year, the remitter must file Form 15CA (declaration of remittance) online and obtain Form 15CB (certificate from a Chartered Accountant) confirming that TDS has been deducted at the appropriate rate. Form 15CB must reference the applicable DTAA article and confirm that treaty conditions are satisfied.

• Remittance up to INR 5 lakh: Only Form 15CA Part A required
• Remittance exceeding INR 5 lakh: Form 15CA Part C + Form 15CB from a CA
• With Section 195(2)/195(3)/197 certificate: Form 15CA Part B

Quarterly TDS Return (Form 27Q)

After deducting TDS, the payer must deposit the tax with the government by the 7th of the following month and file quarterly TDS returns in Form 27Q. The return must correctly reflect the treaty rate applied and the relevant DTAA article number.

Common Disputes and Judicial Precedents

Several areas of dividend taxation under the India-Canada DTAA have been the subject of disputes and judicial interpretation:

Domestic Rate vs Treaty Rate for Portfolio Investors

Since the treaty rate for portfolio investors (25%) exceeds the domestic rate (20% before surcharge and cess), tax practitioners routinely apply the lower of the two rates. Section 90(2) of the Income Tax Act provides that DTAA provisions apply only to the extent they are more beneficial to the taxpayer. This means for dividends received by individual Canadian investors from Indian companies, the domestic rate of 20% (plus surcharge and cess) effectively applies rather than the treaty rate of 25%.

Beneficial Ownership Challenges

Indian tax authorities have increasingly scrutinized beneficial ownership claims, particularly where dividends are routed through intermediary entities. Courts have held that mere receipt of dividends does not establish beneficial ownership; the recipient must have the legal and economic right to use and enjoy the income independently. Canadian holding companies receiving dividends from Indian subsidiaries must demonstrate genuine substance and independent decision-making to defend beneficial ownership claims.

MLI Principal Purpose Test Denials

Since the MLI came into effect for the India-Canada DTAA from FY 2020-21, the PPT has added an additional layer of scrutiny. Arrangements where one of the principal purposes is to obtain treaty benefits may be denied. The CBDT issued Circular No. 01/2025 providing guidance on PPT application, emphasizing that legitimate business restructuring would generally not be affected.

Dividend Stripping and Anti-Avoidance

Indian tax law contains dividend stripping provisions under Section 94(7) of the Income Tax Act, which disallow losses on shares purchased shortly before ex-dividend dates and sold shortly after. These domestic anti-avoidance rules apply alongside the treaty provisions and can affect the overall tax treatment of dividend income received by Canadian investors.

Practical Examples and Calculations

Example 1: Canadian Parent Company Receiving Dividends from Indian Subsidiary

A Canadian corporation holds 100% of the shares in an Indian subsidiary. The Indian subsidiary declares a dividend of INR 1,00,00,000 (INR 1 crore).

• Domestic rate: 20% = INR 20,00,000 (plus surcharge and cess)
• DTAA rate (Article 10(2)(a)): 15% = INR 15,00,000
• Tax saving under DTAA: INR 5,00,000 (minimum, excluding surcharge and cess savings)

The Canadian parent company provides a valid TRC, Form 10F, and beneficial ownership declaration. The Indian subsidiary deducts TDS at 15% and remits INR 85,00,000 to the Canadian parent. The parent claims a foreign tax credit in Canada for the INR 15,00,000 withheld in India. For companies setting up Indian operations, see our guide to registering a company in India from Canada.

Example 2: Canadian NRI Receiving Dividends from Indian Listed Company

A Canadian-resident NRI holds shares in an Indian listed company. The company declares a dividend of INR 5,00,000.

• Domestic rate: 20% = INR 1,00,000 (plus surcharge and cess)
• DTAA rate (Article 10(2)(b)): 25% = INR 1,25,000
• Applicable rate: 20% (domestic rate is lower, so Section 90(2) applies)
• TDS deducted: INR 1,00,000 (plus surcharge and cess)

In this case, the domestic rate is more beneficial, and the investor benefits from the lower domestic rate. The NRI can claim credit for Indian tax paid against Canadian tax liability on the same income.

Example 3: Treaty Shopping Through a Canadian Conduit

A company resident in a third country sets up a shell company in Canada to receive dividends from an Indian subsidiary. The Canadian entity has no employees, no office, and its sole purpose is to route dividends. Under the MLI Principal Purpose Test, treaty benefits are denied because one of the principal purposes of the arrangement is to obtain the reduced 15% rate. The domestic withholding rate of 20% (plus surcharge and cess) applies instead.

For a comprehensive rate lookup across all income types, see our India to Canada withholding tax rates page. Businesses needing help with cross-border structuring can explore our tax advisory services and FEMA compliance support. For the related interest rate analysis, see interest tax rate between India and Canada.

Frequently Asked Questions

What is the dividend tax rate under the India-Canada DTAA?

The DTAA rate depends on the level of ownership. Companies controlling 10% or more of the voting power pay a maximum of 15% under Article 10(2)(a). All other shareholders, including individual portfolio investors, face a maximum rate of 25% under Article 10(2)(b). However, if the domestic Indian rate (20% plus surcharge and cess) is lower, that rate applies instead under Section 90(2).

Is the India-Canada DTAA affected by the MLI?

Yes. Both India and Canada have ratified the Multilateral Instrument (MLI), and the India-Canada DTAA is a Covered Tax Agreement. The MLI modifications, including the Principal Purpose Test (PPT), apply from the 2020-21 financial year onwards. This means arrangements primarily aimed at obtaining treaty benefits may be denied.

What documents do I need to claim the reduced DTAA rate on dividends?

You need a valid Tax Residency Certificate (TRC) from the Canada Revenue Agency, Form 10F filed on India's e-filing portal, a self-declaration of beneficial ownership, and a no-PE declaration. For remittances exceeding INR 5 lakh, Form 15CA and Form 15CB must also be filed.

Can a Canadian individual investor claim the 15% DTAA rate on Indian dividends?

No. The 15% rate under Article 10(2)(a) is available only to companies controlling at least 10% of the voting power. Individual investors fall under Article 10(2)(b) with a 25% treaty cap. Since the domestic rate of 20% (before surcharge and cess) is lower, individual investors typically pay at the domestic rate under Section 90(2).

How does the Principal Purpose Test affect dividend tax claims?

Under MLI Article 7, if obtaining a DTAA benefit was one of the principal purposes of the arrangement, the benefit may be denied. This means Canadian entities must demonstrate legitimate commercial substance and business purpose beyond merely claiming reduced withholding rates. Genuine holding companies with active management and real business activities are generally not affected.

Can I claim a foreign tax credit in Canada for Indian withholding tax on dividends?

Yes. Canada provides a foreign tax credit mechanism that allows Canadian residents to offset Indian withholding tax paid against their Canadian tax liability on the same income. This prevents economic double taxation. The credit is limited to the lesser of the foreign tax paid or the Canadian tax attributable to the foreign income.

What happens if the Indian payer deducts TDS at a higher rate than the DTAA rate?

If TDS is deducted at 20% instead of the applicable DTAA rate of 15%, the Canadian resident can claim a refund by filing an income tax return in India. Alternatively, the Canadian resident can apply for a lower withholding certificate under Section 197 before the payment is made. For ongoing dividend payments, obtaining a Section 197 certificate is the more efficient approach.