Withholding Tax Rates: India to Canada Under DTAA

India to Canada Withholding Tax Rates Under DTAA

When an Indian entity makes payments to a Canadian resident — whether dividends, interest, royalties, or fees for technical services — withholding tax must be deducted at source under Section 195 of the Income Tax Act, 1961. The India-Canada DTAA, signed on 11 January 1996 and effective from 6 May 1997, provides reduced rates on most payment types compared to India's domestic rates. Under Section 90(2), taxpayers can apply whichever rate is more beneficial — the treaty rate or the domestic rate — meaning the effective rate is always the lower of the two.

Both India and Canada have ratified the OECD Multilateral Instrument (MLI), which modifies the treaty with anti-abuse provisions including the Principal Purpose Test (PPT). The MLI came into force for India on 1 October 2019 and for Canada on 1 December 2019. The CBDT has published the synthesised text. For the full treaty analysis, see our India-Canada DTAA complete guide.

Dividend Withholding Rates

Under Article 10 of the India-Canada DTAA, dividends paid by an Indian company to a Canadian resident are subject to the following withholding rates:

Key points: Since India abolished the Dividend Distribution Tax (DDT) from 1 April 2020, dividends are taxable in the hands of the recipient. For Canadian shareholders with less than 10% voting power, the treaty rate of 25% is higher than the domestic rate of 20%, so the domestic rate applies. This structure is identical to the India-USA DTAA and less favorable for portfolio investors compared to treaties like the India-Japan DTAA which offers a flat 10% rate.

Canadian parent companies with Indian subsidiaries controlling 10% or more of the voting power benefit from the 15% treaty rate, saving 5 percentage points compared to the domestic rate. The dividend withholding rate is applied on the gross amount of dividends without deduction of expenses.

NRIs (Non-Resident Indians) living in Canada who hold Indian equity investments should evaluate whether their holdings meet the 10% voting power threshold to qualify for the reduced 15% rate. For portfolio investments below this threshold, the domestic rate of 20% automatically applies as the more beneficial rate.

Interest Withholding Rates

Article 11 of the treaty provides for a general rate with a government exemption:

The interest provisions offer meaningful savings for Canadian lenders. A Canadian bank lending to an Indian company pays 15% withholding tax instead of the domestic 20%, translating to a 5-percentage-point saving on external commercial borrowings. Interest paid to the Government of Canada, its political subdivisions, local authorities, or the Bank of Canada is fully exempt.

While the 15% rate is less favorable than the 10% rate available under the India-Japan DTAA or the 10% rate for banks under the India-USA DTAA, it still provides a consistent 5-percentage-point reduction from the domestic rate for all categories of Canadian interest recipients.

Interest is deemed to arise in India if the payer is the Government of India, a political subdivision, a local authority, or an Indian resident. Where interest is connected with a permanent establishment in India, it is deemed to arise in India regardless of the payer's residence.

Royalty and FTS Withholding Rates

Article 12 of the India-Canada DTAA provides differentiated rates for royalties and fees for technical services based on the nature of the payment:

Equipment vs other royalties: The key distinction in the India-Canada treaty is between payments for the use of equipment (10% rate) and payments for intellectual property and know-how (15% rate). Canadian companies leasing mining equipment, industrial machinery, or scientific instruments to Indian companies benefit from the lower 10% rate. In contrast, technology licensing, software royalties, brand licensing, and know-how transfers are subject to the higher 15% rate.

The FTS provision in the India-Canada treaty follows a similar bifurcation. Technical services associated with equipment (installation, maintenance, operation support) attract the 10% rate, while general consulting, management advisory, and IT services attract 15%. This is broader than the India-USA treaty's "make available" clause, meaning most cross-border service payments are taxable regardless of whether technical knowledge is transferred.

Canada is a significant source of mining technology, energy sector expertise, and environmental consulting services for India. Canadian companies providing these services should carefully classify their payments to apply the correct rate — equipment-related services at 10% and general consulting at 15%.

Capital Gains Treatment

Article 13 of the India-Canada DTAA provides the following rules for capital gains taxation:

Immovable property: Gains from the alienation of immovable property situated in India are taxable in India at domestic rates — 12.5% for long-term capital gains (assets held over 24 months) and applicable slab rates for short-term gains.

Shares deriving value from immovable property: Gains from shares that derive their value substantially from immovable property situated in India may be taxed in India. This anti-avoidance provision prevents the use of holding companies to avoid real estate capital gains tax.

Business assets: Gains from the alienation of movable property forming part of the business property of a PE are taxable in the state where the PE is located.

Ships and aircraft: Gains from ships or aircraft operated in international traffic are taxable only in the state where the enterprise is resident.

Other property: Gains from other property may be taxed in both contracting states. Canada provides a foreign tax credit for Indian taxes paid on such gains to prevent double taxation.

NRIs in Canada disposing of Indian property or shares should plan for Indian capital gains tax liability and ensure they claim the foreign tax credit in Canada to avoid double taxation.

How to Apply Reduced Rates

To apply the reduced DTAA rates instead of domestic rates, both the Canadian recipient and the Indian payer must follow specific procedures:

For the Canadian Recipient

1. Obtain TRC from the CRA — The Tax Residency Certificate from the Canada Revenue Agency certifying Canadian tax residency is the foundational document. For individuals, this may be Form NR73 or a CRA letter; for corporations, a certificate on CRA letterhead
2. Complete Form 10F — Furnish Form 10F electronically on the Indian Income Tax portal with prescribed details including Canadian Social Insurance Number (SIN) or Business Number as the tax identification number
3. Self-declaration — Provide a declaration confirming beneficial ownership of the income, absence of PE in India (if applicable), and compliance with the Principal Purpose Test (PPT) under the MLI

For the Indian Payer

1. Verify documentation — Ensure TRC, Form 10F, and self-declaration are on file before applying reduced rates
2. File Form 15CA online — Submit Form 15CA on the Income Tax portal before making the remittance
3. Obtain Form 15CB — For payments exceeding INR 5 lakh, obtain a Chartered Accountant's certificate in Form 15CB confirming the treaty rate applicability
4. Apply for lower withholding certificate — Under Section 197, the payer or payee can apply to the Assessing Officer for a certificate authorizing lower or nil withholding (particularly relevant for government-exempt interest)

BeaconFiling's tax advisory team handles the complete documentation process for claiming DTAA benefits on cross-border payments to Canada.

Domestic Rates vs Treaty Rates Comparison

India's domestic withholding tax rates for non-residents (without surcharge and cess) compared against the India-Canada DTAA rates:

Important note on surcharge and cess: Under domestic law, the 20% withholding rate is further increased by applicable surcharge (rates vary by income level) and health and education cess of 4%, leading to effective domestic rates of approximately 20.8% to 21.84%. When treaty rates are applied, surcharge and cess are not levied on top of the treaty rate, making the effective savings even greater. For a Canadian company receiving equipment royalties of INR 1 crore, the saving between the effective domestic rate (~21.84%) and the treaty rate (10%) is approximately INR 11.84 lakh annually.

Common Mistakes and Compliance Tips

Mistake 1: Not Obtaining TRC Before Remittance

Many payers apply treaty rates without collecting the Tax Residency Certificate first. The Income Tax Department can disallow the treaty benefit and demand tax at domestic rates (20% plus surcharge and cess) plus interest under Section 201(1A) if the TRC is not on record at the time of payment.

Mistake 2: Misclassifying Equipment vs Other Royalties

The 5-percentage-point difference between equipment royalties (10%) and other royalties (15%) makes correct classification critical. Payments for the physical use of equipment qualify for 10%, while payments for technology embedded in equipment (software licenses, design rights) may be classified as other royalties at 15%. When in doubt, obtain a professional opinion to avoid reassessment.

Mistake 3: Applying Treaty Rate to Portfolio Dividends

For dividends paid to Canadian shareholders with less than 10% voting power, the treaty rate of 25% is higher than the domestic rate of 20%. Payers must apply the more beneficial rate (20%) under Section 90(2), not the treaty rate. Applying the 25% rate results in excess withholding and unnecessary administrative burden of seeking refunds.

Mistake 4: Forgetting Form 15CA/15CB Requirements

Failing to file Form 15CA/15CB before remittance can result in penalties under Section 271-I (up to INR 1 lakh per default). The form must be filed electronically before the bank processes the outward remittance.

Mistake 5: Not Claiming Foreign Tax Credit in Canada

Canadian residents who have had Indian tax withheld must claim the foreign tax credit on their Canadian return using Form T2209 (Federal Foreign Tax Credits) within the applicable limitation period to avoid actual double taxation. NRIs in Canada sometimes overlook this credit, resulting in double taxation that could have been avoided.

For end-to-end compliance support on cross-border payments between India and Canada, contact BeaconFiling's FEMA and RBI compliance team.

Frequently Asked Questions

What is the withholding tax rate on dividends paid from India to Canada?

For Canadian shareholders controlling 10% or more of the voting power, the DTAA rate is 15%. For shareholders with less than 10% voting power, the domestic rate of 20% applies as it is more beneficial than the treaty rate of 25%. The effective rate is therefore 15% for substantial shareholders and 20% for portfolio investors.

Why is the equipment royalty rate lower than other royalty rates?

The India-Canada DTAA distinguishes between payments for the physical use of industrial, commercial, or scientific equipment (10%) and payments for intellectual property such as copyrights, patents, and know-how (15%). Equipment rentals involve lower value addition compared to IP licensing, which is reflected in the preferential rate. Canadian mining and energy companies leasing equipment to Indian operations benefit significantly from this distinction.

How do NRIs in Canada claim DTAA benefits on Indian fixed deposit interest?

NRIs who are Canadian tax residents can claim the reduced 15% DTAA rate on interest from Indian fixed deposits (compared to 20% domestic rate). They must provide a TRC from the CRA, file Form 10F electronically, and furnish a self-declaration to their Indian bank. The bank applies the reduced 15% TDS rate on interest payments. The NRI then claims the Indian tax as a foreign tax credit on their Canadian return.

Is the India-Canada DTAA favorable for technology transfers?

Moderately. Technology royalties (patents, know-how, software licensing) attract a 15% rate — a 5-percentage-point saving over the domestic 20%. Equipment-related technical services attract 10%. However, the India-Japan DTAA offers a flat 10% on all royalties and FTS, making Japan a more tax-efficient jurisdiction for technology transfers to India. Companies should consider this in their holding structure planning.

Can I apply for a lower withholding certificate under Section 197?

Yes. Under Section 197, the payee or payer can apply to the Assessing Officer for a certificate authorizing lower or nil withholding if the actual tax liability is expected to be less than the standard withholding rate. This is particularly useful for government interest (0% under Article 11(3)) and for cases where the Canadian recipient has losses or other deductions that reduce their effective Indian tax liability.

What happens if the bilateral relationship between India and Canada affects DTAA implementation?

The DTAA remains a legally binding international agreement regardless of the state of bilateral diplomatic relations. Tax treaty benefits cannot be unilaterally withdrawn by either country without formally terminating the agreement under Article 30 of the treaty. Taxpayers should continue to claim treaty benefits as long as the DTAA remains in force and they meet the substantive and procedural requirements.