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 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; 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 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961), 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 caps interest at 15% and adds a narrow set of exemptions in Article 11(3):

The domestic comparison depends on the type of debt: interest on money borrowed in foreign currency is taxed at 20% under section 207(1) (Table, Sl. Nos. 1-3) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), while rupee-denominated interest outside section 207(1) — NRO deposit interest, for example — is withheld under section 393(2) at the "rates in force", currently 30% for non-resident individuals and 35% for foreign companies. Surcharge and 4% health and education cess apply on top of the domestic rate; the 15% treaty cap is inclusive of both.

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% under section 207(1), translating to a 5-percentage-point saving on external commercial borrowings.

The Article 11(3)(a) exemption is payer-side, not recipient-side. Interest is exempt at source where the payer of the interest is the Government of the source state (or a political sub-division or local authority thereof) — so Indian government securities held by Canadian residents are exempt — where the beneficial owner is the central bank of the other state (the Bank of Canada, or the Reserve Bank of India), or where the interest is paid to an agency or instrumentality (including a financial institution) agreed upon in letters exchanged between the competent authorities. There is no exemption merely because the recipient is the Government of Canada. Separately, under Article 11(3)(b)(i) interest arising in India on a loan made, guaranteed or insured, or a credit extended, guaranteed or insured, by Canada's Export Development Corporation is taxable only in Canada; the mirror rule in Article 11(3)(b)(ii) covers Canada-source interest backed by the Export-Import Bank of India.

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 caps Indian tax at 15% — a 5-percentage-point saving against the 20% section 207(1) rate on foreign-currency debt, and a saving of 15 to 20 points against the 30%–35% rates in force on rupee interest.

Under Article 11(6), 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 the payer has a permanent establishment or fixed base in India in connection with which the indebtedness was incurred and which bears the interest, the interest is deemed to arise in India regardless of the payer's residence.

Royalty and FTS Withholding Rates

Article 12 of the India-Canada DTAA is headed "Royalties and fees for technical services", but the operative defined term in Article 12(4) is "fees for included services" (FIS) — a narrow, US-treaty-style class of services, not the wide Indian-domestic FTS concept. Rates differ by 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.

Services under Article 12 are narrow, not broad. Article 12(4) defines fees for included services as payments for technical or consultancy services only — managerial services are deliberately absent from the definition — and only where those services either (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which an Article 12(3) royalty is paid, or (b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. This mirrors the India-USA treaty's make-available test rather than being broader than it. Services meeting neither limb are not FIS at all: they fall to business profits under Article 7 — taxable in India only if the Canadian provider has a permanent establishment here — or, for individuals and firms of individuals, to Article 14. Article 12(5) further excludes services inextricably linked to a sale of property, ship, aircraft and container rental services, teaching in or by educational institutions, services for the payer's personal use, and payments to employees.

Canada is a significant source of mining technology, energy sector expertise, and environmental consulting services for India. Canadian companies providing these services should classify each engagement carefully: FIS ancillary and subsidiary to the enjoyment of leased equipment is capped at 10%, other FIS at 15%, and routine advisory, managerial or consulting work that transfers no technical knowledge is outside Article 12 altogether — taxable in India only through a permanent establishment under Article 7.

Capital Gains Treatment

Article 13 of the India-Canada DTAA is unusually short — it has only two paragraphs, and is one of the starkest capital-gains articles in India's treaty network. Do not read the familiar OECD structure into it: there is no separate immovable-property paragraph, no land-rich-share paragraph, no permanent-establishment-assets paragraph and no residence-only residual rule.

Article 13(1) — ships and aircraft: gains from the alienation of ships or aircraft operated in international traffic by an enterprise of a Contracting State, and of movable property pertaining to the operation of such ships or aircraft, are taxable only in that State — the operator's state of residence.

Article 13(2) — everything else: gains from the alienation of any other property "may be taxed in both Contracting States". Shares (listed or unlisted, whatever the underlying asset mix), immovable property and every other asset therefore remain fully taxable in India under domestic law, with Canada relieving the double taxation by credit under Article 23. Paragraph 4 of the Protocol confirms that "alienation" includes a "transfer" as understood in Indian law.

Because Article 13(2) preserves Indian domestic law rather than capping it, the Indian charge is at domestic rates. Following the Finance (No. 2) Act 2024, long-term gains are taxed at 12.5% without indexation (immovable property and unlisted shares held over 24 months) under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961), listed equity long-term gains at 12.5% above INR 1.25 lakh under section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961), and listed equity short-term gains at 20% under section 196 of the Income-tax Act, 2025 (section 111A of the Income-tax Act, 1961); other short-term gains are taxed at the rates otherwise applicable to the taxpayer.

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. The CRA issues this as a Certificate of Residency, for individuals and corporations alike; Form NR73 is a residency-determination questionnaire, not a residency certificate, and does not satisfy section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961)
2. Complete Form 41 (formerly Form 10F) — Furnish Form 41 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 41, and self-declaration are on file before applying reduced rates
2. File Form 145 (formerly Form 15CA) online — Submit Form 145 on the Income Tax portal before making the remittance
3. Obtain Form 146 (formerly Form 15CB) — For payments exceeding INR 5 lakh, obtain a Chartered Accountant's certificate in Form 146 confirming the treaty rate applicability
4. Apply for lower withholding certificate — Under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961), the payee can apply to the Assessing Officer for a certificate authorizing lower or nil withholding (particularly relevant for interest exempt under Article 11(3), such as Export Development Corporation-backed lending); a payer uncertain about the correct rate applies instead under section 395(2) of the Income-tax Act, 2025 (section 195(2) of the Income-tax Act, 1961)

Beacon Filing'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 398(3)(a) of the Income-tax Act, 2025 (section 201(1A) of the Income-tax Act, 1961) 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 159(4), not the treaty rate. Applying the 25% rate results in excess withholding and unnecessary administrative burden of seeking refunds.

Mistake 4: Forgetting Forms 145 and 146 Requirements

Failing to file Forms 145 and 146 before remittance can result in a penalty under section 462 of the Income-tax Act, 2025 (section 271-I of the Income-tax Act, 1961) of 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 Beacon Filing'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, capped at 10% by Article 12(2)(b), and payments for intellectual property such as copyrights, patents, and know-how, capped at 15% by Article 12(2)(a)(ii). 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. On rupee deposits such as NRO accounts the domestic alternative is not 20% — that is the section 207(1) rate for foreign-currency debt — but the "rates in force" under section 393(2), currently 30% for non-resident individuals, plus surcharge and cess. They must provide a TRC from the CRA, file Form 41 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 under Article 12(2)(a)(ii) — a 5-percentage-point saving over the domestic 20%. Fees for included services ancillary and subsidiary to the enjoyment of leased equipment attract 10%, and services that do not make available technical knowledge are outside Article 12 entirely. 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 395(1)?

Yes. Under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961), the payee 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. A payer who is uncertain about the correct rate applies to the Assessing Officer instead under section 395(2) of the Income-tax Act, 2025 (section 195(2) of the Income-tax Act, 1961). This is particularly useful for interest exempt under Article 11(3) — for example interest on an Export Development Corporation-backed loan — 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.