2014 may be a taxing new year for Hong Kong-Canada dual residents
Tax dodgers beware – a long-awaited tax treaty with Hong Kong came into effect in Canada last week with the new year.
The treaty, which was signed in November 2012 during Canadian Prime Minister Stephen Harper’s visit to Hong Kong, has some pretty substantial implications. The treaty (which comes into effect in Hong Kong when the new financial year starts there in April) aims to provide clarity for the huge floating community of dual residents and dual nationals who split their time between Hong Kong and, generally, Vancouver or Toronto. This was essential, since it had previously been established that the 1986 tax treaty between Canada and China did not apply to Hong Kong, with its pre-1997 colonial status and post-1997 standing as a Special Administrative Region of the PRC.
On the one hand, the new treaty is intended to provide relief for those unfortunates who find themselves unfairly hit by double taxation, allowing payments in one jurisdiction to be offset by those in the other. But it also targets the tax evaders who seek to claim Canadian residency for its convenience and social benefits, while paying only Hong Kong’s much lower rate of tax. It’s unlikely that many dodgers would opt to structure things the other way around, given Hong Kong’s maximum personal tax rate of 17 per cent, versus 43.7 per cent for a British Columbia resident and 42.16 per cent in Ontario.
Among the other key points:
The treaty targets capital gains on immovable property – say, real estate purchased and resold in Canada by HK residents – specifying that gains be taxed in the location of the property.
The withholding tax on dividends sent from Canada back to Hong Kong is slashed, hopefully inspiring investment in Canada by Hong Kong firms or mainland Chinese companies with HK subsidiaries. Investors with a 10 per cent or greater holding in a firm would face only a 5 per cent withholding tax from Canada’s taxman. That’s down from the present 25 per cent.
The treaty also introduces a set of tie-breaker rules to help determine the residency of a taxpayer if it is in dispute, and allows for the exchange of data on taxpayers between Hong Kong and Canada. It should be noted that the matter of determining Canadian residency remains quite complex.
All in all, the treaty carries great weight. Yet, interestingly, Hong Kong’s authorities have been rather disingenuous in promoting the document’s potential reach.
Upon its announcement in 2012, Hong Kong’s immigration department stated that there were about 16,554 Canadians in Hong Kong. But this vastly understates the number of people in the city who might be affected by the treaty: in fact, there are thought to be about 300,000 Canadian citizens in Hong Kong. For its part, Ottawa has happily acknowledged the true size of the Canadian community in Hong Kong, which is almost entirely made up of returnee immigrants with dual status.
It was only after several disbelieving emails and a couple of telephone calls that a source in the Hong Kong Immigration Department confirmed to me the reason for the disparity.
Despite hundreds of thousands of Hong Kong residents also carrying Canadian passports, their status as Canadians is not publicly acknowledged out of deference to China’s nationality laws. These officially preclude the possibility that a Chinese person, whether from Hong Kong or the mainland, could have dual nationality.
Tell that to Canada’s taxman and see how far it gets you.
The Hongcouver blog is devoted to the hybrid culture of its namesake cities: Hong Kong and Vancouver. All story ideas and comments are welcome. Connect with me by email [email protected] or on Twitter, Ian Young @ianjamesyoung70 .