How are Indian Investments Taxed for Canada NRIs?

Are you a Canada-based NRI with investments in India and wondering how taxes apply to your income and gains from those investments? You're not alone!

India's diverse and promising investment landscape has attracted global NRIs, including those residing in Canada. However, understanding the tax implications becomes crucial if you have investments back in India.

To mitigate the issue of double taxation, the Double Taxation Avoidance Agreement (DTAA) between India and Canada integrates two main approaches: the exemption and tax credit methods.

Under the exemption method, the individual's income is solely taxed in their country of residence.
The tax credit method permits offsetting foreign taxes paid against the taxpayer's domestic tax liability.

Navigating the complexities of constantly evolving tax rules can be overwhelming. Keeping up and filing taxes accurately can feel like a challenge. Hiring a tax consultant can simplify the process and ease your burden.

Before exploring the specific tax implications for Canada NRIs with Indian investments, let's first understand the types of income or gains that are taxable.

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Type of Income and Taxation

The taxation for NRIs in Canada depends on the type of income you earn and the type of assets you hold.

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Capital Gains

As per the DTAA between India and Canada -

Gains from the alienation of ships or aircraft operated in international traffic by an enterprise of a Contracting State and movable property pertaining to the operation of such ships or aircraft shall be taxable only in that State.
Gains from the alienation of any property other than those referred to in the above point may be taxed in both Contracting States.

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Equity

Short-term capital gains (STCG) from the sale of investments held for less than 12 months are taxed at 20%
Long-term capital gains (LTCG) from the sale of investments held for more than 12 months are taxed at 12.5% if they exceed Rs. 1.25 lakh in a financial year.

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Debt

STCG Tax: If your debt mutual funds investments holding period is less than 24 months, the resulting capital gains are short-term. These are subject to taxation at your applicable tax slab rates. The applicable TDS rate is 30%.
LTCG Tax: If your holding period is more than 24 months, the long-term capital gains are taxed at 12.5%. The applicable TDS rate is 12.5%.

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Note: From 1st April 2023, the capital gains (both long and short-term) for debt funds are taxable as per your income tax slab rate.

In Canada, capital gains are taxable on 50% of the actual gains taxable in India.

The Canadian taxation rates on capital gains vary depending on the province of residence. Quebec imposes the highest rate at 54%. Thus, the applicable tax rate is 27% on the total gains, given that only 50% of the realised capital gains are taxable.

Also, Canada does not differentiate between long-term capital gains (LTCG) and short-term capital gains (STCG).

Any taxes paid in India, whether through withholding or actual payments, can be claimed as foreign tax credits on the Canadian tax return.

A proportionate amount of the tax paid in India is eligible for credit in Canada. Since Canada taxes only 50% of the capital gains, the tax credit allowed for the capital gains tax paid in India is limited to 50% of the amount paid.

For detailed information on the tax reporting requirements for Canadian NRIs, you can read our comprehensive blog Understanding Reporting Requirements for Canadian NRIs.

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Interest

Interest income is taxed in Canada. However, when taking the DTAA into account, the interest taxed in the country where it arises (India) will not exceed 15% of the gross amount of the interest.

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Dividend Income

Any dividend income from shares of an Indian company is taxable in Canada. As per the DTAA between India and Canada, the interest taxed in the country where it arises (India) will not exceed the following:

15%, of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10% of the voting power in the company paying the dividends
In other cases, 25%

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Royalties

Royalties earned are taxed in Canada. As per the DTAA, the royalty income that may be taxed in India will range between 10 to 20% depending on the number of years.

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Documents to Avoid Taxation in India

To avoid double taxation, you need

Tax Residency Certificate (TRC): TRC is issued by Canada's tax authority that confirms the residential status of the NRI in Canada for a particular financial year. A TRC is required to claim the benefits of the DTAA between India and Canada, such as lower tax rates or exemptions.
You must submit the TRC to the Indian tax authorities, the mutual fund houses, the banks, or the portfolio managers, as the case may be, to avoid TDS or double taxation.

Form 10F: It is a declaration form that contains your personal and tax details, such as name, address, PAN, tax identification number, etc.
Form 10F is required to claim the benefits of the DTAA between India and Canada, in addition to the TRC, if the TRC does not contain all the information required by the Indian tax authorities. You must fill and sign Form 10F and submit it along with the TRC

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Conclusion

Taxation of Indian investments for Canada NRIs is a complex and dynamic subject which requires careful planning and compliance.

Managing all these responsibilities can be daunting and consume a significant amount of time. You might lack the expertise or resources to effectively handle them.

At iNRI, we offer comprehensive taxation and repatriation assistance for NRIs. Our services include: