Withholding Tax on Dividends Costs Canada up to $2.6 Billion in Foreign Investment Annually

OTTAWA, March 4, 2016 /CNW/ - Canada's efforts to attract foreign direct investment (FDI) are held back by a withholding tax of up to 25 per cent on dividend payments to non-residents. Eliminating this tax would increase inbound FDI by $2.6 billion per year, according to a Conference Board of Canada study from its Centre for Tax Analysis, Fiscal Incentives and Competitiveness (TAFIC).

Canada's share of global inward FDI slipped from an average of 13.4 per cent in the 1970s to an average of 3.1 per cent between 2000 and 2013 period. The Conference Board report, Canadian Corporate Dividend Withholding Tax: Holding Back Inbound Investment, assesses how much more FDI Canada could capture if it eliminated this specific tax.

"A small, open economy like Canada is at risk of seeing corporations shift their investments to lower-tax jurisdictions," said Paul Darby, Executive Director, Forecasting and Analysis.

"With economic globalization a reality and capital increasingly mobile, Canada must follow the trend and continue reforming its business-tax regime to attract a growing share of FDI. Eliminating the withholding tax on dividend payments to non-residents would make Canada more open to inbound FDI."

Highlights

• Canada's share of global inward FDI has slipped steadily since the 1970s.
• Canada has gradually lowered corporate tax rates in the past 15 years, but so have other countries.
• A reduction of the dividend withholding tax in Canada would have a double effect: encouraging foreign firms to increase their investment, reducing the cost of borrowing capital for Canadian companies.

Canada has steadily lowered its combined provincial/federal corporate tax rate, from 43 per cent in 2000 to an average of 26 per cent in 2013. But other countries are also reforming their tax regimes. To name just one example, the U.K. has gradually reduced its corporate tax rates in recent years and completely eliminated its non-resident withholding taxes on dividends in 2009.

Dividends paid by a publicly traded Canadian corporation to non-resident shareholders are subject to a 25 per cent withholding tax. The general rate of 25 per cent can be reduced if Canada has a tax treaty with the non-residents' country. For example, the rate of dividend withholding tax goes down to 5 per cent for a resident of the United States that controls at least 10 per cent of a Canadian subsidiary.

Between 2011 and 2013, the Canada Revenue Agency (CRA) raised about $1.2 billion per year from withholding tax on dividends paid by Canadian subsidiaries to foreign parent corporations. The payer of the dividends must withhold the amount owed to the CRA.

The Conference Board's analysis finds that eliminating the withholding tax would increase inbound FDI by $2.6 billion. Total inbound FDI flows in Canada averaged $50.4 billion per year from 2011 to 2013.

A reduction of the dividend withholding tax in Canada would both encourage foreign firms to increase their investment in Canada, and reduce the cost of borrowing capital for Canadian companies.

Launched in 2014, TAFIC provides Canadian business leaders and policy-makers with credible, leading-edge quantitative research on all aspects of the Canadian system of taxation and fiscal incentives. Using sophisticated econometric tools to measure the impact of proposed reforms on the Canadian economy, TAFIC publishes evidence-based and accessible reports on key issues related to taxation and fiscal incentives. 

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SOURCE Conference Board of Canada

Sean Burgess, Media Relations, The Conference Board of Canada, Tel.: [phone] ext. 294, E-mail: [email protected]; Juline Ranger, Director of Communications, The Conference Board of Canada, Tel.: [phone] ext. 431, E-mail: [email protected]