Canada-Germany tax agreement: owning German property

Which agreement applies

Canada’s Department of Finance lists two Germany agreements. The older one was signed at Ottawa on 17 July 1981. The current one was signed at Berlin on 19 April 2001 and published as Canada Treaty Series 2002 No. 6. It enters into force when both states have notified that their national requirements are met, and its Article 31 says it has effect for taxes withheld at source on amounts paid or credited from 1 January 2001, and for other taxes for taxation years beginning on or after 1 January 2001. The 1981 agreement ends for the taxes the new one covers. This guide reads the 2001 text, in the version published on the Government of Canada’s treaty database.

Article 2 covers taxes on income and on capital, “including taxes on gains from the alienation of movable or immovable property”. For Germany the named taxes are income tax (Einkommensteuer), corporation tax, the capital tax (Vermögensteuer), trade tax and the solidarity surcharge (Solidaritätszuschlag); for Canada, the taxes imposed by the federal government under the Income Tax Act. The Grunderwerbsteuer and the annual Grundsteuer are not on the list.

Who is a “resident”

Article 4 defines a resident as someone liable to tax in a state by reason of domicile, residence, place of management or a similar criterion, but not someone taxed there only on income from sources in that state. If an individual is a resident of both countries, the agreement applies these tests in order: a permanent home available, then the closer personal and economic relations (centre of vital interests), then habitual abode, then nationality, and if still unresolved the two authorities settle it by mutual agreement.

The German side of the question starts from § 1 EStG: a person with a home (Wohnsitz) or habitual abode in Germany is taxed on worldwide income. A Canadian who moves to Germany, or who keeps a permanent home there, can become resident in both countries and then rely on Article 4.

Rent from a German property

Article 6(1) says income that a resident of one state derives from immovable property in the other, including income from agriculture and forestry, may be taxed in that other state. Article 6(3) applies this to income from direct use, letting or use in any other form, and, unusually, also to income from the alienation of such property. Article 6(2) defers to the law of the state where the property is for the meaning of “immovable property”, and a protocol adds that an option in respect of immovable property counts.

Germany applies this through § 49 EStG, under which rent from land in Germany is German-source income of a non-resident. See renting out as a non-resident for the German filing side.

Selling a German property

Article 13(1) lets Germany tax gains from the sale of German immovable property. Article 13(4) goes further for shares and similar interests: gains from shares (other than shares listed on an approved stock exchange there) in a company resident in the other state, if they form a substantial interest and their value derives principally from immovable property there, may be taxed there, as may gains on an interest in a partnership, trust or estate whose value derives principally from property there. A substantial interest means that the resident and related persons own 10 per cent or more of the shares of any class. Gains from other assets are taxable only in the state where the seller is resident (Article 13(6)).

Under German domestic law, § 23 EStG makes a sale of land taxable when ten years or less separate purchase and sale, with an exclusion for property used exclusively for your own residential purposes from purchase to sale, or in the year of sale and the two years before. Read the guides on the ten-year rule and selling as a non-resident. The agreement says Germany may tax; it does not say your gain is taxable, which depends on those German rules.

How Canada removes double taxation

Article 23 provides that, subject to Canadian law on the deduction of foreign tax and any later changes that do not alter the general principle, German tax (other than capital tax) payable in accordance with the agreement on profits, income or gains arising in Germany is deducted from the Canadian tax payable on the same profits, income or gains. Profits, income or gains of a Canadian resident are deemed to arise in Germany if they may be taxed in Germany under the agreement. Canada may also take exempt income into account in computing tax on other income.

This is a deduction from Canadian tax, not an exemption: your Canadian return remains the place where the property income and the gain are reported. The details of the foreign tax credit are set by Canadian law, which this guide does not set out; ask the Canada Revenue Agency or a cross-border adviser.

For a German resident with Canadian-source income, Article 23 works the other way round: income that Canada may tax is, in principle, excluded from the German tax base, with the right to count it when setting the rate on other income, and the protocol directs Germany to switch to a credit in certain cases of different classification.

Non-discrimination

Article 24 prevents either state from burdening nationals of the other with taxation or requirements more burdensome than those for its own nationals in the same circumstances, and it also applies to individuals who are not residents of either state. The article adds that it does not oblige a state to grant non-residents the personal allowances, reliefs and reductions that it gives its own residents.

Which professional to consult

You will usually need two advisers, a German tax adviser (Steuerberater) for the German return and a Canadian accountant for the foreign tax deduction. A notary (see the notary profession page) only drafts the contract. Payotte reports published rules and does not give personal tax advice.