Spain-Canada tax treaty and Spanish property

The documents

The BOE publishes the convention, with its consolidated text updated by the Protocol signed on 18 November 2014. The Department of Finance page on canada.ca lists, under 2014, “Protocol Signed Between Canada and Spain (November 18, 2014)”, and under 2015, “Entry into Force of the Protocol between Canada and Spain (September 29, 2015)”. The BOE adds a note: the provisions of the convention may have been affected by the multilateral convention against base erosion and profit shifting (the MLI), and refers readers to the Spanish Ministry’s synthesised text. The MLI’s effect on this convention was not analysed in this guide.

The convention covers income taxes and wealth. Spain’s own rules, in the non-resident income tax law, still decide the rate and the way the tax is computed; the treaty decides who may tax.

Article VI: income from real estate

Article VI.1 states that income from real estate “pueden someterse a imposición en el Estado Contratante en que tales bienes están situados” (may be taxed in the contracting state where the property is located). Article VI.3 says this applies to income from the direct use, letting or any other form of exploitation of the property, and to the profits from its sale. So for a Canadian who lets a flat in Spain, Spain has the right to tax the rent. The Spanish rates are in renting out as a non-resident: 24% on the gross rent for a Canadian resident, since Canada is outside the EU and EEA.

For a home you keep for yourself and do not let, the treaty’s wording on direct use leads to the same place: Spain may tax. The Spanish measure is the imputed income described in non-resident property tax.

Article XIII: gains on a sale

Article XIII.1 reads: “Las ganancias derivadas de la enajenación de bienes inmuebles pueden someterse a imposición en el Estado Contratante en que estén sitos.” Gains from selling real estate may be taxed where the property lies. Spain’s rate for a non-resident seller’s gain is 19%, under article 25.1.f of its law: see selling as a non-resident. Article XIII.3 treats shares in a company whose assets consist mainly of real estate in one country in the same way, so holding the home through such a company does not avoid it.

Article XIII.5 adds a rule that does not concern a Canadian who never lived in Spain: a state may tax, under its own law, gains of an individual who is its own national, or who has been its resident for at least fifteen years, and who has been its resident in the last five years.

Article XXII: wealth

Article XXII.1 gives the same treatment to real estate as a part of wealth: it may be taxed where the property is. This is relevant to the Spanish taxes on wealth, which are not covered in this guide.

Article XXIII: eliminating double tax

Because both countries may tax, the treaty says how double tax is avoided. After the 2014 Protocol, article XXIII has these parts:

• For Canada (XXIII.2.a). Subject to the Canadian rules on crediting foreign tax and later changes that do not alter the general principle, “el impuesto exigible en España sobre los beneficios, renta o ganancias procedentes de España será deducible del impuesto canadiense exigible sobre dichos beneficios, renta o ganancias”. In plain words, Spanish tax on Spanish-source income is deducted from the Canadian tax due on that same income.
• Source rule (XXIII.3). For this purpose, the profits, income or gains of a Canadian resident that may be taxed in Spain under the convention are treated as coming from sources in Spain. That is the link that makes the credit apply to rent and to the gain on a Spanish property.
• For Spain (XXIII.1). For a Spanish resident with income taxable in Canada, Spain allows a deduction of the Canadian income tax paid, within limits. This is the mirror image and relevant to a person who becomes resident in Spain.

The wording leaves the detail to Canadian law (“sin perjuicio de las disposiciones vigentes … de la legislación canadiense”). How much credit you may claim, in which year and in what form, is a question for Canadian tax rules, which this guide does not cover.

What the treaty does not do

• It does not lower the Spanish rate. It says Spain may tax.
• It does not cancel the buyer’s 3% withholding on a sale; the withholding is an advance and the Spanish return settles it.
• It does not give a Canadian the EU/EEA treatment: no 19% on rent, no deduction of expenses on rent, no reinvestment exemption on sale.
• It does not deal with the municipal plusvalía, the property tax (IBI) or the purchase taxes, which are local or transfer taxes. The articles of the convention on the taxes covered were not read for this guide.
• It does not give residence rights in Spain.

Which professional to consult

A tax professional in Canada who knows the foreign tax credit rules reads the Canadian side of article XXIII. A Spanish tax adviser or a lawyer registered with a Spanish bar association (colegio de abogados) handles the Spanish returns: see the modelo 210 guide. Do not rely on a bank or an agent for the treaty.