The India-Canada Tax Treaty: Residence, Pensions and Gains

What the treaty settles, and what it leaves to domestic law

The Agreement between Canada and India for the avoidance of double taxation was signed on 11 January 1996 and has the force of law in Canada as Schedule IV to the Income Tax Conventions Implementation Act, 1996. It is a short treaty by modern standards, and several of the articles that matter most to individuals do considerably less work than their titles suggest.

Start with what it cannot do. The treaty does not decide whether you are resident anywhere. Each country applies its own domestic test first — India through the day-count and look-back rules in section 6 of the Income-tax Act 2025, which replaced the 1961 Act, and Canada through a facts-and-circumstances assessment of residential ties. Only when both tests come out positive does the treaty engage.

On the Indian side the treaty operates through section 159 of the 2025 Act, the successor to section 90. Section 159(4) contains the rule that quietly decides most practical questions: where an agreement applies, "the provisions of this Act shall apply to the extent they are more beneficial to that assessee". The treaty is a ceiling, not a floor. Where domestic law charges less, domestic law governs. Section 159(6) adds that the general anti-avoidance provisions apply whether or not that is beneficial to you.

The residence tie-breaker in Article 4

Article 4(1) defines a resident as a person liable to tax in a state by reason of domicile, residence, place of management or any other criterion of a similar nature. Where that definition catches you in both countries at once — the normal position in a year of moving — Article 4(2) applies a tie-breaker.

The cascade is sequential and stops at the first limb that produces an answer. That is the mechanism people most often miss. If a permanent home is available to you in only one country, the analysis ends there, and the centre-of-vital-interests question — where your family, your work and your bank accounts are — is never reached. "Available" is not the same as owned or occupied; a flat retained in India and kept ready for your use can be enough to settle the first limb.

Winning the tie-breaker does not remove you from the other country's tax system. It settles which country may tax your worldwide income. The other retains its rights over income arising within its own borders through the source rules in the remaining articles.

Article 18 hands pensions entirely to Canada

This is the provision that surprises people, and it is worth reading the words. Article 18(1): "Pensions arising in a Contracting State shall be taxable only in that State." Article 18(2) then deems a pension to arise where the payer is the state itself, a political subdivision, a local authority or a resident of that state.

Most of Canada's treaties cap withholding on periodic pension payments and leave the residence country free to tax with credit. The India treaty does neither. It allocates pensions exclusively to the source country and sets no ceiling on the rate. There is no separate annuity article and no social security article.

The reach of that rule depends on what counts as a pension. The Agreement never defines the term, and Article 3(2) provides that an undefined term takes the meaning it has under the domestic law of the state applying the treaty. In Canada that meaning comes from section 5 of the Income Tax Conventions Interpretation Act, which — where the convention contains no definition — treats a payment out of a registered retirement savings plan, a registered retirement income fund, a registered pension plan, a deferred profit sharing plan or a retirement compensation arrangement as a pension.

Chained together, those provisions mean an RRSP or RRIF withdrawal taken while you are resident in India is a Canadian-source pension that Canada alone may tax. Section 212(1) of the Canadian Income Tax Act imposes tax at 25 per cent on amounts paid to a non-resident, and paragraphs 212(1)(l) and (q) bring RRSP and RRIF payments within that charge. Article 18 contains no rate limit, so the treaty does not reduce it.

There is a domestic release valve rather than a treaty one. Section 217 of the Canadian Act lets a non-resident elect to be taxed on certain Canadian benefits, including these payments, under the ordinary graduated-rate regime by filing a Canadian return within six months of the year end. Whether that helps depends on how much other Canadian income you have.

Separately, section 158 of the Income-tax Act 2025 — the successor to section 89A — addresses the timing mismatch created by income accruing inside a foreign retirement account that its home country taxes only on withdrawal. Canada is among the notified countries for that relief. Accrual inside the plan and payment out of it are different events under different rules, and need analysing separately.

Article 13 allocates almost nothing on capital gains

Article 13 has only two paragraphs. The first gives exclusive rights over gains on ships and aircraft operated in international traffic. The second reads: "Gains from the alienation of any property, other than those referred to in paragraph 1, may be taxed in both Contracting States."

That is a treaty declining to allocate. There is no exclusive residence-state rule for shares, no immovable-property carve-out, no holding-period test. Both countries may tax, and the entire burden of preventing double taxation falls on Article 23. Paragraph 4 of the Protocol widens the Indian side further by confirming that "alienation" includes a "transfer" within the meaning of Indian tax law.

Article 23(3)(a) is India's relief mechanism: Canadian tax paid on Canadian-source income taxed in both countries is credited against Indian tax on that income, capped at the proportion of Indian tax which that income bears to total income chargeable. Article 23(2)(a) gives Canada the mirror deduction. A credit is not a refund — where one country's charge on a gain exceeds the other's, the excess stays where it fell.

Where the departure tax collides with the treaty

Section 128.1(4)(b) of the Canadian Income Tax Act deems an individual who ceases to be resident to have disposed of each property owned at fair market value. Several categories are excluded — real or immovable property situated in Canada, property used in a business carried on through a Canadian permanent establishment, an "excluded right or interest", and, for someone resident in Canada for 60 months or less out of the preceding 120, property held on arrival or acquired by inheritance.

The "excluded right or interest" definition in section 128.1(10) covers RRSPs, RRIFs, TFSAs and pension plans, which is why registered accounts escape the departure charge. Section 128.1(9) requires an emigrant owning reportable property worth more than $25,000 in total to file a list of it, and sections 220(4.5) and (4.51) allow an election to defer payment of the tax attributable to the deemed disposition, with security, until the property is actually disposed of.

The collision arises afterwards. Canada taxes an unrealised gain in the year you leave. India, once you are resident there, taxes the same asset when you actually sell it, and Indian law contains no provision adopting the Canadian deemed proceeds as your Indian cost. Article 13(2) permits both charges. Article 23(3)(a) offers a credit, but a credit for tax paid in a different year on a deemed event is not a mechanical claim, and this treaty contains nothing resembling the basis-alignment election found in some of Canada's other agreements. If you hold appreciated non-registered assets and are moving to India, the sequencing deserves attention before departure, not after.

Interest, dividends and other income

Article 11(2) caps source-country tax on interest at 15 per cent of the gross amount where the recipient is the beneficial owner. For interest credited to an NRO account this is usually the most valuable clause in the treaty, because the domestic deduction is materially higher. Our guide to NRE, NRO and FCNR accounts covers how those balances are taxed.

Article 10(2) sets the dividend ceilings: 15 per cent where the beneficial owner is a company controlling at least 10 per cent of the voting power, and 25 per cent in all other cases. For an individual portfolio shareholder that 25 per cent ceiling is high enough that India's domestic charge is frequently the lower of the two, and section 159(4) then leaves you on domestic law.

Article 21(1) makes items of income not dealt with elsewhere taxable only in the state of residence, with a 15 per cent source-country ceiling in Article 21(3) for income distributed by an estate or trust. Paragraph 5 of the Protocol preserves each country's right to tax its own residents on amounts attributed to them from partnerships, trusts and controlled foreign affiliates.

Getting the paperwork right on both sides

Section 159(8) makes treaty relief conditional for a non-resident. You may claim it only where a certificate of your residence has been obtained from the government of the other country, and where you provide such other documents and information as are prescribed. In practice the second limb means Form 10F, filed electronically through the Indian portal; a registration route exists for non-residents who do not hold and are not required to hold a PAN.

Going the other way, the Canada Revenue Agency issues a certificate of residency to Canadian residents on request, and Canadian payers generally ask for a declaration of eligibility for treaty benefits before applying a reduced rate at source. Both systems are built around documentation being in place before the payment, not afterwards. Reclaiming over-withheld tax is slower and less certain than having the right rate applied in the first place, which is the practical theme of our guide to DTAA relief and the Tax Residency Certificate.

If you are moving to India rather than away from it, the treaty analysis sits alongside a domestic one: the RNOR window can keep foreign income outside the Indian charge for a limited run of years regardless of the treaty, and foreign asset disclosure runs on its own timetable.

Compliance caveat

This guide describes the general structure of the 1996 Agreement between Canada and India as given force of law in Canada, together with the Indian implementing provisions in the Income-tax Act 2025 and the Canadian domestic provisions referred to. It does not cover employment income, business profits, permanent establishments, students, directors' fees, the effect of the Multilateral Instrument on this Agreement, provincial taxation in Canada, or FEMA residence, which is decided separately from income-tax residence and can differ from it. Rates, thresholds and section numbering change with each Finance Act on the Indian side and each budget bill on the Canadian side, and treaty positions are fact-sensitive. This is a simplified educational guide, not tax advice. Global Investments is not authorised by the Financial Conduct Authority or by the Securities and Exchange Board of India. Confirm your position with qualified advisers in both countries before acting.

How Global Investments can help

Cross-border cases fail at the joins rather than within either system, and this relationship has more joins than most: a pension article that gives Canada everything, a capital gains article that gives neither country anything, and a departure charge that lands years before the Indian charge on the same asset. Our advisers work with clients moving in both directions to map which article governs each income stream, to sequence disposals and account changes around the move rather than after it, and to see that residence certificates and declarations exist before the payments they cover. Where the answer turns on domestic law in one country or the other, we coordinate with Indian and Canadian specialists rather than reasoning from the treaty alone.