Does Canada tax interest earned on an Israeli bank account?

A Canadian resident with an Israeli savings account or investment account earning interest faces two sets of obligations: Israel deducts tax at source before the bank pays the interest, and Canada taxes the gross amount again as foreign income. The treaty framework eliminates the double-taxation problem, but only if the account is registered correctly with the Israeli bank and the foreign tax credit is properly claimed with the CRA.

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Detailed Answer

Israeli withholding at source. Israel imposes a 25% withholding tax on interest paid to non-residents under Section 170 of the Income Tax Ordinance 1961. That rate is the default if the account holder has not informed the bank of their Canadian residency and provided the relevant treaty documentation. Under Article 11 of the Canada-Israel Tax Convention 1975, Israeli-source interest paid to a Canadian resident may be taxed in Israel at no more than 15%. To receive the reduced rate, the account holder must formally declare non-resident status to the Israeli bank and, in practice, provide a CRA residency certificate (Form NR301 or equivalent) or a self-declaration that the bank accepts. If the 25% default rate has been applied, excess withholding can be reclaimed from the Israel Tax Authority (Rashut HaMasim) by filing a refund application, but this is a cumbersome process that takes 6–12 months.

Canadian income reporting. Canada taxes residents on worldwide income. Interest earned on an Israeli bank account is reported on Schedule 4 (Statement of Investment Income) of the T1 personal income tax return for the year it is received or accrued. The gross amount before Israeli withholding is reported as income; the Israeli tax withheld is then claimed as a foreign tax credit on Form T2209 (Federal Foreign Tax Credits). The credit is limited to the Canadian tax otherwise payable on the same income — so if Israeli withholding at 15% exceeds the Canadian tax on that income, the excess withholding is not fully creditable, although it may be eligible as a deduction instead. Canadians with Israeli accounts holding rental property proceeds or inheritance funds face additional layers.

Form T1135 — Foreign Income Verification Statement. Any Canadian resident who owns specified foreign property with a total cost base exceeding CAD $100,000 at any time during the year must file Form T1135. An Israeli bank account qualifies as specified foreign property. T1135 is filed with the T1 return. Failure to file carries penalties of CAD $25 per day up to CAD $2,500 per year per form, plus potential gross negligence penalties if the CRA believes the omission was deliberate.

In Practice: Under Article 11 of the Canada-Israel Tax Convention 1975, Israeli interest withholding for Canadian residents is capped at 15% — half the default rate. On an Israeli bank account earning NIS 30,000 in interest annually, 15% withholding means NIS 4,500 deducted at source. The Canadian T1 return reports the gross NIS 30,000 (converted to CAD at the Bank of Canada annual average rate for the year), and Form T2209 claims a credit for the NIS 4,500 withheld. The net result is typically zero residual Canadian tax on that interest if the marginal rate difference between the two countries is small.

When to Consult a Lawyer

• You have held an Israeli bank account for several years without registering as a non-resident with the bank — you may have paid 25% withholding rather than the 15% treaty rate, and the refund process from the ITA requires professional assistance.
• Your Israeli account holds a mix of interest, capital gains distributions, and dividends — each type of income is treated differently under both Israeli tax law and the Canada-Israel treaty, and conflating them on the T1 creates CRA assessment risk.
• You are unsure whether your Israeli account balance triggers T1135 — converting Israeli shekel balances to CAD at the right date matters, and a balance that was below CAD $100,000 at year-end may have exceeded the threshold mid-year.

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Speak With an Israeli Attorney

Getting the Israeli bank to apply the correct treaty withholding rate and providing the CRA with correctly documented foreign tax credits are both easier to manage proactively than retroactively.

Contact us for a confidential initial consultation.