Tax & Accounting Blog

New Canadian Withholding Tax Documentation Requirements

Global Tax Compliance, Information Reporting for Wealth Management, Tax Information Reporting, Trust & Estate Administration, Trust Tax, Trusts, Withholding Management September 18, 2013

Color Balloon 320The Canada Revenue Agency (CRA) has changed its procedures for determining whether non-residents can claim a reduced rate of withholding tax under a tax treaty.

Background

Canada imposes a 25% withholding tax on certain types of Canadian source income paid to nonresidents of Canada.  Residents of countries with which Canada has a treaty may be eligible for reduced rates.  The withholding rate on Canadian source dividends paid to US residents eligible for treaty benefits is 15%.

Traditionally, Canada has allowed payers to rely on the payee’s name and address to determine if the payee is entitled to treaty benefits.  Effective for payments after 2012, payers must have sufficient recent documentation on file to establish the beneficial owner’s identity, residence and eligibility for treaty benefits.

New Documentation Requirements

The CRA has issued new forms NR301, NR302 and NR303, that payers may use to gather the necessary information. The forms serve a function similar to IRS Form W-8BEN.  Alternatively, payers can use their own format that solicits “equivalent information.”  The CRA recommends that payers or intermediaries collect the information on the CRA forms.

If the payer does not have sufficient documentation, then the payer must apply the Part XIII withholding rate of 25% to certain types of income paid to non-residents of Canada.  However, payers may apply the reduced treaty withholding rates, without obtaining the CRA forms or equivalent information, if all the following conditions are met:

  1. the payee is an individual, or an estate of a US resident that is managed and controlled from the US;
  2. the payer has a complete permanent address on file that is not a post office box or care-of address;
  3. the payer has no reason to suspect the information is inaccurate or misleading; and
  4. the payer has procedures in place so that changes in the payee’s information will result in a review of the withholding tax rate. [1]

Notwithstanding this exception, it is preferable to have payees use the CRA forms to provide written confirmation of beneficial ownership, residency and eligibility for treaty benefits.

Individuals

US resident individuals use form NR301 to certify their eligibility.

Trusts

The CRA posted information about the new forms to its website, in the form of questions and answers.  The answer to one question says that a non-resident trust is generally a person under the Income Tax Act if it is taxed as a person under the tax rules of its country of residence.  In these circumstances, the CRA would generally consider the trust to be the beneficial owner of the income, and eligible for treaty benefits on the income it receives.  If this is the case, then the trust would complete Form NR301.


[1] Pending Updates to IC76-12, http://www.cra-arc.gc.ca/formspubs/frms/ic76-12r6-eng.html, visited Aug. 5, 2013.