Question 1

What is Part XIII withholding tax?

Accepted Answer

Part XIII of the Canadian Income Tax Act requires payers of certain types of income to non-residents to withhold 25% of the gross payment and remit it to CRA. This applies to passive income including dividends, interest, rent, royalties, pension payments, retiring allowances, and certain management fees. The payer (not the non-resident) is responsible for withholding and remitting the tax.

Question 2

How do tax treaties reduce withholding rates?

Accepted Answer

Canada has tax treaties with over 90 countries that can reduce the standard 25% withholding rate. Treaty rates vary by income type and country. For example, the Canada-US treaty reduces dividend withholding to 15% (or 5% for corporate shareholders with 10%+ ownership), eliminates withholding on interest, and reduces pension withholding to 15%. The non-resident must provide a properly completed NR301 form to the payer to claim treaty benefits.

Question 3

What is an NR4 slip?

Accepted Answer

An NR4 slip (Statement of Amounts Paid or Credited to Non-Residents of Canada) is issued by Canadian payers to non-residents reporting amounts paid and tax withheld. It is similar to a T4 or T5 slip but for non-resident recipients. Payers must file NR4 slips with CRA and provide copies to non-residents by March 31 following the calendar year. Non-residents use NR4 information to claim foreign tax credits in their country of residence.

Question 4

What is the Section 216 election for rental income?

Accepted Answer

By default, non-resident rental income is subject to 25% withholding on gross rents. However, under Section 216, a non-resident can elect to file a Canadian tax return and pay tax on net rental income (after expenses) at graduated rates instead. This usually results in significantly less tax. To reduce withholding at source, file Form NR6 with CRA before the rental year. The Section 216 return must be filed within two years of the year-end.

Question 5

Is interest paid to non-residents still subject to withholding?

Accepted Answer

Since 2008, interest paid to arm's length non-residents on most obligations is exempt from Part XIII withholding tax (this change was part of Canada's effort to make it easier for Canadian companies to borrow internationally). However, "participating debt interest" (interest that varies based on profits) is still subject to withholding. Interest paid to non-arm's length parties may also be subject to thin capitalization rules.

Question 6

How are pension payments to non-residents taxed?

Accepted Answer

Pension payments (including RRSP/RRIF withdrawals, OAS, and CPP) paid to non-residents are subject to 25% Part XIII withholding tax, reducible by treaty. For periodic pension payments, many treaties reduce the rate to 15%. Lump-sum payments may be treated differently. OAS payments to non-residents are also subject to the OAS clawback (recovery tax) if the non-resident's worldwide income exceeds the clawback threshold.

Country	Rate	Tax on $50,000.00	Net
None (selected)	25%	$12,500.00	$37,500.00
United States	15%	$7,500.00	$42,500.00
United Kingdom	15%	$7,500.00	$42,500.00
Australia	15%	$7,500.00	$42,500.00
France	15%	$7,500.00	$42,500.00
Germany	15%	$7,500.00	$42,500.00
India	15%	$7,500.00	$42,500.00
China	15%	$7,500.00	$42,500.00
Japan	15%	$7,500.00	$42,500.00
South Korea	15%	$7,500.00	$42,500.00
Mexico	15%	$7,500.00	$42,500.00
Other Treaty Country	15%	$7,500.00	$42,500.00

Non-Resident Withholding Tax