Part XIII Tax: Withholding Tax On Canadian-Source Income - Withholding Tax - Canada (2024)

Introduction

When a Canadian resident makes a payment to a non-resident, theCanadian payor is required to withhold 25% in certaincirc*mstances. Generally, the requirement arises where the paymentis of a passive nature – this includes interest, dividends,rents, and royalties, amongst others. Payments from non-resident tonon-resident in relation to property in Canada are also often tosubject withholding taxes in relation to passive sources ofincome.

What income is subject to Withholding Tax?

Section 212 of the Income Tax Act (Canada) (the"Tax Act") specifically requires a withholding for thefollowing:

• Dividends;
• Management fees;
• Interest;
• Estate or trust income;
• Rents;
• Royalties (including those from trademarks, patents, secretformulas, and certain visual media);
• Timber Royalties;
• Payments by cooperatives to members;
• Pension Benefits (including Canada Pension Plan and Old AgeSecurity);
• Non-competition amounts;
• Retirement Compensation Arrangement benefits;
• Retiring Allowances (including termination and severancepayments);
• Registered Retirement Savings Plans;
• Deferred Profit Sharing Plans;
• Registered Retirement Income Fund Payments; and
• Several other types of payments

The specific application of the withholding tax to any of theabove-mentioned sources of income must be considered alongside thejurisprudence, CRA technical interpretations, and any tax treatieswhich may affect whether withholding tax is actually exigible. Forinstance, in the case of management fees, an applicable treatyprovision may deem such payments to be business profits and,therefore, not subject to Part XIII tax. As another example,royalty and rent payments are often reduced by treaty. Consultationwith a tax professional is essential.

Subsection 212(13) of the Tax Act is a deeming provision. Itbroadens the application of the Part XIII withholding to capturepayments made by non-residents to non-residents in respect ofproperty situated in Canada. In the case where payments are madebetween non-residents, the rules contained in Part XIII should becarefully reviewed to determine whether withholding tax isexigible.

Who is liable for the tax?

The payor is liable for withholding the tax and remitting it toCanada Revenue Agency ("CRA"). Subsection 215(6) of theTax Act provides that the payor becomes liable for all amounts thatshould have been deducted or withheld. This can expose, forexample, a tenant or property manager to tax risk, where thelandlord is a non-resident.

The payee is also liable, as they have failed to pay the 25% taxin accordance with subsection 212(1) of the Tax Act. CRA can seekto enforce payment against the recipient payee, but success in thisendeavour is predicated, in part, upon the willingness of onecountry's revenue authority to enforce another's taxes (forexample, see Article XXVI A of The Canada-US Income TaxTreaty).

In the Solomon decision (2007 TCC 654), the issue waswhether the taxpayer (who became a resident of Switzerland) wasproperly assessed on Canada pension and social security income hereceived. Importantly, the judge explained that subsection 215(6)of the Tax Act does not shift that tax burden to the payor,because, in part, subsection 227(8.1) of the Tax Act creates jointliability for the payor and payee. The Solomon case isalso of interest as an example of the possible benefits of a taxtreaty: the tax treaty in question had the effect of reducing thewithholding rate to 15%. Indeed, it is critical to determine (a)whether a tax treaty exists and (b) whether that treaty providesfor a reduced withholding.

There are also filing obligations on the payor which arecanvassed in NR4 - Non-Resident Tax Withholding, Remitting, andReporting – 2013(http://www.cra-arc.gc.ca/E/pub/tg/t4061/t4061-e.html orbit.ly/VEK7B0). The NR4 information return provides information toCRA on amounts paid to the non-resident. This tax does notgenerally, subject to the below commentary, require a filing on thepart of the non-resident recipient.

Special Exception for Rental Income

Section 216 allows rental income to be taxed on a net ratherthan gross basis. Thus, a taxpayer is provided with the option ofeither paying withholding tax on gross rental income or electing topay Part I tax on a net basis. If rental income is tax on a grossbasis, it would ignore the fact that many non-resident landlordsface mortgage interest payments, maintenance, and otherexpenditures. Without section 216 of the Tax Act, if thewithholding exceeded the net income on a given property, the taxwould be highly punitive.

Although not canvassed in this posting, section 216 alsoprovides for payments on net for timber royalties.

The Canada-US Income Tax Treaty

Many countries have entered into tax treaties with Canada. TheCanada-US Income Tax Treaty is used in this article forillustrative purposes. Importantly, applicable withhold rates varybetween treaties.

Indeed, certain withholding obligations are reduced by operationof The Canada-US Income Tax Treaty. These withholding obligationshave changed over time, and it is important to be cognizant of anyProtocols to the Treaty, which may further alter withholdingrates.

In the case of dividends, the withholding is limited by ArticleX to 5-15% of the gross amount of the dividend, depending upon thepercentage of the company owned by the non-resident. In the case ofinterest, the withholding is limited to 0% by Article XI. In thecase of royalties, the withholding is limited by Article XII to10%, but may not be subject to any withholding, depending upon thenature of the royalty. In the case of pension income, thewithholding is limited to 15% by article XVIII. In the case ofestate or trust income, the withholding tax is limited by articleXXII to 15%.

Conclusion

In transactions involving, for example, payments of dividends,interest, rents, and royalties to non-residents, carefulconsideration must be given to Part XIII tax. As the withholdingobligation rests with the payor, payors should be vigilant indetermining whether such payments are taxable and whether there isrelief from the 25% pursuant to the applicable tax treaty, ifany.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

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