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David Rotfleisch: Non-Residents & Canadian Withholding Tax

posted 2 years ago

For residents and non-residents of Canada, the applicable income tax laws are different. While a non-resident Canadian is solely responsible for paying tax on Canadian sources of income, Canadian residents (for tax purposes which is not the same as immigration status) are required to pay Canadian tax on all of their sources of income. Non-residents’ sources of income from Canada include earnings from jobs held there and revenues from organizations trading there. Earnings from Taxable Canadian Properties are also subject to withholding tax under Part XIII of the Income Tax Act (the “Tax Act”).

The broad discussion of withholding taxes for non-residents in this article will be followed by a discussion of the specific requirements in Part XIII of the Act that pertain to interest payments made from a Canadian payer to a non-resident.

Who is liable for paying withholding tax? What does it mean?

A withholding tax is a tax that is paid to the government by the person who is actually generating the earnings opposed to the person who is receiving it but paid on behalf of the recipient. For instance, a company will frequently deduct taxes from an employee’s wages at the time of payment. Employers in Canada are required to withhold income tax on behalf of their employees and return the appropriate amounts to the Canada Revenue Agency, which is shown in Box 22 of the T4 slip sent to the employee.

Different rules apply to the withholding tax under Part XIII than to the taxes deducted from the earnings of the majority of Canadian employees. First, only non-resident persons’ income with a source in Canada is subject to Part XIII of the Act. Interest payments, rent, royalties, pension benefits, and dividends are examples of common payments that must have taxes withheld. Second, a flat rate of 25% of payments made to non-residents is the amount that must be withheld from those payments. In the case of non-resident tax returns, the non-resident is exempt from filing a tax return if all of their income comes from Canadian sources and is subject to withholding tax. With numerous nations, Canada has also signed tax treaties that often reduce the amount of withholding tax that is deducted from some payments.

Regarding who is responsible for the tax withholding and repayments, the Act imposes a duty on the payer to withhold the tax under subsection 215 (6). In spite of this, a non-resident is however required by subsection 212(1) of the Act to pay these balances to the CRA if the payer fails to withhold tax and remit those payments to the CRA. In other terms, if the payer missed to deduct the appropriate amounts, the non-resident is nonetheless responsible for paying the withholding tax.

Income under Part XIII – Tax on the earnings of Non-Resident People from Canada

 Paragraph 212(1)(b) of the Act explains how interest payments made by a Canadian payer to a non-resident are paid. Major modifications were made to the way interest payments to non-residents are taxed, and the new rules took effect on January 1, 2008.

Under the current system, interest payments made to non-residents are subject to withholding tax in one of two circumstances: either the debt is a “participating debt interest” or the payer is a non-resident who is not in an arm’s length relationship and the interest is not “fully exempt interest” as defined by the Act. To put it another way, a payer of interest at arm’s length to a non-resident is not obligated to deduct and pay withholding tax unless the debt qualifies as a “participating debt interest” as defined by Section 212(3) of the Act. Participating debt interest, in general, refers to interest that is based on the accomplishment of the payer’s organization or investments.

In a broad sense, participation debt interest is interest that is based on how well the payer’s business or investments perform.

To some extent, the Act includes suggestions on whether parties are at arm’s length from one another. First off, according to section 251(1), “connected individuals” are unable to do business independently from one another. This implies that no one who is related to another through blood, marriage, a common-law connection, or adoption may ever be considered an arm’s length party. Furthermore, depending on the organizational control structure, businesses and people may be considered “related persons.”

Pro Tax Tip – Non-Residents’ Withholding Tax

Although the idea of a flat rate of withholding tax for non-residents on income with Canadian sources might seem straightforward, certain of the regulations under Part XIII can be extremely complex. A non-resident should take care to ensure that withholdings are taking place as needed since they are still responsible for tax even if the recipient of the Canadian income fails to do so. If not, the non-resident may be responsible for both the 25% tax and late payment fines.

The non-resident taxation system has several different components, one of which is the withholding tax that is applied to non-residents’ property-related income having a Canadian source. For instance, non-residents are subject to various regulations when it comes to the acquisition of taxable Canadian property. To determine your tax liabilities please get in touch with our expert Toronto tax lawyers, if you are a non-resident with income that is derived in Canada and are unsure of whether you are adhering to your Act-related requirements.


The content in this page is only generic in nature. Only at the time of posting is it current. It is not updated, thus it might not be relevant anymore. It does not offer legal advice, and neither should it nor can it be relied upon. Every tax scenario is unique to its circumstances and will be different from the instances described in the articles. You should consult with a knowledgeable Canadian tax lawyer if you have particular legal inquiries.


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