Pending updates to IC76-12, Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention related to forms NR301, NR302, and NR303
- The following information will replace paragraphs 4, 5, 9, and 11.
Eligibility for tax treaty benefits
The payer must have recent and sufficient information to establish the identity of the beneficial owner for the purpose of applying treaty benefits, whether they are resident in a particular country with which Canada has a tax treaty and whether they are eligible for treaty benefits under the tax treaty on the income being paid.Non-residents can use the following forms to provide this information. Partnerships or other flow-through entities with non-resident partners or members can also use them to certify that they have obtained such information from their partners or members. Although forms NR301, NR302, and NR303 are not prescribed forms, the information they request is important for determining whether a tax treaty rate can be applied. Equivalent information can be accepted.
- Form NR301, Declaration of eligibility for benefits under a tax treaty for a non-resident taxpayer
- Form NR302, Declaration of eligibility for benefits under a tax treaty for a partnership with non-resident partners
- Form NR303, Declaration of eligibility for benefits under a tax treaty for a hybrid entity
Since this is a change from the Canada Revenue Agency's previous position that generally accepted the use of the payee's name and address to determine whether to apply treaty benefits, we provided a transition period, which ended December 31, 2012, that allowed payers to gather the forms or additional information and perform any procedural or system changes needed.
Generally, you can accept the payee as the beneficial owner of the income unless there is reasonable cause to suspect that this is not correct. Although this list does not cover all situations, if any of the following criteria are met, the payer should question whether the payee is the beneficial owner:
- The payee is known to act, even occasionally, as an agent or nominee (except agents or nominees residing in Switzerland).
- The payee is reported to be "in care of" another person, or "in trust."
- The mailing address for payment of the income is different from the registered address of the owner.
In any doubtful case, or when the payment is made to a partnership with non-resident partners or to a hybrid entity with members resident in the United States, a declaration has to be completed and forwarded to the payer. Refer to the above comments on forms NR301, NR302, and NR303 for information on how to make this declaration.
If the payee is an insurance corporation or pension trust, you can accept the payee as the beneficial owner of amounts paid to a non-resident. However, that corporation or trust has to invest only for itself and include the amounts when it calculates its revenue.
The payer may choose to apply reduced withholding tax without obtaining the forms or equivalent information regarding beneficial ownership, country of residence, and eligibility for treaty benefits if all of the following are true:
- You know that:
- the payee is an individual, or
- the payee is an estate of a United States resident that is managed and controlled from the United States.
- You have a complete permanent address on file that is not a post office box or care‑of address.
- You have no reason to suspect the information is inaccurate or misleading.
- You have procedures in place so that changes in the payee's information (for example, a change of address or contact information that includes a change in country, or returned mail) will result in a review of the withholding tax rate.
Reductions and exemptions provided in the Income Tax Act
Under the Income Tax Act there are many exemptions from withholding tax on interest payments to non-residents and on certain other amounts. There is no need to obtain declarations or equivalent information if you are applying an exemption or a statutory withholding tax rate specified in Part XIII or Part XIII.2 of the Act.
Letters of exemption or written authorization
The Canada Revenue Agency (CRA) issues a letter of exemption or written authorization in certain situations confirming that a treaty exemption or reduction can be applied. In these cases, the payer will rely on that letter. A declaration from the non-resident payee is not sufficient or may not be relevant. For example:
Certain amounts paid to foreign governments
Certain amounts paid to the government of another country might not be subject to the Part XIII withholding tax either due to a provision in a tax treaty or according to the Doctrine of Sovereign Immunity. Information Circular IC77-16 discusses how to obtain a written authorization from the CRA for the Doctrine of Sovereign Immunity exemption to apply.
A number of Canada's tax treaties provide for an exemption from withholding tax for certain pensions and similar payments received in the year from Canada if the total amount received from all payers is less than a certain threshold amount. Consult Guide T4061, NR4 – Non Resident Tax Withholding, Remitting, and Reporting, for more information on pension exemptions.
In addition, where the non-resident has made an election to file an income tax and benefit return to report and pay tax on their rental or pension income under section 216 or section 217 of the Income Tax Act, the CRA will send the payer a letter authorizing a lower rate of tax.
Amounts exempt under Article XXI of the Canada – United States Tax Convention
A pension plan or a religious, scientific, literary, educational, or charitable organization may be exempt from tax on certain income under Article XXI of the Canada – United States Tax Convention. If you only receive the exemption number from the non-resident you must verify the expiry date by checking Guide T4016, Exempt U.S. Organizations - Under Article XXI of the Canada – United States Tax Convention.
Agents or nominees residing in Switzerland
The tax based upon the tax rates in the Canada-Switzerland tax treaty may be withheld from all amounts subject to Part XIII tax paid or credited to an agent or nominee in Switzerland. However, there may be additional Canadian Part XIII tax payable if the beneficial owners reside outside Switzerland. These amounts are to be withheld and remitted by those agents or nominees to the Federal Tax Administration of Switzerland for the purposes of forwarding it to the Canadian tax authorities.
Elective dividend service
Payments made to CDS Clearing and Depository Services Inc. (CDS) on securities registered in the name of Cede & Co. are made without withholding tax. Tax will be withheld by CDS based on information received from the Depository Trust Company (DTC) and collected by DTC's participants.
- The following information will replace paragraphs 10 and 12.
Interest or dividends payable to a non-resident agent or nominee / financial intermediaries
Canadian payers or disbursing or withholding agents are required to withhold 25% tax on taxable payments subject to Part XIII tax that are made to non-resident agents or nominees/financial intermediaries located in foreign countries. A reduced rate of tax under an applicable tax treaty between Canada and the beneficial owner's country of residence should only be applied where the Canadian payer or withholding agent has received documentation from the agent or nominee that certifies beneficial ownership, country of residence, and eligibility for treaty benefits, prior to the payments.
- a taxable amount of interest or dividends is paid to a person in a country with which Canada has a tax treaty, and
- an agent or nominee of the beneficial owner of the amount provides financial intermediary services as part of a business,
the information supplied to the payer by the agent or nominee, pursuant to the following criteria, will establish whether the withholding rates indicated in Part XIII or the rates given in the appropriate tax treaty apply. Please refer to the Income Tax Act to verify whether the interest amount paid or credited to a non-resident is taxable. It is understood that only the entity who directly pays the beneficial owner will have the address and identification information of the beneficial owner. We expect that entity to maintain this information and not pass it up to a chain of intermediaries. The payer will only receive pooled information in the form of agent or nominee certificate as described in IC 76-12R6.
If the agent or the nominee is in receipt of interest subject to Part XIII tax for more than one beneficial owner in respect of a particular debt issue of a resident of Canada, the rate of the tax to be applied has to be determined. It will be acceptable to determine the portion of the interest beneficially owned by residents of the countries with which Canada has a tax treaty, who are eligible for treaty benefits, and calculate the tax accordingly. The portion of the interest that is beneficially owned by residents of the countries with which Canada does not have a tax treaty or who are not eligible for treaty benefits will be subject to the statutory Part XIII withholding rates. It is recommended that the beneficial owner or payee use the applicable Form NR301, NR302, or NR303, or provide the information requested in these forms (see above for exceptions) to the agent or nominee, who will then prepare its own certification as outlined below to provide to the payer.
Where the agent or the nominee is in receipt of dividends subject to Part XIII tax for more than one beneficial owner in respect of a particular class of shares of a corporation resident in Canada, the dividends may be segregated into groups. One or more groups will consist of dividends beneficially owned by residents of countries with which Canada has a tax treaty, who are eligible for treaty benefits, providing a particular preferential rate of Canadian tax. The remainder of the dividends beneficially owned by residents of countries with which Canada does not have a tax treaty or who are not eligible for treaty benefits will be subject to the statutory Part XIII withholding rates. It is recommended that the beneficial owner or payee use the applicable Form NR301, NR302, or NR303, or provide the information requested in these forms (see above for exceptions) to the agent or nominee, who will then prepare its own certification as outlined below to provide to the payer.
These procedures should enable the non-resident nominee or agent to advise the payer, on a timely basis, as to the portion of interest or dividend payments subject to preferential tax rates, thereby enabling the payer to determine the proper amount of tax to be withheld from a particular payment. This information must be provided initially to the payer in the form of a certification (see below), for each interest or dividend payment. However, for subsequent payments, a replacement certificate is required only where there has been a change, other than in the amount to be paid or credited, that would affect the amount of Canadian tax to be withheld.
Certifications by agents, nominees or registered holder
Certifications should be forwarded to the payer to permit the withholding of tax at the lower treaty rate. The suggested form that follows illustrates the basic information that must be provided:
CERTIFICATION WITH RESPECT TO CANADIAN NON-RESIDENT WITHHOLDING TAX, BY A PERSON WHO IS AN AGENT OR NOMINEE
PROVIDING FINANCIAL INTERMEDIARY SERVICE AS PART OF A BUSINESS
RE: ______________(description of property)
I/We _______________________(name of agent, nominee or registered holder) hereby certify that the income from all of the property described above, registered or to be registered in my/our name, is and will continue to be held solely on behalf of beneficial owners entitled to claim tax treaty benefits under a tax treaty [Footnote 1] that provides for a Canadian withholding tax rate of __% on amounts paid or credited in respect of such property.
I/We undertake to replace this certificate should there be any changes in the underlying information that would make this certification inaccurate.
I/We also undertake to provide to the Canada Revenue Agency, upon request, such information as may be necessary to substantiate the accuracy of the information contained herein.
While not an exhaustive list, this would include for example:
- Form NR301, NR302, or NR303, the information requested in these forms received from the beneficial owners or payees,
- a Letter of Exemption or exemption number issued by CRA,
- other supporting information for beneficial owners who are individuals for which there is guidance on the CRA website [Footnote 2], or
- an agent/nominee certifications from a payee who is an agent or nominee providing financial intermediary services as part of a business (for clients who are financial intermediaries).
Dated, _______, 20__ .
(Authorized signature of agent, nominee, or registered holder)
Footnote 1 Entitled to claim – Resident in the tax treaty country and eligible for tax treaty benefits even if the treaty contains limitation on benefits provisions, or other restrictions on benefits such as the person being taxable in /taxed in a country or the income being remitted to or received in the country of residence. In addition, a tax treaty provision reduces the withholding tax on the particular amount being paid to the rate specified in the certification. Further information concerning declarations of eligibility to claim benefits under a tax treaty is available at www.cra-arc.gc.ca.
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