More information on forms NR301, NR302, and NR303

The Canada Revenue Agency (CRA) held a public consultation on forms NR301, NR302, and NR303 before their final release. The following information addresses comments and questions that were submitted but not addressed on the forms, in the new information linked to Information Circular IC76-12, Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention, or on the CRA Web site.

Due diligence of payer
The payer should review the information provided by a non-resident on Form NR301, NR302, or NR303, or in another format, to make sure they have enough information to support that the non-resident is eligible for tax convention/treaty benefits on the income being paid.

To establish a withholding tax rate, the payer should question the information given and look at other information received from the non-resident, or known about the non-resident, if the payer knows or has reasonable cause to believe that the information on the form:

• is not correct or is misleading;
• contradicts information in the payer’s files; or
• is given without knowledge or consideration of the facts of a situation.

Not enough tax withheld
If the CRA determines that not enough Part XIII tax was withheld on a payment to a non-resident, an assessment (including interest) can be issued to the payer, the non-resident recipient, or both. If the payer is issued an assessment of tax, a penalty applies on that amount.

You can ask for penalty/interest relief under subsection 220(3.1) by writing to the tax services office and by submitting a completed Form RC4288, Request for Taxpayer Relief. For details on how to support a request, see Information Circular IC07-1, Taxpayer Relief Provisions.

Foreign tax identification number
A foreign tax identification number is the number that is used by non-resident taxpayers when reporting their income in their country of residence. Some countries do not issue tax identifier numbers. So if the “Foreign Tax Identifier” field is blank on an otherwise completed form, the payer can consider that form complete. However, most non-residents will have an identifier, and the payer should ask them to provide it.

Mailing address and country of residence
Form NR301 will be considered valid if a non-resident completes the mailing address information with a care-of address or post office box, since the payer will not rely on the mailing address to determine the country of residence of the payee. The payer will instead rely on the field called “Country of residence for treaty purposes.” This field has to be properly completed by the payee. An entry is this field such as “see above” is not acceptable.

The CRA recommends that a revised Form NR301 be requested from a taxpayer if their mailing address has changed to a different country. A change in mailing address from one country to another indicates that the country of residence for convention/treaty purposes may have changed.

Relying on the draft forms
Draft forms NR301, NR302, and NR303 were posted on the CRA Web site for some time before they were officially released. A payer may have asked a non-resident to complete the draft version of one of these forms, or asked for written confirmation of similar information (beneficial ownership, residency, eligibility for convention/treaty benefits). If so, they can continue to rely on that completed form to apply the treaty tax rate on payments subject to Part XIII withholding tax until the expiry date noted on the draft form (related to a change in the eligibility for convention benefits or two years from the date of signature, whichever is earlier).

Benefits of getting Form NR301 from individuals resident in the United States and other countries
An individual resident in the United States will always be a qualifying person under Article XXIX – A (Limitation on Benefits Article) of the Canada-United States Income Tax Convention. However, by completing Form NR301, a payee confirms that they are the beneficial owner and an individual who is resident of the United States. Asking for written confirmation of these facts provides assurance to the payer. Such a request requires active participation by the payee in the payer’s determination of the withholding tax rate. This should reduce instances of not enough, or misleading, information being provided to a payer by a non-resident payee.

Individuals who are not sure of their residency can refer to Interpretation Bulletin IT221, Determination of an Individual’s Residence Status, use either Form NR73, Determination of Residency Status (Leaving Canada), or NR74, Determination of Residency Status (Entering Canada),to ask for help from the CRA.

Non-resident refuses to complete Form 301 or otherwise provide information
Completing Form 301 is not mandatory. However, if a non-resident refuses to provide certification of beneficial ownership, residency, or eligibility for treaty benefits on request by a payer, the full statutory rate should be withheld.

Non-resident corporations
Not all corporations with an address in the United States will be entitled to treaty benefits under the Limitation on Benefits Article in the Canada-United States Income Tax Convention. Therefore the CRA recommends that the payer get Form NR301 or similar information before applying a reduced tax treaty rate.

Joint accounts
When paying or crediting amounts to joint account holders, you should get a form for each account holder. If they are resident in the same country or in separate countries with the same tax rate, apply the appropriate rate. If they are resident in separate countries, with different tax rates, apply a composite rate depending on the ownership percentages of the income in the account.

When you apply a composite rate, keep the information on ownership percentages on file in case we ask to see it. Alternatively, you could withhold at the statutory tax rate of 25%, and tell the account holders that a refund can be obtained from the CRA by using Form NR7-R, Application for Refund of Part XIII Tax Withheld.

If one account holder is a Canadian resident and the other is not, and you choose to withhold Part XIII tax on the full amount, the Canadian resident includes their part of income and their part of tax withheld on their income tax return (report the full amount paid and the tax withheld on an NR4 slip).

Income paid to a non-resident by an estate or a trust, such as a mutual fund trust
Payments from an estate or trust to a non-resident beneficiary are taxed as trust income, regardless of the source of the income. The income type to be entered on a Form NR301, NR302, or NR303 is trust income. (However, this does not include a deemed dividend paid by a SIFT trust—to which subsection 104(16) applies. Such a deemed dividend keeps its character as a dividend). The tax rate that applies to trust income under Part XIII of the Income Tax Act is 25%, although it may be reduced by a tax treaty (for example, the Canada-United States Income Tax Convention rate is 15%).

As long as the income of a trust is payable to a non-resident and that non-resident is entitled in the year to enforce the payment, the income is deemed paid or credited to the non-resident and is subject to withholding tax. It is therefore recommended that the payer get Form NR301, NR302, or NR303 as applicable, or the information asked for on these forms.

There is a 15% withholding tax under Part XIII.2 on amounts paid or credited to a non-resident investor that are not otherwise subject to tax under Part I or Part XIII. Since this 15% withholding tax is provided for in the Income Tax Act rather than a tax treaty, there is no need to get Form NR301 for such a situation.

A person cannot use Form NR301 to claim treaty benefits under Article XXI of the Canada-United States Income Tax Convention. For exemptions from tax under Article XXI, a non-resident must apply to the CRA for a letter of exemption. See Publication T4016, Exempt U.S. Organizations, Under Article XXI of the Canada - United States Tax Convention. Trust income paid to an organization that holds a letter of exemption issued by the CRA under paragraph 1 of Article XXI of the Canada-United States Income Tax Convention is exempt from withholding tax. Paragraph 1 provides an exemption for all income to the extent that such income is exempt from tax in the United States. However, an organization that holds a letter of exemption issued by the CRA under paragraph 2 of the same article is not exempt from tax on trust income. This is because paragraph 2 only provides an exemption for interest and dividend income, not trust income.

Income attributable to the permanent establishment of a non-resident in Canada
A non-resident of Canada receiving income normally subject to Part XIII withholding tax that is attributable to a permanent establishment in Canada cannot use Form NR301, NR302, or NR303 to prove to the payer that no withholding tax is required. Under regulations 805 and 805.1 of the Income Tax Regulations, a non-resident corporation can ask for confirmation from the CRA that an amount will be considered to be attributed to a business carried on by the corporation through a permanent establishment in Canada, and therefore reported on the non-resident’s Canadian income tax return. Requests should be sent in the form of a letter to the applicable tax services office. The non-resident can then provide the letter from the CRA to their payer.

Hybrid entities
A hybrid entity can be considered a corporation or a trust for Canadian tax purposes.

The Canada-United States Income Tax Convention is the only treaty that Canada has signed under which a person (who is a resident of the United States) can be considered to derive income that flows through a hybrid entity (Article IV, paragraph 6 of the treaty). Therefore to calculate Part XIII tax on an amount payable to a hybrid entity, you use the treaty tax rate for members or shareholders who are residents of the United States and the statutory withholding rate of 25% for all other members (including residents of Canada).

When completing Form NR303, the authorized person should take care to read and understand paragraphs 6 and 7 of Article IV of the Canada-United States Income Tax Convention and make sure that treaty benefits apply to the income earned.

Reporting of payments made to partnerships and hybrid entities
Complete one NR4 slip for payments subject to Part XIII tax and one T4A-NR slip for payments made to the partnership which are subject to withholding tax under regulation 105 of the Income Tax Regulations. For payments to hybrid entities, do the same thing. The partnership will allocate its income and the withholding tax among partners and may have to file a T5013 information slip for each partner.

Hybrid entities and partnerships with many members or partners
If a partnership or a hybrid entity with non-resident partners or members has many partners or members and it is not practical to get a completed Form NR301, NR302, or NR303 from each one (for example, where a small share or amount of income is attributable to a particular partner or member that is itself another partnership or hybrid entity with many partners or members), it is acceptable to include them in Part II on worksheets A or B of Form NR302 and on Part II of Worksheet A of Form NR303. In this way the composite tax rate will be calculated, assuming no benefits apply to those partners or members.

A refund can be requested from the CRA using Form NR7-R, Application for Refund of Part XIII Tax Withheld, no later than two years after the end of the year in which an excess withholding is remitted.

Statement of Canadian residency for Canadian resident partners
Form NR302, Declaration of Eligibility for Benefits Under a Tax Treaty for a Partnership With Non-Resident Partners, provides for a reduction of the Part XIII withholding tax on income of a partnership that is allocated to Canadian resident partners who will report their share of partnership income on their Canadian income tax return. The certification part of Form NR302 requires the partnership to get a statement of Canadian residency for Canadian resident partners. A signed statement by the person or their authorized representative indicating the person is resident and taxable in Canada on their world income is preferable. However, also acceptable are similar statements or information obtained by the partnership from which it can be reasonably concluded that the partner will report the amount on a Canadian income tax return as a resident of Canada.

Note
Form NR302 cannot be used to provide support for a reduction of Part XIII withholding tax on rental income if either the non-resident is making an election under Section 216 to file a Canadian income tax return to report the rental income, or if there are Canadian resident partners.