If you make payments to non-residents of Canada, you may be required to withhold an amount from the payment and remit it to the CRA. Additionally, you may be required to file an annual information return and distribute tax slips to the recipients of the payments. Failing to do any one of these things could lead to you being held liable for one or more of the amounts listed below.
Payments for Services
Payments to a non-resident of Canada for services rendered in Canada are subject to a 15% withholding at source. The withholding must be remitted to the CRA by the 15th day of the following month. The payor must file a T4A-NR Summary with the CRA and issue a T4A-NR Slip to the recipient by February 28th of the following year.
Corporate directors are considered employees for income tax purposes, so the regular payroll withholding and reporting requirements apply to the payment of director’s fees to non-residents of Canada.
Rent, Royalties, Interest, Dividends and Other
Generally, payments of rent, royalties, interest or dividends made by a resident of Canada to a non-resident of Canada are subject to a 25% withholding at source. The rate of withholding may be reduced where there is a tax treaty between Canada and the recipient’s country of residence.
The payor is responsible for ensuring the correct withholding rate is applied to the payment, and can be held liable for any deficiency in the withholding as a result of applying the incorrect rate. If the recipient of the payment is claiming that they are eligible for a reduced rate of withholding under a tax treaty, the payor should request that the recipient provide a completed form NR301 Declaration of Eligibility for Benefits under a Tax Treaty for a Non-Resident Taxpayer. If the CRA assesses the payor for insufficient withholding, a completed form NR301 can be used to raise a due diligence defense against the assessment. However, a completed form NR301 does not guarantee protection against the assessment. For this reason, the safest thing for the payor to do is to withhold at 25% and let the recipient apply for a refund of the excess withholding.
In some circumstances, a non-resident of Canada can be deemed to be Canadian resident in respect of certain payments. Where this applies, the non-resident payor will be subject to the withholding requirement.
The withholding must be remitted to the CRA by the 15th day of the following month. The payor must file an NR4 Summary with the CRA and issue an NR4 Slip to the recipient by March 31st of the following year.
Most people don’t think to ask their landlord where they’re from or what their legal status is. But because, as a tenant, you’re required to make a withholding from rent payments to a non-resident of Canada, it’s a good idea to confirm your landlord’s legal status before entering into a lease.
Certain types of royalty payments may be exempt from withholding.
Withholding from most interest payments to non-residents has been eliminated. However, withholding may still be required for payments of interest to non-residents that don’t deal at arm’s length with the payor, and for interest that is “participating debt interest.”
Withholding is required both from ordinary “taxable dividends” and from “capital dividends” paid to non-residents. Capital dividends can be received tax-free by Canadian residents, but not by non-residents.
Other types of payments that may be subject to withholding include payments of management fees, and estate or trust income. We can talk about them, and anything else regarding paying non-residents.
Please, see your DMCL advisor to learn more about how this topic can affect you.