Non Resident Withholding Tax Canada - The Canadian income tax regime is different for Canadian resident taxpayers and non-resident taxpayers. While a Canadian resident (for tax purposes) must pay tax on Canadian income worldwide, a non-resident Canadian is only required to pay tax on Canadian sources of income. Sources of Canadian income for non-residents include income from employment in Canada and income from businesses operating in Canada. In addition, taxes under Part XIII of the Income Tax Act (the "Act") apply to income derived from Canadian properties.
This article will provide general considerations regarding the taxation of payments and discuss the specific provisions in Part XIII of the Act that apply to interest payments made by a Canadian payee to a non-resident.
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Withholding tax is a tax paid to the government by the payer of income against the recipient of income. For example, an employee will often have taxes withheld from each paycheck by their employer. The amounts withheld by the employer for income tax are shown in box 22 of the T4 slip issued to Canadian employees and sent to Canada Revenue Agency.
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The tax under Part XIII is different from the tax on the income of most Canadian employees. First, Part XIII of the Act applies only to a non-resident's Canadian-source income. Common types of payments that must be withheld are interest payments, rent, royalties, pension benefits and dividends. Second, withholding tax is levied at a flat rate of 25% of payments made to non-residents. If all income to a non-resident from Canadian sources is subject to tax, the non-resident is not required to file a tax return. Canada also has tax treaties with many countries which can reduce the tax rate on certain payments.
With regard to who is liable for payment and payment, the Act imposes an obligation on the payer to withhold tax under subsection 215(6). However, even if a taxpayer fails to withhold tax and remit these amounts to the CRA, a non-resident is also liable to pay these amounts to the CRA under subsection 212(1) of the Act. In other words, a non-resident is still liable for income tax even if the payer has not withheld the amounts.
The tax treatment of interest payments by a Canadian payer to a non-resident is described in paragraph 212(1)(b) of the Act. The current tax treatment of interest payments to non-residents changed significantly about 10 years ago, with changes that came into force on 1 January 2008.
Under the current regime, interest payments to non-residents are subject to tax in two situations: if the loan is "participating loan interest" or if the loan is from a non-resident payer and is not "fully exempt interest". . Action In other words, the payment of interest to a non-resident is not subject to tax unless the loan is "joint loan interest" as defined by s 212(3) of the Act. Generally, interest on debt is interest that is related to the payer's business or investment activity.
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The law provides some guidance, if the parties are distant from each other. To begin with, subsection 251(1) provides that "related persons" cannot deal equally with each other. This means that anyone related by blood, marriage or partnership or adoption cannot be a party under any circumstances. In addition, companies and individuals may be "related persons" depending on the company's control structure.
While a flat tax rate for non-residents on Canadian-source income may seem like a simple concept, some of the provisions under Part XIII can be quite controversial. Since a non-resident is liable for tax even if not paying Canadian income, a non-resident should take care to ensure that the tax is due when required. If not, the non-resident may be liable not only for the 25% tax but also for the late delivery penalty.
The withholding tax that applies to Canadian property income for non-residents is only one part of the non-resident tax regime. For example, there are different rules regarding the arrangement of Canadian taxable estates that apply to non-residents. If you are a Canadian non-resident with income and have concerns about whether you are complying with your obligations under the law, contact our top Toronto lawyers.
"This article provides information of a general nature only. It is current only as of the date of posting. It has not been updated and may no longer be current. It does not constitute legal advice and cannot or should be relied upon. All tax terms are They are fact-specific and will vary with the context of the articles. If you have specific legal questions, you should consult with an attorney." Non-residents are subject to Canadian withholding tax (also called Part XIII tax) on passive payments, investment-type income from Canada (generally where the payer is a Canadian resident). The most important examples of income subject to Part XIII tax are dividends, interest (whether paid between parties or if the interest is a participating interest), rent and royalties. The tax rate is 25% of the gross payment amount, with no deductions allowed. If the recipient is resident in a country that has a tax treaty with Canada, in most cases that treaty will reduce (or in some cases eliminate) Canada's Part XIII tax. So the analysis requires two steps:
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Note that even if the non-resident recipient is economically indifferent as to whether Canadian tax applies or not, because his home country tax is reduced dollar for dollar for the total Canadian tax paid by the foreigner Through the tax credit, it is still necessary. To find out if (and at what rate) Canadian taxes apply. If an insufficient Part XIII tax is remitted to the CRA, the Canadian payer is liable for the deficiency plus interest and penalties.
As mentioned elsewhere, there is a limit to how many expenses can remain paid for a free person before the Canadian creditor's deduction is cancelled. In which indirectly pays the payment tax, which is applicable. with money). Expenses incurred by a taxpayer on account of an unarmed person in a tax year must be repaid at the end of the payer's second succeeding tax year. If it is not paid by then, the amount is added to the payer's income in the immediately following tax year, effectively canceling any deductions already taken (see Figure 1).
As an alternative to raising the debtor's income, the parties can file a joint Form T2047 to estimate that the money was paid and owed back to the taxpayer, which would avoid raising income. However, an expense claim will often trigger Canadian income tax when the non-resident is a non-resident. Form T2047 must be filed by the due date of the taxpayer's income tax return for the following year (for example, mid-2023 for expenses incurred during 2020).
The main principle underlying the suspension of Part XIII is the imposition of tax on non-resident Canadian income of a passive, investment-type nature, i.e. income not normally included in the scope of what the non-resident is entitled to in the first Sections are taxable below. (Income from conducting business in Canada, employment services in Canada or gains from taxable Canadian property). Various aspects of this general rule that require further elaboration are:
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The "Canadian source" element of the Part XIII tax is established by the identity of the payer to whom the Part XIII tax applies: Canadian residents (or in the case of dividends, Canadian resident corporations). However, Part XIII tax may also apply to a non-resident payee.
S. 212(13) lists various payments in respect of which a non-resident payer is deemed to be a resident of Canada. 212, in consequence of which the stay of Part XIII may apply to a payment from one non-resident to another. Payments covered by 212(13) include:
Similarly, a non-resident payer is considered to be a resident of Canada with respect to amounts that are deductible in computing the non-resident's taxable income from a source in Canada that is subject to a tax treaty. The following are not exempt from Canadian tax (s) 212(13.2)). Non-residents are also considered Canadian residents with respect to certain special payments described in Part XIII, making it important to review the legislation carefully. For example, a non-resident is considered a resident of Canada under s. 214(9) relates to assignment or assignment of certain debt obligations.
A partnership is treated as a person resident in Canada for the purposes of Part XIII to the extent that the non-resident pays income that is deductible in computing the partnership's income from a source in Canada (s. 212 (13.1)). This has the effect of widening the scope of payments to which Part XIII tax applies to include partnerships
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