For non-residents earning income from Canadian sources, understanding Part XIII of the Income Tax Act is crucial. This provision governs the withholding tax on certain types of income paid to non-residents. Failure to comply can lead to significant tax liabilities, including penalties and interest.
What Is Part XIII Tax?
Part XIII tax is a withholding tax applied to specific types of income paid or credited to non-residents of Canada. This may be the case if you moved away from Canada but kept your Canadian address on your taxable investment accounts. The standard withholding rate is 25% of the gross amount, though this rate can be reduced under tax treaties between Canada and other countries.
The tax is typically withheld at the source by the Canadian payer, or custodian, who is responsible for remitting it to the Canada Revenue Agency (CRA). This tax generally represents the final Canadian tax obligation on the related income for non-residents.
Who Does It Apply To?
Part XIII tax applies to non-resident individuals and corporations receiving certain types of Canadian-source income, including:
- Dividends
- Interest (with exceptions)
- Rental and royalty payments
- Pension payments
- Old Age Security (OAS) and Canada Pension Plan (CPP) benefits
- Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) withdrawals
- Annuities
- Management fees
- Estate or trust income
- Payments for film or video acting services
It’s important to note that the responsibility for withholding and remitting Part XIII tax lies with the Canadian payer. If the payer fails to withhold the appropriate tax, they may be held liable for the tax, along with any applicable penalties and interest.
Key Considerations
- Tax Treaty Benefits
Canada has tax treaties with numerous countries that may reduce the Part XIII withholding tax on certain types of income. To benefit from a reduced rate, the non-resident recipient must:
- Be a resident of a country that has a tax treaty with Canada,
- Be the beneficial owner of the income, and
- Provide appropriate documentation (e.g., Form NR301) to the Canadian payer.
Failure to provide the necessary documentation may result in the application of the full 25% withholding rate.
- Rental Income and Section 216 Election
Non-residents earning rental income from Canadian properties are subject to Part XIII tax on the gross rental income. However, they may elect under Section 216 of the Income Tax Act to file a Canadian tax return and pay tax on the net rental income (after expenses), which could result in a lower tax liability.
Another alternative regarding the disposition of Canadian property and rental income is to file a Form T2062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property. Once approved by the CRA, your agent can withhold 25% of the net profits rather than 25% of the gross revenue.
If you need to establish non-residency with the CRA, you can file Form NR73 Determination of Residency Status (leaving Canada). We recommend consulting with a cross-border professional before filing any forms with the CRA related to non-residency or the disposition of property.
- Pension Income and Section 217 Election
Similarly, non-residents receiving certain types of Canadian pension income can elect under Section 217 to file a Canadian tax return. By making a section 217 election, you pay tax on your Canadian-source income at the same rate as Canadian residents and may receive a refund for all or part of the non-resident tax withheld.
- Interest Income Exceptions
While interest payments to non-residents are generally subject to Part XIII tax, there are exceptions. For example, interest paid to arm’s-length non-residents is often exempt from withholding tax. However, interest paid to non-arm’s-length non-residents or participating debt interest may still be subject to withholding tax.
- Obligations of Canadian Payers
Canadian payers must:
- Determine if the payment is subject to Part XIII tax,
- Withhold the appropriate amount of tax,
- Remit the tax to the CRA by the 15th day of the month following the payment, and
- File an NR4 information return to report the amounts paid and taxes withheld.
Failure to comply with these obligations can result in the payer being held liable for the tax, along with penalties and interest.
Part XIII tax is a critical consideration for non-residents earning certain types of income from Canadian sources. Understanding the types of income subject to this tax, the potential for reduced rates under tax treaties, and the obligations of Canadian payers is essential to ensure compliance and avoid unexpected tax liabilities.
If you’re a non-resident receiving Canadian-source income or a Canadian payer making payments to non-residents, it’s advisable to consult with a tax professional to navigate the complexities of Part XIII tax and ensure compliance with all applicable regulations.
Note: This article provides general information and is not a substitute for professional tax advice. Tax laws and regulations are subject to change, and individual circumstances can vary. Always consult with a qualified tax advisor for personalized guidance.
