CRA releases New Forms for Treaty-Reduced Rates of Canadian Withholding Tax

The Canada Revenue Agency (CRA) recently released final versions of new forms, NR301, NR302 and NR303 which is to be provided by recipients of payments from Canadian residents to certify eligibility for treaty-reduced rates of Canadian withholding tax.

These Forms are not to be provided to the CRA, but rather to the Canadian resident payer of the withholdable amount or to certain intermediaries along a chain of payments subject to withholding.

Until recently, the CRA generally accepted reliance on the payee’s address for determining whether to apply a treaty rate. By releasing these forms, it signals that the CRA is requiring a greater level of diligence on the part of payers of withholdable amounts to be as sure as possible that the correct reduced treaty rate is applied.

Although the use of the Forms is not mandatory, and they will not guarantee avoidance of penalties, interest, or liabilities for underwithheld tax, many taxpayers will likely apply a 25% withholding rate on payments of withholdable amounts to recipients who do not complete the Forms.

The CRA is looking at the payor, to review the information provided by a non-resident on these forms, or in another format, and 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.

In cases of inconstencies, the CRA is looking for intermediaries, prior to establishing a withholding tax rate, to 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.

Forms are valid for the earlier of 2 years, or a change in the eligibility for convention benefits.

* 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.

One question that came up after the release of these forms was that they do not address holding global securities through CDS or DTC.

For some direction, you need to check the update 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.

In this update, the CRA states that payments made to CDS on securities registered in the name of Cede & Co. (the nominee name for DTC) are made without tax. Tax will be withheld by CDS based on information received from DTC and collected by DTC’s participants.

I recommend you read the news release below to familiarize yourself with these forms.

The link to the release follows; http://www.cra-arc.gc.ca/formspubs/frms/nr301-2-3-eng.html

Here are the forms;

Form NR301, Declaration of eligibility for benefits under a tax treaty for a non-resident taxpayer; http://www.cra-arc.gc.ca/E/pbg/tf/nr301/nr301-10e.pdf

Form NR302, Declaration of eligibility for benefits under a tax treaty for a partnership with non-resident partners; http://www.cra-arc.gc.ca/E/pbg/tf/nr302/nr302-10e.pdf

Form NR303, Declaration of eligibility for benefits under a tax treaty for a hybrid entity; http://www.cra-arc.gc.ca/E/pbg/tf/nr303/nr303-10e.pdf

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Random tax stuff – withholding

A dividend payment from Canadian source dividends is subject to Canadian non-resident tax at a rate of 15%.

If the corporation is registered on the United States stock exchange, then it becomes IRS eligible, making the dividend payment subject to back-up withholding at the rate of 28%,

The 28% back-up withholding amount is reduced to 15% – the negotiated US – Canada treaty rate provided the holder submits a valid IRS form W9.

Without a W9, the holder is subject to 43% withholding tax (28% + 15%)