Certain amounts that are paid or credited by a Canadian resident to a non-resident of Canada, including dividends, royalties, and income from certain estates or trusts, are generally subject to Canadian tax under Part XIII of the Income Tax Act (Canada) (the "Act "). 1 Although the ultimate liability for Canadian Part XIII tax (commonly referred to as "withholding tax ") rests with the relevant non-resident, it is the Canadian-resident payer of an amount that is subject to Part XIII tax that generally has the obligation to withhold and remit withholding tax on behalf of the non-resident. The general rate of withholding tax under the Act is 25 percent, but the applicable rate may be reduced by the terms of a bilateral tax treaty. For instance, under the Canada-United States Income Tax Convention (the "Canada-US Treaty "), 2 royalties paid by a Canadian resident to a resident of the United States may be subject to a reduced withholding tax rate of 10 percent (or a complete exemption, under certain circumstances).
Prompted by recent changes to the Canada-US Treaty, such as the addition of the new, bilateral "limitation on benefits" clause, the Canada Revenue Agency (the "CRA") recently released a new set of declaration forms, the stated purpose of which is to help Canadian residents determine whether it is appropriate to apply a reduced rate of withholding tax to payments made to non-residents. Forms NR301, NR302 and NR303 (the "Forms") 3 are declarations that are designed to be used by conventional non-resident taxpayers ( e.g ., corporations, individuals), partnerships with non-resident partners, and hybrid entities, respectively, to substantiate eligibility to claim the benefits afforded by a particular tax treaty. While the Forms are not prescribed forms, and Canadian resident taxpayers are not required by statute to obtain a completed Form or equivalent information before applying a reduced rate of withholding tax on amounts paid or credited to non-residents, it is likely that, as a practical matter, the CRA will request such Forms or equivalent information during an audit of a taxpayer's cross-border tax affairs.
Draft versions of the Forms were initially released in June 2009 and the CRA sought public comments on the Forms until September 30, 2009. Some of the concerns raised during the public consultation period were addressed in the recently released versions of the Forms and supplementary information thereto. For instance, the Forms now include an undertaking that non-residents will advise Canadian payers of any changes to the information provided in the Forms, and the supplementary information released by the CRA confirms that penalty and interest relief may be available under subsection 220(3.1) of the Act ( i.e., by way of a Taxpayer Relief Request) (the " Fairness Regime ") to Canadian payers who obtain completed Forms and whose withholdings are thereafter found by the CRA to be deficient. However, other concerns that were expressed during the public consultation period do not appear to have been addressed, such as whether a payer may accept a duly completed Form without undertaking additional due diligence with respect to the accuracy of the statements made in the Form.
The Forms require a non-resident to provide information, such as its name, mailing address, foreign tax identification number (and Canadian tax identification number, if any), country of residence for treaty purposes, the type of income for which the non-resident is making the declaration, and a certification and undertaking with respect to the accuracy of the information presented in the Form. In addition to the standard certification that the information given on the Form is correct and complete, a non-resident must also certify that (i) it is the beneficial owner of the income to which the Form relates, and (ii) to the best of the non-resident's knowledge, and based on the factual circumstances, the non-resident is entitled to the benefits of the tax treaty between Canada and its country of residence on the relevant income. Furthermore, as noted above, a non-resident undertakes to immediately notify the payer, or partnership or hybrid entity through which it derives the income and to whom it submits the Form, of any changes to the information in the Form. It is not clear what the consequences, if any, are to a non-resident who makes a false certification or does not comply with its undertaking.
The Forms expressly provide that, for withholding tax determination purposes, they expire on the earlier of (i) a change in the non-resident's eligibility for treaty benefits, and (ii) three years from the end of the calendar year in which the Form is signed and dated.
Completion of the Forms should generally not be particularly burdensome, except in circumstances where the non-resident recipient of the subject payments is a partnership or hybrid entity that has a large number of non-resident partners or members, respectively.
establishing entitlement to treaty benefits
As indicated above, the information requested in the Forms is intended to assist Canadian residents in determining whether it is appropriate to apply a reduced rate of withholding tax to amounts paid or credited to non-residents. Historically, the CRA suggested that a payer could generally use a non-resident recipient's name and address when assessing whether the non-resident was entitled to claim the benefit of a reduced rate of withholding tax under a bilateral tax treaty, unless there was reasonable cause to suspect the beneficial owner resided in another jurisdiction. However, with the introduction of the new "limitation on benefits" clause in the Canada-US Treaty, the CRA is of the view that, in order to apply a treaty-reduced rate of withholding tax to an amount paid or credited to a non-resident, Canadian payers must have sufficient information to establish (i) the identity of the beneficial owner of such an amount, (ii) that the beneficial owner is resident in a country with which Canada has a tax treaty, and (iii) that the beneficial owner is eligible to claim the benefits afforded by the tax treaty on the income paid or credited. The CRA had stated that there will be a transition period until December 31, 2011 to allow payers to gather any additional information that is necessary to establish a non-resident's eligibility for a treaty-reduced rate of withholding tax under the CRA's new pronouncements. 4
(i) beneficial ownership
The CRA has stated that, generally, a Canadian resident payer can accept the payee as the beneficial owner of a subject amount, unless there is reasonable cause to suspect that the payee is not the beneficial owner. The CRA has provided the following examples of situations in which the payer should question whether the payee is, in fact, the beneficial owner of the amount paid: 5
- The mailing address for payment of the income is different from the registered address of the owner.
- The payee is known to act, even occasionally, as an agent or nominee (except agents or nominees residing in Switzerland).
- The payee is reported to be "in care of" another person, or "in trust".
Where the payer has any doubt as to the beneficial ownership of the subject payment, or when the payment is made to a partnership with non-resident partners or to a hybrid entity with members resident in the United States, the CRA is of the view that a declaration ( i.e., a Form) must be completed and forwarded to the payer. 6
Payers may accept an insurance corporation or a pension trust as the beneficial owner of amounts paid to a non-resident if such corporation or trust invests solely for itself and includes the amount in the calculation of its revenue. 7
(ii) eligibility to claim treaty benefits
Where a Canadian resident payer has reason to believe that the "limitation on benefits" clause in the Canada-US Treaty may restrict the application of treaty benefits, the CRA requires that the payer ask the non-resident recipient of the amount for certification that it is eligible for treaty benefits immediately or withhold tax at a rate of 25 percent. 8
amounts payable to a non-resident agent, nominee or registered holder
Canadian resident payers have an obligation to withhold and remit withholding tax in respect of payments made to intermediaries, such as agents, nominees and registered holders, located in foreign jurisdictions. Under such circumstances, the CRA has asserted that a reduced rate of withholding tax under an applicable tax treaty should only be applied where the Canadian payer has received, prior to the relevant payment, documentation from the agent or nominee that certifies the beneficial ownership of the payment, the country of residence of the beneficial owner(s) of the payment and their eligibility for treaty benefits. The CRA is of the view that the payer should receive a certification from the intermediary in the suggested form set out in the Pending Updates to IC76-12. The suggested form of the certification is similar to the suggested certification in paragraph 5(a) of the current version of Information Circular 76-12R6, 9 with modifications to include a certification that the beneficial owner is eligible to claim the benefits of a particular tax treaty and a reference to the Forms and the information in the Forms as examples of information that may be necessary to substantiate the accuracy of the information contained in the certification, which the agent, nominee or registered holder undertakes to provide to the CRA upon request. 10
when should a non-resident complete a Form?
Despite the fact that, as noted above, there is no statutory requirement for a payer to obtain a completed Form prior to applying a reduced rate of withholding tax, each Form sets out the circumstances in which the CRA asserts a Form should be completed. Based on the information contained in the Forms, the CRA suggests that Forms should be completed and obtained in the following circumstances:
- a non-resident taxpayer, partnership with non-resident partners, or a hybrid entity receives a payment that is subject to withholding tax;
- a non-resident taxpayer, partnership with non-resident partners, or a hybrid entity is submitting a request for a compliance certificate under section 116 of the Act ( i.e., forms T2062 or T2062A);
- a non-resident taxpayer is asked by a partnership or hybrid entity through which it derives income to complete Form NR301 to support a declaration by the partnership or the hybrid entity;
- a partnership with non-resident partners or a hybrid entity is requesting a refund of withholding tax;
- a partnership with non-resident partners or a hybrid entity is submitting a waiver request for amounts required to be withheld under Regulation 105 of the Income Tax Regulations ; and
- a hybrid entity is filing a Canadian income tax return and claiming a deduction relating to treaty benefits.
The CRA has also set out the following circumstances, which it refers to as "exceptions", in which a payer need not obtain a Form or equivalent information from a payee: 11
- where all of the following are true: (i) the payer knows that the payee is an individual, or the payee is an estate and the trustee has an address in the United States; (ii) the payer has a complete permanent address on file that is not a post office box or "care-of" address; (iii) the payer has no contradictory information; (iv) the payer has no reason to suspect the information is inaccurate or misleading; 12 and (v) the payer has procedures in place so that changes in the payee's information ( e.g ., a change of address or contact information that includes a change in country, or returned mail) will result in a review of the withholding tax rate;
- a payer is applying an exemption or a statutory withholding tax rate specified in Part XIII or Part XIII.2 of the Act ( e.g ., an exemption from withholding tax on interest payments to non-residents);
- where a payer pays or credits amounts to a Swiss address, withholding tax may be based on the tax rates in the Canada-Switzerland Income Tax Convention ; 13
- the payer has received a letter of exemption or written authorization issued by the CRA, which confirms that a treaty exemption or withholding tax rate reduction can be applied ( e.g., (i) a written authorization from the CRA in respect of the Doctrine of Sovereign Immunity exemption; or (ii) a letter of exemption issued by the CRA confirming that an organization or plan is exempt from tax under Article XXI of the Canada-US Treaty); and
- payments made to CDS Clearing and Depository Services Inc. on securities registered in the name of Cede & Co. without withholding tax.
why should a Canadian resident payer obtain Forms from non-resident recipients?
There is no absolute statutory requirement for a Canadian resident payer to obtain a Form from a non-resident to whom it pays or credits amounts subject to withholding tax. The Forms appear to be a tool to gather information that is relevant to the determination of whether a non-resident is eligible for benefits under a tax treaty. Ideally, the ability to demonstrate that completed Forms or equivalent information was previously obtained would be of assistance where there has been a deficiency in the amount of withholding tax and (i) the payer's directors wish to support a due diligence defence under subsection 227.1(3) of the Act, or (ii) the payer wishes to request penalty relief under the Fairness Regime in respect of such withholding deficiencies. However, the CRA has given no express indication that the possession of the Forms will be accepted as supporting such a due diligence defence or increase the likelihood that a taxpayer might be granted penalty relief under the Fairness Regime.
In fact, it arguably appears as though additional due diligence may be required in respect of the accuracy of the information contained in the Forms. In the supplementary information that accompanied the release of the Forms, the CRA advises that a Canadian resident payer should question information given by, and look at other information received from, the non-resident recipient or known about the non-resident where the payer "knows or has reasonable cause to believe that the information on the form:
- is incorrect or misleading;
- contradicts information in the payer's files; or
- is given without knowledge or consideration of the facts of a situation." 14
The CRA also states that where it determines that an insufficient amount of withholding 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." 15 The CRA notes that a taxpayer can seek penalty and interest relief under the Fairness Regime by making a request for taxpayer relief, but provides little additional detail as to the prospects of such a request being accepted under various circumstances. 16
Based on such CRA statements, it appears as though obtaining completed copies of the Forms or equivalent information may not necessarily provide the payer or payee with any additional protection from liability where the amount of withholding tax withheld from payments to non-residents is subsequently determined by the CRA to be insufficient.
The recent introduction of the Forms represents the culmination of several years of internal study and consultation by the CRA. It is reasonable to expect that the CRA will request copies of all Forms relevant to cross-border payments when conducting withholding tax audits. On that basis, recipients of payments from Canadian resident taxpayers should expect that requests for completed Forms will become more commonplace in the future. The current ambiguities with respect to the protections afforded by obtaining completed Forms, and the required due diligence associated with obtaining such documentation, will hopefully be resolved by the CRA in due course.