The Canada-U.S. Tax Treaty provides reduced rates of withholding tax on various types of income and cross-border transactions for residents of one country receiving or earning income from the other. Generally, to take advantage of the reduced treaty rates the payee (individual earning the income) has to prepare and file certain forms. The form(s) required to be filed will depend on the type of income that is received and are generally submitted to the payer.
A common scenario is an individual who recently moved to the U.S. and became a non-resident of Canada for tax purposes, but maintains non-registered investment or bank accounts in Canada. From these Canadian accounts, the individual continues to earn Canadian source investment income.
Since the individual is a non-resident of Canada, the Canadian source income earned in his Canadian investment and bank accounts may be subject to Part XIII non-resident withholding tax. The rate of Part XIII withholding tax that is generally withheld is 25%.
This withholding tax can usually be reduced or eliminated by the Canada-U.S. Tax Treaty. For example, the withholding rate on the interest could be reduced to 0% and the withholding rate on the dividends could be reduced to 15%.
To receive these reduced rates, the non-resident of Canada would need to prepare Form NR301 – Declaration of Eligibility for Benefits Under a Tax Treaty for a Non-Resident Taxpayer. This form is Canada’s version of the U.S. Form W-BEN, Certificate of Foreign Status of a Beneficial Owner for United States Tax Withholdings. Some Canadians may be familiar with the latter if they hold U.S. securities in their investment accounts.
If you are intending to become a non-resident of Canada for tax purposes and you anticipate earning any Canadian source income during your non-residency status (e.g. investment income, pension, annuities, royalties, rental, and estate or trust income it is important to discuss your situation with one of our qualified professionals to ensure that the appropriate amount of tax is being withheld.