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Non-residents of Canada that are eligible for benefits under a tax treaty entered into between Canada and another country will now have to complete a declaration or provide equivalent information to avail themselves of any reduced rate of tax or exemption provided under the relevant tax treaty. Canada Revenue Agency (“CRA”) recently released three declaration forms to be used by non-residents of Canada for this purpose, namely Form NR301 – Declaration of eligibility for benefits under a tax treaty for a non-resident taxpayer (“Form NR301”), Form NR302 – Declaration of eligibility for benefits under a tax treaty for a partnership with non-resident partners (“Form NR302”), and Form NR303 – Declaration of eligibility for benefits under a tax treaty for a hybrid entity (“Form NR303”), which include specific instructions from CRA. Certain guidelines were also recently issued by CRA in relation thereto (the “Guidelines”).
Non-Resident Individuals, Corporations and Trusts
Form NR301 must be completed by non-residents of Canada that are individuals, corporations, trusts and foreign entities (e.g. foreign partnerships) that are taxed as corporations on their worldwide income under the laws of the foreign country and are claiming treaty benefits in respect of: (i) income subject to Canadian withholding taxes under Part XIII of the Income Tax Act (Canada) (the “ITA”), such as interest, dividends, pension, annuities, royalties and estate or trust income, (ii) gains realized on the disposition of taxable Canadian property or (iii) income of any kind subject to Canadian taxation that is derived through a partnership or hybrid entity that is treated as a fiscally transparent entity by a country with which Canada has a tax treaty and the particular entity requests that the non-resident complete Form NR301 to support a declaration by such entity on Form NR302 or Form NR303, as discussed below.
An entity will generally be considered to be fiscally transparent under the laws of a foreign country if the income or gains of such entity are taxed at the member or partner level. A hybrid entity is generally a foreign entity that is treated differently under foreign tax laws than for Canadian tax purposes. For example, a US limited liability company (“US LLC”) that is treated as fiscally transparent for US tax purposes is considered to be a hybrid entity because it is treated as a corporation for Canadian tax purposes.
Non-residents of Canada must disclose on this form the following information: (i) legal name of non-resident, (ii) mailing address of non-resident, (iii) confirmation of type of non-resident (i.e., individual, corporation or trust), (iv) foreign and Canadian tax identification numbers if any, (v) country of residence for treaty purposes, (vi) type of income for which the non-resident is eligible for treaty benefits (e.g., interest, dividends, royalties, trust income, income from business carried on in Canada or gains from disposition of taxable Canadian property).
This form must be executed by the non-resident, or if the non-resident is a corporation, trust or partnership, a person who is authorized to sign on behalf of the corporation, trust or partnership. By executing this form, the non-resident certifies that the information given on the form is correct and complete, the non-resident is the beneficial owner of all income to which the declaration relates and that, to the best of the non-resident’s knowledge, the non-resident is entitled to the benefits under the tax treaty between Canada and the country of residence with respect to the particular type of income.
In this regard, CRA instructs the non-resident to take into account any limitation on benefits provision (e.g., Article XXIX-A of the Canada-US Tax Treaty (the “Tax Treaty”)) under the relevant tax treaty which may deny treaty benefits to the non-resident. CRA also indicates that it may ask the non-resident for more information to substantiate its treaty benefit claim in the context of an audit or review or while processing a request related to such claim.
The non-resident also undertakes by executing Form NR301 to immediately notify the payer of any such income, or partnership or hybrid entity through which the income is derived, as the case may be, of any changes to the information provided on Form NR301. For purposes of claiming a reduced withholding tax rate under Part XIII of the ITA, the declaration on Form NR301 expires on the earlier of any change in the non-resident’s eligibility for treaty benefits or three years from the end of the calendar year in which this form is signed and dated.
According to CRA’s instructions, Form NR301 is not required to be completed to support exemptions or reductions from Part XIII withholding taxes that are provided for in the ITA rather that in the particular tax treaty, such as fully exempt interest payments as defined in subsection 212(3) of the ITA, exempt arm’s length interest payments under paragraph 212(1)(b) of the ITA and reductions of Part XIII non-resident withholding tax on rental income when the non-resident files an election under section 216 of the ITA.
If the income is received by the non-resident directly from a Canadian resident payer and is subject to Canadian withholding taxes under Part XIII, the non-resident is instructed to send the completed form to such payer in order to benefit from any reduced Canadian withholding tax rate on such income under a tax treaty. Form NR301 must be sent to a partnership or hybrid entity if income is derived by the non-resident through a fiscally-transparent partnership or hybrid entity as discussed above, and such entity has requested the non-resident to complete this form to support the entity’s declaration on Form NR302 or NR303, as applicable. Form NR301 must also be sent to CRA along with forms T2062-Request by a non-resident of Canada for a certificate of compliance related to the disposition of taxable Canadian property or T2062A – Request by a non-resident of Canada for a certificate of compliance related to the disposition of Canadian resource or timber resource property, Canadian property (other than capital property), or depreciable taxable Canadian property if the non-resident is requesting a certificate of compliance for the disposition of taxable Canadian property that is treaty protected property under section 116 of the ITA.
For its part, a Canadian resident payer is instructed not to apply a reduced Canadian withholding tax rate under Part XIII where: (i) the non-resident has not provided Form NR301 or equivalent information and such payer is not sure if the reduced rate applies, (ii) Form NR301 provided by the non-resident is not complete (iii) a tax treaty is not in effect between Canada and the non-resident’s country of residence; or (iv) such payer has reason to believe that the information provided in the non-resident’s declaration is incorrect of misleading. CRA notes that Canadian and foreign tax identification numbers field on the form may be blank because not all non-residents will have these tax numbers. Therefore, it would appear that CRA will not consider a form to be incomplete if such fields are left blank for this reason. However, CRA indicates that most non-residents should have a foreign tax identification number and that the payer should specifically ask the non-resident for such number.
In the Guidelines, CRA advises the payer to conduct due diligence in respect of the information provided by the non-resident on Form NR301, Form NR302 or Form NR303. In determining the applicable Canadian withholding tax rates, CRA indicates that if the payer knows or has cause to believe that the information on the form is not correct or misleading, contradicts information in the payer’s files, or is given without knowledge or consideration of the facts of a situation, the payer should question the information given and look at other information received from the non-resident, or known about the non-resident.
Partnerships with Non-Resident Partners
Form NR302 must be completed by fiscally transparent partnerships with non-resident partners in order to claim treaty benefits to which the partners are entitled to in respect of income or gains of the partnerships that are subject to Canadian taxes. The partnership must disclose on this form information in respect of the partnership that is similar to Form NR301. In addition, the partnership must compute and disclose the Part XIII effective Canadian withholding tax rate applicable to income subject to such tax based on partners’ treaty entitlement and treaty exemption percentage applicable to Canadian business income and gains from disposition of taxable Canadian property based on partners’ treaty entitlement.
There are two worksheets attached to Form NR302 for purposes of computing the Part XIII effective Canadian withholding tax rate and the treaty exemption percentage as described above. In order to compute this rate and percentage, the partnership must obtain the following information from each partner: (i) name of partner; (ii) type of partner (i.e., individual, corporation, trust, partnership or hybrid entity (type of hybrid entity must be specified)); (iii) Canadian tax identification number if any; (iv) country of residence; (v) percentage of income or gain of partnership allocated to partner; (vi) applicable treaty rate or exemption percentage in respect of each partner.
By executing Form NR302, the authorized partner certifies that it has received completed Form NR301, NR302 and NR303 (or equivalent information), or a statement of Canadian residency, as appropriate, for each partner whose residency in Canada or entitlement to treaty benefits affected the calculation of the effective rate of withholding or treaty exemption percentage. Therefore, it is expected that the information to be disclosed will generally be obtained by the partnership from Form NR301, Form NR302 and Form NR303 provided by the partners of the partnership. In particular, if any of the partners of a partnership are themselves partnerships or hybrid entities, then the applicable treaty rate or exemption percentage for such partnership or hybrid entity would be obtained from their respective declaration on Form NR302 or Form NR303, as applicable.
In addition, the authorized partner certifies by signing this form that the information given on the form and its attachments is correct and complete and must undertake to immediately notify the payer, or the partnership or hybrid entity through which the income is derived and to whom it is submitting this form of any changes to the information provided therein.
CRA states that it may ask the partnership for more information to substantiate the tax treaty benefit entitlement of the partners during an audit or review or while processing a related request for treaty benefit claim. According to CRA, this additional information could include, among other things, Forms NR301, NR302 and NR303 (or equivalent information), or statements of Canadian residency, as appropriate, for each partner whose residency in Canada or entitlement to treaty benefits affected the calculation of the effective Canadian withholding tax rate or treaty exemption percentage.
Form NR302 also includes instructions from CRA similar to those found on Form NR301 with respect to expiry period of declaration for Part XIII Canadian withholding tax purposes, exemptions from Part XIII Canadian withholding tax under the ITA for which no form should be completed, where to send the form, and circumstances where Canadian resident payers should not apply a reduced rate of Canadian withholding taxes. CRA instructs that Forms NR301, NR302 and NR303, including completed worksheets, collected from each partner eligible for reduced tax treaty rate should not be submitted to Canadian resident payers but should be kept in the partnership’s records.
Form NR302 (and relevant worksheets) should also be sent to CRA with Form R105 – Regulation 105 Waiver Application regarding Canadian withholding taxes on fees, commissions or other amounts paid to a non-resident of Canada for services rendered in Canada and with Form NR7-R – Application for Refund of Part XIII Tax Withheld. Forms NR301, NR302 and NR303 (or equivalent information) collected from each partner eligible for a reduced Canadian withholding tax rate must also be filed in support of an application for refund of Part XIII Canadian withholding taxes.
Non-Resident Hybrid Entities
Form NR303 must be completed by a hybrid entity (such as a US LLC as noted above) to claim treaty benefits to which its members or shareholders may be entitled to. In the case of US LLCs, CRA continues to treat a US LLC as a corporation and views the US LLC as the only visible taxpayer. CRA has consistently maintained that a US LLC is not entitled to treaty benefits under the Tax Treaty and will only suppress the Canadian taxation of US LLC to the extent that the shareholders of US LLC are themselves entitled to treaty benefits under such treaty. The information to be disclosed on Form NR303 and the instructions related thereto are similar to the disclosure requirements on Form NR302.
A hybrid entity such as a US LLC that is required to file a Canadian income tax return and is claiming treaty benefits on behalf of its shareholders must include a completed Form NR303 (including relevant worksheet showing computation of treaty exemption percentage applicable to Canadian business profits and gains on disposition of taxable Canadian property based on shareholders’ treaty entitlement) with its return.
Since the Tax Treaty is the only treaty that contains a look-through rule (Article IV(6)) that allows US resident shareholders or members of a hybrid entity to qualify for treaty benefits, the effective Part XIII Canadian withholding tax rate applicable to income (such as dividends, interest and royalties) received by US LLC and the treaty exemption percentage applicable to Canadian business profits and gains from disposition of taxable Canadian property must be computed on the basis that a non-US resident shareholder or member of a US LLC is not entitled to any treaty benefits. Similarly, if a partnership is a member of a hybrid entity, the partnership must compute its effective Part XIII Canadian withholding tax rate and treaty exemption percentage on Form 302 on the basis that a non-US resident partner is not entitled to any treaty benefits in respect of income or gain derived through a hybrid entity.
What this means for Non-Residents and Canadian Resident Payers
These new Canadian compliance requirements represent a change from CRA’s previous position whereby it generally accepted the use of the payee’s name and address for determining whether to apply treaty benefits. CRA intends to update its Information Circular 76-12r6, which includes certain guidelines for payers of amounts that are subject to Part XIII non-resident withholding taxes, to provide for, among other things, a transition period until December 31, 2011 to allow payers to gather any additional information required to determine the applicable Canadian withholding tax rate.
Canadian resident payers (or payers that are deemed to be resident of Canada for purposes of Part XIII non-resident withholding taxes) are responsible for withholding Canadian taxes on amounts paid or credited by them to a non-resident of Canada and for remitting such taxes to CRA. If a Canadian resident payer fails to do so, it will be liable to CRA for taxes, interest and penalties related thereto. As a result, it is expected that, at least in the arm’s length context, Canadian resident payers will apply the full Canadian resident withholding tax rate of 25% to amounts paid or credited to non-residents of Canada unless the relevant completed form is provided beforehand. In turn, this will mean that non-residents of Canada will have to start collecting information to support their treaty entitlement on the relevant forms which, in the case of complex structures including fiscally transparent partnerships and hybrid entities with many partners, shareholders or members, may prove to be a complicated process.
In the non-arm’s length context, Canadian resident payers may decide to apply a reduced Canadian withholding tax rate even if the relevant form is not completed beforehand. However, it is expected that, even in the non-arm’s length context, information to support treaty entitlement as requested on the relevant forms will be collected since such information (including relevant forms) may be requested by CRA in the context of an audit, review or other treaty entitlement related request (e.g., treaty entitlement in respect of fees, commissions or other amounts received for services rendered in Canada, Canadian business income and gains on disposition of taxable Canadian property).