Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
As a non-resident of Canada you are liable for tax and reporting for income earned from Canadian sources. This guide will walk you through the rules and regulations related to each type of Canadian source non-resident income.
Non-Resident Withholding Taxes
Non-residents of Canada are subject to withholding taxes on certain types of income from Canadian sources. Examples of such income include:
- estate or trust income
- management fees
- rents and royalties
- other income
The general rate of withholding tax for payments of income to a non-resident is 25%. This maximum rate can be reduced based on specific tax treaty rates and how they relate to the recipients resident country.
In many cases the payer of income is not familiar with the actual amount of rate reduction pursuant to a particular treaty. If you feel like the payer of income will be incorrectly withholding you’ll be able to submit form NR301 Declaration of eligibility for benefits (reduced tax) under a tax treaty for a non-resident person in order to have the non-resident withholding reduced appropriately. Form NR302 and NR303 are also available for partnerships and hybrid entities respectively.
In cases where the payer does not properly withhold tax the recipient has the ability to file from NR7 to request a refund of excess withholding amounts.
Special rules relate to the specific type of income earned by the non-resident. For example:
Interest Payments – Payments to arm’s length recipients will be exempt from non-resident tax withholdings. Various tax treaties with Canada also reduce the amount of tax withholdings on payments to non-arm’s length individuals to zero.
Management or Administration Fees – Generally speaking the withholding rate on management fees to paid to a non-resident is 25%. However management fees will generally be exempt from this tax withholding if the payment is made to an arm’s length party. In cases where the management fees are earned in Canada there would be a 15% withholding (regulation 105) which can be reduced if the individual providing the services does not have a permanent establishment in Canada and an appropriate waiver is obtained from CRA.
Trust or Estate Income – Generally speaking income paid from a trust or estate to a non-resident person is subject to withholdings (treaty reductions will apply) unless the distribution is considered capital in nature.
Rental Payments – Rent payments attract a 25% withholding on the gross amount of rents paid to the non-resident. By filing form NR6 with CRA the recipient can elect withholdings to be calculated on the estimated net rental income as long as a non-resident income tax return is filed before June of the following year.
Pension Payments – Generally speaking pension payments to non-residents will attract the 25% withholding tax, however in most cases tax treaties with Canada will reduce the amount to lower amounts.
Section 217 Non-Resident Tax Returns
Section 217 of the income tax acts allows non-residents earning specific types of income a further reduction in the amount of Canadian tax they pay by filing a specialized non-resident tax return to report this income. Income available to report on a section 217 income tax return include:
- CPP and OAS payments
- Pension and annuities payments
- Retirement allowances
- EI benefits
- Death benefits
- RRSP payments
- LIF payments
- RRIF payments
- DPSP payments
- Other type of payments may also be eligible.
In order to take advantage of the special filing you’ll need to ensure that income being reported on the Canadian s.217 tax return is at least 90% of your total income for that particular year. In some cases you can plan for certain payments (RRSP and other) to try and reach this 90% threshold for a particular year. For more information on electing under section 217 of the income tax act and filing of the return please download this PDF guide.
Tax Treaties and Foreign Tax Credits
Now, it certainly would not be fair to have to pay taxes twice on the same income to 2 different countries. That’s where tax treaties come in. Most tax treaties with Canada solve the potential of double taxation by outlining some rules related to how, when and which country will level tax on specific income.
The specifics of foreign tax credits and treaty provisions will not be outlined in this guide, however a simple example will help illustrate the concept.
Consider a US resident is earning rental income from a rental property in Canada. They have properly filed forms NR6, NR4 and have prepared and filed section 216 Canadian non-resident tax returns (see discussion above). Assume the net rental income totals $10,000 per year and the following tax rates apply. Canadian tax rate is 20% and their US tax rate is 15%.
They will pay $2,000 of taxes in Canada and $1,500 of taxes in the US on this income. Assuming they do not take advantage of treaty provisions and foreign tax credits their overall tax on the income would be 35% of $3,500.
To avoid this double taxation the taxpayer would report the income on both returns, pay the 20% Canadian tax and request a foreign tax credit on their US tax return for the 20% Canadian tax they have already paid. In total their overall tax will then become 20% and not the total of 35% as outlined above.
Please note however that not all countries have tax treaties with Canada and in some cases double tax can occur if proper planning is not considered.
Dual Resident Taxpayers
It’s common for tax payers to be both a resident of Canada and the US at the same time. In cases like these we may defer to the treaty to properly assess where the taxpayer will be a resident for tax purposes.
Article 4 of the Canada-US tax treaty deals with the “tie breaker rules” and how they relate to assessing an individuals tax residence under the treaty. The application of these rules are beyond the scope of this guide and if you have questions regarding the tie breaker rules please contact me at firstname.lastname@example.org.
Treatment of Specific Types of Income Between Canada and the US
Outline below are some common types of income outlined in the treaty. We’ll breakdown in very general terms when and how this income is taxed between Canada and the US:
Interest income – Interest income earned by a taxpayer will be taxed in the country where the taxpayer is a resident. For example, interest earned on US bonds by a Canadian resident will not be taxable (zero withholding tax) in the US.
Rental income – Rental income earned will be taxable in the country in which the rental income is generated. For example, Canadian rental income earned by a resident of the US will first be taxed in Canada and then in the US. The US will allow for a foreign tax credit for any Canadian taxes paid on this income. As noted above the taxpayer should ensure to be compliant with their NR4, NR6 and S.216 income tax filings.
Pension income – Pension income paid to a resident of one country to the other will generally be taxable fully in the recipients country of residence. However 15% withholding will apply and be levied by the source country.
Capital gains – Other than gains on real property (generally speaking) capital gains (stocks and other securities) will only be taxable to the taxpayer in the country of residence.
Employment income – Employment income is taxable in the country where it is earned unless the total amount earned is less than $10,000. If it is more than $10,000 it is exempt only if the recipient is in the source country for less than 183 days in any 12 month period and the income is not paid by a company that has a PE in the country.
Please note that the information above is only general in scope and does not cover all the intricacies of non-resident Canadian tax. If you have any specific questions regarding your non-resident tax issues please leave a comment here or reach out to one of our professionals on your Question and Answer forum.