Amounts paid by a Canadian to a non-resident as interest, dividends, rents, royalties or most any other form of income from property, are subject to Canadian withholding tax. The rate is 25% but may be reduced under an applicable tax treaty. However, in the case of rents in respect of Canadian real property, the rate may remain at 25%. Canada has eliminated withholding tax on interest payments to non-residents who deal at arm’s length with the payor, to the extent that the interest does not constitute “participating debt interest”, as defined in the Income Tax Act (Canada).
Amounts paid to a non-resident for services rendered in Canada (other than in the course of regular and continuous employment) are subject to a withholding tax of 15% of the gross payment. The payor must deduct and withhold 15% for federal income tax and 9% for Quebec income tax, whether or not they are resident in Canada.
A non-resident who owns certain types of Canadian real property has the option under the Income Tax Act Canada of paying tax on rental income, as if the non-resident were a resident taxpayer. This alternative method of payment may result in a lower tax rate, since the non-resident is thereby allowed to deduct his or her expenses, including permitted depreciation costs connected with earning rental income. The non-resident would not otherwise be allowed to deduct expenses, since withholding tax is payable on gross amounts received as interest, dividends and other income from property, without deductions. This special alternative to payment of withholding tax also applies to tax on royalties paid to the non-resident for the use of timber resource properties.
Withholding taxes will be payable in respect of income earned by a non-resident on its investments in Canadian property, whether the Canadian payor is a subsidiary or is unrelated to the non-resident receiving the payment. The tax is imposed on the non-resident, but is required to be collected by the Canadian payor and remitted by it to the Canadian authorities. Property or investment income which would normally be subject to withholding tax, but which is attributable to a Canadian business carried on by the non-resident directly, is generally included in the branch’s business income and is not subject to withholding tax, although the Canadian payor is required to obtain the consent of Canada Revenue Agency not to withhold.
In addition, Ontario indirectly levies a 5% withholding tax on management or administration fees, and on rents, royalties and similar payments when paid to a related non-resident, such as a parent company. Dividends and interest are not subject to this rule.
Payment of withholding tax usually will allow the non-resident to claim a foreign tax credit for its own income tax purposes, although this should be confirmed by a foreign entity’s domestic tax advisors.
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