CRA releases guidance from 2012 IFA conference

At the 2012 IFA conference, the Canada Revenue Agency (CRA) commented on three items of interest: treaty-benefit declarations by non-residents, partnerships that sell taxable Canadian property, and Reg. 105 withholding for partnerships that provide services in Canada.

o Treaty-benefit declarations. New forms NR301 (for directly earned income), NR302 (for income earned through partnerships), and NR303 (for income earned through hybrid entities) allow non-residents to declare eligibility for certain benefits under an applicable tax treaty with Canada. One example of a treaty benefit is reduced withholding tax on income derived from Canada. Failing to withhold the correct amount of tax on such income can expose the payer (or the payer’s agent) to penalties. In 2012-0444051C6, the CRA commented that the payer’s level of effort to collect the above NR forms from non-residents (or from partnerships or hybrid entities, as the case may be) will be an important consideration in any request for discretionary relief from such a penalty. As a result, non-residents can expect payers and their agents to request these forms. If the forms are not provided, the payer may decide to withhold at the base-level Canadian withholding tax rate (25% in many cases).

o Sale of TCP by partnership. Non-residents who sell taxable Canadian property (TCP) are required to file with the CRA a notice under s. 116. This notice can also facilitate a reduced level of withholding tax imposed on the buyer of the TCP. In 2012-0444081C6, the CRA confirmed that where the seller is a partnership with non-resident partners, the partnership may file one notice under s. 116 on behalf of all direct and indirect partners – as long as sufficient information about each partner is included in the notice. However, a partnership cannot file one income tax return on behalf of all the partners. Rather, each partner is required to file their own income tax return in order to determine that partner’s final tax liability in Canada in respect of the sale.

o Reg. 105 withholding for partnerships. Any person paying a non-resident in respect of business services rendered in Canada is required to withhold 15% of the payment (s. 153 and Reg. 105). This withholding equally applies where the payment is made to a partnership composed of non-resident partners. In 2012-0444101C6, the CRA confirmed that each non-resident partner, not the partnership, must file a Canadian income tax return to determine the partner’s final Canadian tax liability (and any resulting refund of amounts previously withheld under Reg 105). However, the CRA confirmed that the partnership can file one request for a waiver of Reg. 105 withholding, if the partners qualify for a treaty-based waiver. Such a waiver can be available where, by reason of a tax treaty, the non-resident’s final tax liability in Canada will be less than the Reg. 105 withholding.