Tax under Part XIII of the Income Tax Act (“the Act”) applies to many types of payments received by non-residents of Canada from Canadian residents.
Most commonly this can apply to dividends paid by Canadian corporations; royalties paid by Canadians for the use of property in Canada; rents paid by Canadians for the use of property in Canada; pension or superannuation payments from Canadians; and income from a Canadian trust. Because of changes made to domestic law that generally apply to payments made after 2007, Part XIII tax will rarely apply to interest payments.
But what happens when the recipient is a partnership, particularly in cases where there are both resident and non-resident members of that partnership?
In situations where the non-resident members of the partnership are residents of a country which has a tax treaty with Canada, it has always been the administrative practice of the Canada Revenue Agency (“CRA”) to allow the reduced treaty rate (if applicable) to amounts received by nonresidents through a partnership. The administrative practice has recently been formalized by the introduction of CRA form NR302 which may be used to calculate and document the calculation of Part XIII tax in connection with amounts paid to partnerships.
But what about the portion of any payments that accrues to members of the partnership who are Canadian residents? Logically, there should not be any Part XIII tax withholding on that portion.
However, based on a strict application of the Act, as long as there is at least one member of a partnership who is not resident in Canada, the partnership is, itself, treated as a non-resident of Canada in connection with payments to the partnership. As such, Part XIII tax would have to be withheld and remitted on the full amount of such payment, even if non-residents represent only a small percentage of the interests in the partnership. This results from the application of paragraph 212(13.1)(b) of the Act.
In such cases, Paragraph 68(d) of Information Circular 77-16R4 states that the Canadian resident members should treat their share of any Part XIII tax withheld as being tax paid for which they can claim a credit when they file their Canadian tax return for the relevant year.
However, the worksheet, comments, and instructions issued by the CRA in relation to form NR302 now make it clear that the CRA will now allow Part XIII tax withholding to be avoided in relation to the portion accruing to a Canadian resident.
In order for payer’s to be allowed to effectively “zero-rate” the portion applicable to a Canadian resident member of the partnership, the CRA states, as part of the instructions:
“You must obtain from Canadian resident partners a statement of Canadian residency that includes their name, Canadian address, and Canadian tax number (social insurance number, business number, or trust account number) as proof that they are a Canadian resident. A statement of Canadian residency is a signed and dated certification by the Canadian resident partner that they are resident in Canada for tax purposes. The statement will expire when there is a change in residency of the partner, or three years from the end of the calendar year in which the statement is signed and dated, whichever is earlier. You must record their name, tax number, and address in Part III of the worksheet. If you do not have a statement of Canadian residency that includes all of the information indicated in the above paragraph, record them in Part II and apply a tax rate of 25% to their partnership allocation. Canadian residents have to report their income on a Canadian tax return and pay tax accordingly.”
In addition, the CRA provides an answer to the following question regarding form NR302 that is posted on its website:
“The certification part of Form NR302 requires the partnership to collect a statement of Canadian residency for Canadian resident partners. Is there any particular form or format for this statement?”
In answer to the question, the CRA states:
“Form NR302, Declaration of eligibility for benefits (reduced tax) under a tax treaty for a partnership with non-resident partners, provides for a reduction of the Part XIII withholding tax on income of a partnership that is allocated to Canadian resident partners that will report their share of partnership income on their Canadian income tax return. The certification part of Form NR302 requires the partnership to get a statement of Canadian residency for Canadian resident partners. A signed statement by the person or their authorized representative indicating the person is resident and taxable in Canada on their world income is preferable. However, similar statements or information obtained by the partnership from which it can be reasonably concluded that the partner will report the amount on a Canadian income tax return as a resident of Canada is also acceptable.
Form NR302 cannot be used to support a reduction of Part XIII withholding tax on rental income if either the non-resident is making an election under section 216 to file a Canadian income tax return to report the rental income or there are Canadian resident partners.”
 As well as certain payments from other non-residents who may be deemed residents for this purpose.