Have you spent time living outside of Canada and feel unsure of how you’ll file your taxes? Did you consider another country your main home? As you may know, the Canada Revenue Agency (CRA) imposes tax obligations on non-residents for most Canadian-source income. And understanding Canadian non-resident withholding tax is very important for individuals receiving income from Canadian sources while residing abroad.

Institutions, such as banks, withhold a non-resident tax at a rate of 25% on various income streams like interest, dividends, and pension payments. Non-residents receiving such income will receive an NR4 slip detailing their gross income and any non-resident tax withheld. What’s also good to know: if non-resident tax is withheld, it typically fulfills the final tax obligation to Canada, relieving non-residents of the need to file a Canadian return to report the income or withheld tax.

Understanding residency determination and these tax obligations is essential for individuals navigating cross-border financial transactions with Canada. So let’s dive in together to understand if you need to pay the tax, how to determine your residency status, and what those important residency ties really mean.

Key Takeaways
  1. Regulation 105 requires Canadian entities to withhold taxes on income earned in Canada by non-residents.
  2. Banks and similar institutions withhold a 25% non-resident tax on interest, dividends, and pensions.
  3. Non-residents get an NR4 slip detailing gross income and withheld non-resident tax for certain income types.

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What is non-resident withholding tax?

Non-resident withholding tax is a mechanism employed by Canada to ensure that individuals or entities considered residents for tax purposes still contribute their fair share. It’s like Canada’s way of saying, “Hey, even if you’re not a permanent resident here, you may still have tax obligations.”

Essentially, if you’re earning income from Canadian sources but not residing here permanently, you may still be liable for Canadian taxes. There’s a law called regulation 105, which mandates that Canadian businesses withhold taxes on specific payments made to non-residents, particularly for services rendered within Canada.

So even if you’re not Canadian, you might still have to chip in a bit on the taxes for income earned here.

Who pays withholding tax?

Non-resident withholding tax is typically paid by the entities or individuals who are making payments to non-residents.

Institutions like banks, for example, are required to withhold a 25% non-resident tax on various income streams, including interest, dividends, rental income, royalties, and pension payments made to individuals or entities who are not permanent residents. This ensures that the appropriate tax amount is deducted at the source before the payment reaches the non-resident recipient.

The rates for withholding taxes vary depending on the type of income and the tax treaties between Canada and the country of residence of the non-resident.

Is non-resident withholding tax deductible?

Non-resident withholding tax is generally not deductible for individuals or entities subject to it. However, you may qualify for a reduced non-resident withholding tax rate for treaty countries. Tax treaties are legal agreements between Canada and other countries to help ensure you’re not double taxed on the same income.

If you’re a resident of a tax-treaty country, you can fill out form NR301 to reduce withholding tax on Canadian-earned income, such as that from dividends and/or interest paid to non-residents. Canada non-resident withholding tax rates for treaty countries can be reduced to 15%. But specific reduction rates depend on the details in each country’s treaty.

How do I pay non-resident withholding tax?

You do not pay non-resident withholding tax directly. When you earn income from a Canadian entity, that entity withholds and remits the tax for you. They’ll then issue you an NR4 slip at the end of the year.

What is an NR4?

An NR4 is a slip that states the amounts paid or credited to non-residents of Canada. The NR4 summary provides non-residents with a receipt of sorts for the taxes that were withheld, because it lists the gross income earned and the amount of non-resident tax that was withheld.

Let’s say you earned dividend income from a Canadian bank but you’re a resident of the US. The bank is required to withhold 25% of the dividend income you earn throughout the year because you are a non-resident of Canada. If the income is earned from a mutual fund, however, then the bank will withhold 15%.

Since the company withheld these taxes for you, that’s your final tax obligation to Canada. You aren’t required to file a Canadian return to report the income or taxes that were withheld.

How do I report an NR4 on a Canadian tax return?

Sometimes a person would receive an NR4 slip and still need to file Canadian taxes because they have Canadian-source income subject to non-resident withholding tax—but they also have additional income or meet other criteria requiring them to file a Canadian tax return. When this happens, you may need to report your NR4 slip on your Canadian tax return.

Reporting an NR4 slip on your Canadian tax return involves entering foreign income on line 10400 “Other Employment Income” on your T4 slips. If you paid any foreign withholding tax, enter this on line 40500. After gathering all NR4 slips received, proceed with completing your tax return as usual. Enter the income amounts from the NR4 slips in the relevant sections, considering potential eligibility for claiming a foreign tax credit if foreign taxes were paid on the reported income.

You can hold on to your NR4 slips for your records, unless the CRA requests that you submit them. Finally, review and file your tax return, monitoring for any notices or updates regarding your tax assessment.

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