Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: A Canadian Financial Institution (CFI) provides securities custody services to foreign financial intermediaries (FFI). The FFI opens nominee accounts with the CFI based on tax treaty withholding rates and provides a certification for withholding rates under various treaties per IC76-12R6. The CFI learns that there are Canadian beneficial owners of securities in the 0% withholding accounts. 1. Should the CFI withhold Part XIII tax at a rate of 25% on the dividend payments for inclusion in the 0% withholding "omnibus" accounts? 2. If the CFI should withhold, will the Agency grant administrative relief from such withholding in any circumstances? For example: (a) By modifying the wording of the certification required by paragraph 5 of IC76-12R6 to refer to Canadian residence? (b) Will the Agency grant relief from withholding if the CFI obtains written confirmation from the FFI that T5s will be issued to the CBOs in respect of the dividend payment? (c) Are there any other circumstances? 3. How should the CFI report the dividend payment (a) if Part XIII tax is withheld? (b) if part XIII tax is not withheld? 4. How should the FFI report the dividend payment (a) if Part XIII tax is withheld? (b) if part XIII tax is not withheld? 5. If a CBO is exempt from Canadian income taxes (for example a registered pension plan), will the Agency issue a letter (to the CBO that the CBO can provide to the FFI and the FFI can then provide to the CFI) confirming that Part XIII tax should not be withheld from payments to the FFI on behalf of that CBO and further that the FFI need not issue T5s to the CBO? If so, how should that statement or letter be obtained from the CRA?
Position: 1.Yes. 2. Administrative relief from Part XIII withholding requirements is not available. 3. The CFI should report the dividend payment on forms NR4 and NR4 Summary. The forms have a field for the amount of Part XIII tax withheld. 4. The FFI should report the gross dividend payment, not the dividend less tax withheld, on forms T5 and T5 Summary. The FFI may send statements of account to the CBOs showing the amount of tax withheld. 5. Exempt entities such as registered pension plans should write to the Non-Resident Withholding Division of the International Tax Services Office to request a letter confirming that Part XIII tax need not be withheld. T5s should still be issued.
Reasons: Wording of the Act and Regulations, purpose of section 215, purpose of treaty certification system
XXXXXXXXXX 2011-041919
Eli Kae Moore
November 16, 2011
Dear XXXXXXXXXX ,
Re: Payments to Foreign Financial Institutions
We are responding to your letter of 24 August 2011, and our subsequent phone conversation of 22 September 2011, wherein you requested the Canada Revenue Agency's views regarding the application of subsection 212(1) of the Income Tax Act ( the "Act"), and subsections 201(1), 201(2), and 202(1) of the Income Tax Regulations (the "Regulations") in the context of Canadian income tax withholding and reporting requirements that arise where a Canadian financial institution makes a payment to a foreign financial institution that is acting as nominee or agent for Canadian investors.
You asked us to consider the following fact pattern:
1. A financial institution resident in Canada ("CFI") provides global custody and sub-custody services to Canadian and foreign clients.
2. Foreign financial intermediaries ("FFI" or "FFIs" in the plural) engage the CFI to provide custody services for Canadian securities (debt, equity and trust securities) that are beneficially owned by clients of the FFIs (the "Beneficial Owners"). Pursuant to agreements between the CFI and the FFIs, the CFI acts as the withholding tax agent in respect of income paid to the FFI on the securities of Canadian issuers.
3. The CFI requests that the FFIs provide account opening instructions in respect of distributions on Canadian securities for which the FFI's clients claim relief under a tax treaty ("the Instructions"). The information the CFI requests to be contained in the Instructions is the information that the Canada Revenue Agency suggests should be obtained per the Agency's guidance as set out in Information Circular 76-12R6, Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention ("IC76-12R6").
4. The Instructions are provided at the time an "omnibus" (nominee) account is opened with the CFI by a FFI. In the Instructions the FFI only indicates the residency status or the treaty rate applicable to a particular new account. Separate "omnibus" or nominee accounts are created for each withholding rate category (e.g. 0%, 10%, 15%, or 25%).
5. The CFI does not have a contractual relationship with the Beneficial Owners. Consequently the CFI does not know the identity and/or the country of residence of the Beneficial Owners.
6. The CFI has been made aware that some of the Beneficial Owners with holdings in the 0% accounts are residents of Canada (the Canadian beneficial owners or "CBOs").
7. The CFI pays or credits a taxable dividend (eligible or otherwise) into the FFI's 0% omnibus account with the knowledge that some of the Beneficial Owners of the dividend are Canadian residents.
Based on the above fact pattern you asked us for our views on the following issues, as paraphrased below:
1. Should the CFI withhold Part XIII tax at a rate of 25% on the dividend payments for inclusion in the 0% withholding "omnibus" accounts?
2. If the CFI should withhold, will the Agency grant administrative relief from such withholding in any circumstances? For example: (a) By modifying the wording of the certification required by paragraph 5 of IC76-12R6 to refer to Canadian residence? (b) Will the Agency grant relief from withholding if the CFI obtains written confirmation from the FFI that T5s will be issued to the CBOs in respect of the dividend payment? (c) Are there any other circumstances?
3. How should the CFI report the dividend payment (a) if Part XIII tax is withheld? (b) if Part XIII tax is not withheld?
4. How should the FFI report the dividend payment (a) if Part XIII tax is withheld? (b) if part XIII tax is not withheld?
5. If a CBO is exempt from Canadian income taxes (for example a registered pension plan), will the Agency issue a letter (to the CBO that the CBO can provide to the FFI and the FFI can then provide to the CFI) confirming that Part XIII tax should not be withheld from payments to the FFI on behalf of that CBO and further that the FFI need not issue T5s to the CBO? If so, how should that statement or letter be obtained from the CRA?
Our Comments:
When a resident of Canada pays or credits to a non-resident dividends as you described, section 212 imposes a tax of 25% of the amount credited or paid and subsection 215(1) requires the payer to withhold and forthwith remit to the Receiver General the tax owed on account of section 212. The Courts have noted that the intent of subsection 215(1) is to place the burden of enforcing compliance with the Canadian resident/payer when dealing with non-resident payees. (footnote 1)
Relief from Part XIII withholding and remittance requirements is primarily available through the application of a tax convention or treaty entered into by Canada and the recipient payee's jurisdiction. Since there is no further tax relationship between Canada and the foreign payee after a proper application of Part XIII and an applicable tax convention, relief from the requirement to withhold and remit at the rate of 25% and the need for a later application for a refund of any tax withheld is granted to Canadian payers and certain foreign payees through the certification system outlined in Information Circular 76-12R6 and its forthcoming amendments. This certification system allows the Canadian payer to withhold at a lower rate as specified in the applicable tax convention. The example certification language in the upcoming revision of Information Circular 76-12R6 is as follows:
TO: _________(payer)
RE: ________(description of property)
I/We (name of agent, nominee or registered holder) hereby certify that the income from all of the property described above, registered or to be registered in my/our name, is and will continue to be held solely for the beneficial ownership of persons resident and eligible to claim tax treaty benefits under a tax treaty that provides for a Canadian withholding tax rate of __% on amounts paid or credited in respect of such property.
I/We undertake to replace this certificate should there be a change in the country of residence or holdings affecting the withholding requirements for a subsequent payment.
I/We also undertake to provide to the Canada Revenue Agency, upon request, such information as may be necessary to substantiate the accuracy of the information contained herein, such as Form NR301, NR302, or NR303, or the information requested in these forms received from the beneficial owners or payees. (footnote 2)
The language of the second paragraph remains unchanged from the sample language in the Information Circular's current version.
When the agent, nominee, or registered holder (the "certifier") fails to replace the certificate due to a change of residence of a beneficial owner or any other change which would affect withholding requirements the certifier has breached his or her undertaking and the certificate is no longer valid. Since the certificate is no longer valid the payer should withhold and remit at a rate of 25% as required by the Act.
If the Canadian payer has contradictory information or a reason to suspect the information in the certificate is inaccurate or misleading the Canadian payer should withhold and remit at a rate of 25%.
In situations where Canadian residents are using foreign agents or nominees, Canada has an ongoing tax concern in regards to those payments. Policy considerations surrounding compliance, the language of the Act, and the clear purpose behind Part XIII do not allow for relief through an expansion of the certification system.
When a Canadian payer makes a payment to a non-resident subsection 202(1) of the Regulations requires the payer to report the payment on forms NR4 and NR4 Summary. Form NR4 has a space for recording the amount of non-resident tax withheld, if any. Information on filing and completing forms NR4 and NR4 Summary is contained in guide T4061 "NR4 - Non-Resident Tax Withholding, Remitting, and Reporting."
In order to comply with Canadian tax law, residents and non-residents alike who make dividend payments to Canadian residents should file forms T5 and T5 Summary as required by section 201 of the Regulations. Information on filing and completing forms T5 and T5 Summary is contained in guide T4015 "T5 Guide - Return of Investment Income". Foreign financial institutions acting as agents or intermediaries for CBOs should report the full amount of the dividend on their T5 returns and slips, not the dividend net of the non-resident tax withheld. The foreign financial institution should consider issuing their account holders/the beneficial owners statements of account showing the deduction of the Part XIII tax withheld from the dividend payment by the CFI. This would assist the CBOs in completing form NR7-R in application for a refund or credit. We note that situations where there are intermediaries involved, there are additional requirements to the completion of NR7-R and that the beneficial owner would require the assistance of both the FFI and CFI to complete the form. These additional requirements include, but are not limited to, obtaining notarized affidavits of registered ownership and beneficial ownership which may be in one combined notarized affidavit unless the transaction flowed through the Depository Trust Company in the United States. More information is found in the instructions that accompany form NR7-R.
In situations where the CBO is a registered pension plan, the Agency is prepared to consider administrative relief. The plan administrator should write to the Non-Resident Withholding Division of the International Tax Services Office to request a letter confirming that Part XIII tax need not be withheld. The plan administrator would then give this letter to the FFI which would then pass it to the CFI and the CFI would then be allowed to forward payments to the FFI on behalf of the registered pension plan without withholding and remitting Part XIII tax. The FFI will still be required to file T5 returns.
In summary, the answers to your questions as numbered above are:
1. Yes.
2. Administrative relief from Part XIII withholding requirements is not available.
3. The CFI should report the dividend payment on forms NR4 and NR4 Summary. The forms have a field for the amount of Part XIII tax withheld.
4. The FFI should report the gross dividend payment, not the dividend less tax withheld, on forms T5 and T5 Summary. The FFI may send statements of account to the CBOs showing the amount of tax withheld.
5. Exempt entities such as registered pension plans should write to the Non-Resident Withholding Division of the International Tax Services Office to request a letter confirming that Part XIII tax need not be withheld. T5s should still be issued.
Taxpayers who discover that they are in breach of their Part XIII obligations may wish to consider applying for relief through a "Voluntary Disclosure" as set out in Information Circular 00-1R2.
We trust these comments are of assistance.
Sincerely,
Olli Laurikainen
Manager
International Tax and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Pechet v The Queen, 2008 TCC 208, aff'd 2009 FCA 341. While this case was primarily about the application of interest accrued on account of a failure to withhold and forthwith remit the tax even though the principle tax amount was reduced to nil through the payee's election to be taxed under Part I, the Tax Court judge addressed the nature of the withholding and remitting system and the Canadian payers' consequential obligations; see especially paragraphs 23-27 of the TCC judgment.
2 Pending updates to IC76-12, Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention related to forms NR301, NR302, and NR303, online: < http://www.cra-arc.gc.ca/formspubs/frms/ic76-12r6-eng.html>.
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