19 November 2019 Roundtable, 2019-0829611C6 - TEI 2019 Conference Question E1- Pays or Credits

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: Questions in respect of subsection 212(2) in particular situations where a Canadian corporation declares a dividend and issues a cheque in payment of that dividend.

Position: General comments provided

2019 TEI Conference

Question 1 of part E. Withholding Tax – Dividend “Pays or Credits”

Pursuant to subsection 212(2) of the Act, every non-resident person shall pay an income tax of 25 percent on every amount that a corporation resident in Canada pays or credits, or is deemed by Part I or Part XIV to pay or credit, to the non-resident person as a dividend. Consider the application of that subsection to the case of a Canadian corporation that declares a dividend of $100 and issues a cheque (net of withholding tax) to a U.S.-resident shareholder but the cheque is returned to the Canadian corporation. Has the requirement to withhold pursuant to subsection 212(2) been met? More specifically, has the “pays or credits” element of that subsection been met?

TEI invites the CRA to comment on its interpretation of the phrase “pays or credits” in subsection 212(2). We further invite discussion of the following questions:

a) Returning to the example above where a Canadian corporation declares a dividend of $100 and issues a cheque (net of withholding tax) to a U.S.-resident shareholder but the cheque is returned, if the requirements of subsection 212(2) are not met, what is the appropriate method for the Canadian corporation to recover the over-remitted amount of withholding tax?

b) If the requirements of subsection 212(2) are met but, due the cheque being returned, the Canadian corporation cannot avail itself of the treaty-reduced withholding tax rate because the shareholder’s address is no longer known, what would be the appropriate method to amend and augment the withholding without penalizing the Canadian corporation?

c) If the shareholder in the preceding question was a Canadian resident and, upon receipt of the returned cheque, the Canadian corporation no longer had confirmation that the shareholder was a resident of Canada, what would be the appropriate method to amend and augment the withholding without penalizing the Canadian corporation?

CRA Response

The determination as to whether a corporation resident in Canada “pays or credits” an amount to a non-resident person as, on account or in lieu of payment of, or in satisfaction of, a dividend for the purposes of subsection 212(2) of the Act is generally a question of fact. Such a determination is to be made taking into account all the relevant facts and circumstances of each particular situation.

Information Circular 77-16R4 - Non-Resident Income Tax, issued on May 11, 1992 [Archived], includes the following comments in respect of the concept of “credited”:

“5. The words "credits" and "credited" cover any situation where a resident of Canada or, in certain cases, a non-resident (see 8 below) has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident such as where (a) a tenant or agent deposits rents in a bank account on behalf of a non-resident landlord; (b) a bank credits interest to the savings account of a non-resident; (c) an insurance or trust company deposits a pension or annuity payment in the bank account of a non-resident; or (d) the amount due is applied by the resident (or deemed resident) against an amount owing by the non-resident. When an amount is subject to tax under section 212, subsection 214(1) provides that the tax is payable on the full amount paid or credited without any deduction from the amount.”

From an application perspective, the current practice of the Non-Resident Audit Section is to audit and analyse each file on a case-by-case basis. Many relevant details need to be considered in respect of each particular case and therefore it is not possible to provide specific comments on hypothetical scenarios which may be incomplete without considering all of the facts of a particular situation. In these circumstances, we invite Canadian corporations facing issues in respect of withholding obligations that may result from the application of subsection 212(2) and section 215 of the Act to contact their Tax Services Office.

Yannick Roulier
2019-082961

Response prepared in collaboration with:

Christopher Galvin, Non-Resident Audit Section
Small Business Audit and Non-Resident Division
Domestic Compliance Programs Branch