23 January 2024 External T.I. 2023-0990941E5 - Brief review of Canada's taxation of non-residents

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: Responses to specific questions regarding the Canadian taxation of non-residents.

Position: See below.

Reasons: The Act.

XXXXXXXXXX									2023-099094
										Charles Taylor

January 23, 2024

Dear XXXXXXXXXX:

Re: Canadian provisions regarding cross-border taxation

This is in reply to your letter received September 8, 2023. We apologize for the delayed response.

This letter provides general comments about the provisions of the Income Tax Act (the Act) and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.

Because your committee is reviewing the taxation of non-resident income in the context of a proposed revision of your tax code, you sought information regarding how Canada approaches such issues. We presume that you are planning to compare various countries practices with a view to selecting the one optimal for your country. In that regard, because our reply will necessarily be general in nature, we would be pleased to answer supplemental questions if that would be useful.

The governing statute regarding Canadian federal income taxation is the Income Tax Act, an electronic copy of which may be found at https://laws-lois.justice.gc.ca/eNg/acts/I-3.3/index.html. The provisions which appear to be relevant to your concerns are found in Parts I and XIII of the Act. Part I addresses those things subject to net income taxation whilst Part XIII addresses income subject to withholding taxes based on gross income.

A non-resident person, whether a legal entity or a natural person, who carries on business in Canada, is employed in Canada or disposes of taxable Canadian property (a term defined in subsection 248(1) of the Act) is subject to tax on income earned or deemed to be earned in Canada. Many of Canada’s income tax conventions limit Canada’s right to tax business income where the non-resident does not have a permanent establishment in Canada.

In the absence of a waiver from the Canada Revenue Agency (CRA), any person paying a non-resident a fee, commission or other amount in respect of services rendered in Canada is required to withhold 15% of the gross income and to remit the same to the CRA. This is not a final tax. The non-resident is expected to file a Canadian income tax return identifying its taxable income earned in Canada and the income tax payable for the year. If the amount remitted under the withholding regulation is greater than the actual liability, the excess will be refunded. Waivers typically arise in the case of treaty-exempt income since withholding in those circumstances would be subject to refund.

Similarly if an individual is employed in Canada, the employer is required to withhold and remit income tax. Again, a return for the year should be filed and any excess withholding will be refunded.

Non-residents are generally subject to the same income tax rates as resident taxpayers. For individuals there is a graduated progressive rate structure although non-residents do not generally benefit from personal exemptions which may eliminate personal income tax for lower income Canadians. Corporations, except for Canadian controlled private corporations which would not be relevant to non-residents, are subject to a fixed marginal tax rate. In addition, a non-resident corporation carrying on business here through a branch may be subject to a branch tax on what is effectively a dividend equivalent amount. The statutory rate is 25% although this is typically reduced to the rate which would have applied to a dividend paid from a Canadian corporation to a person resident in the country in which the non-resident person is resident.

The provisions described above appear to be relevant to what you describe as “vigorous activity”. However, if we have misinterpreted that to which you were referring, please let us know the correct interpretation.

Part XIII tax generally applies to passive income from Canadian sources paid to non-resident persons. Not all passive income is necessarily subject to taxation. For example, non-participating interest paid to an arm’s length non-resident is exempted from Part XIII tax. Royalties in respect of copyrights are also generally exempted.

The rate of Part XIII tax, before treaty-based reductions, is 25%. It applies to dividends, interest, royalties and various other forms of income enumerated in subsection 212(1) of the Act.

If one is dealing with a capital property situated in Canada, such as land and buildings, an increase in value may be taxed by Canada but only upon realization. The excess of the proceeds of disposition over the adjusted cost base of the properties is the capital gain realized, one half of which is taxable as income earned in Canada. The adjusted cost base refers to the actual cost of the property less certain adjustments required by the Act. For example, shares of a company the value of which is primarily determined by real property or natural resources situation in Canada is taxable Canadian property and is subject to the tax regime just described. If the company had previously returned some portion of capital to the shareholder, that would have reduced the adjusted cost base of the shares.

Depreciable capital property such as the buildings in the example above illustrate a special case. The gain, if any, on the disposition of depreciable capital property may be viewed as being divided into two parts. The excess of the lesser of proceeds and original capital cost over depreciated cost is recaptured as ordinary income. Of course, this assumes that depreciation (known as capital cost allowance in the Canadian system) was claimed as a deduction in computing net income for Canadian tax purposes. The excess, if any, of proceeds over the original capital cost is a capital gain, one half of which is taxable.

Forms of income enumerated in Part XIII may be exempted from Part XIII if they are attributable to the permanent establishment of a business conducted in Canada. This is designed to ensure that only one of Part I or Part XIII applies.

The Canadian system is largely one of self assessment. A person paying amounts subject to Part XIII is only required to withhold the tax due under that Part which may be less than the statutory rate because of a treaty-entitlement of the recipient. Of course, there is the possibility of error and the paying party is equally liable for the unpaid Part XIII tax so advisors may recommend caution. That said, many cross-border payments of dividends, interest, etc., see tax withheld at treaty determined rates without explicit CRA approval.

We trust that this reply was suitably responsive to your questions. As noted above, should you require clarification in respect of any of these comments, feel free to contact the sender. On that note, in the interest of a more speedy communication, the sender’s email address is Charles.Taylor@cra-arc.gc.ca. While we note that email is not always absolutely secure, it is typically faster than relying upon the post.

Yours truly,

Charles Taylor
Section Manager
for Division Director
(insert Division)
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch