Canada: A Canadian Tax Lawyer's Guide For Registered Charities In Canada: Non-Resident Withholding Tax

Introduction: Registered Charities in Canada

A registered charity in Canada is exempt from tax on taxable income if it meets the definition of a charity under section 149.1(1) of the Income Tax Act (the "Act"). A charity, whether it is a charitable organization or charitable foundation, must be "constituted and operated exclusively for charitable purposes" and no part of its income is "payable to, or is otherwise available for, the personal benefit of any proprietor, member, shareholder, trustee or settlor thereof." In other words, a registered charity should devote all of its resources to charitable activities carried on by the organization. To keep its registration, a charity must meet its disbursement quota by spending a specific amount each year on charitable activities or gifts.

A registered charity can issue donation receipts upon receiving donations from donors, who can then claim charitable tax credits on their tax returns. Generally, a donor can claim part or all of the eligible amount of donation, up to the limit of 75% of his or her net income for the year. Any unclaimed charitable tax credits can be generally carried forward for any of the next five years, with certain exceptions. For example, if your net income of 2022 was $100,000 and you made $100,000 donation to a registered charity. You can claim up to $75,000 for the 2022 tax year and claim the remaining charitable tax credits on subsequent tax returns.

Non-resident Withholding Tax

A Canadian payor, who is making payments to non-residents, is responsible for withholding and remitting Non-Resident Withholding Tax, or Part XIII tax, under the Income Tax Act, and for reporting the income and withholding tax on NR4 information returns. Part XIII tax is imposed on pensions, annuities, management fees, interest, dividends, rents, royalties, estate or trust income, and payments for film or video acting services that are paid to individuals (including trusts) or corporations that are non residents in Canada. The general rate of the Non-Resident Withholding Tax is 25%, which can be reduced to a lower rate or exempted under the Act or a tax treaty. Failure to file information returns, failure to deduct required Non-Resident Withholding Tax, or failure to remit or to remit on time, can result in penalties and interest.

Obligations of Registered Charities in Canada Regarding Non-Resident Withholding Tax

Registered charities in Canada may find themselves facing unexpected tax obligations and consequences when they work with non-residents of Canada. In spite of the general exemption a registered charity is entitled to under the Act, a portion of the payment for any non-resident independent contractors to provide services in Canada should generally be withheld and remitted to the CRA by the payor. The applicable tax rate is determined by relevant tax treaties. For example, under Article XXI of the Canada-US Tax Treaty, 15% of payment for an independent contractor from the U.S.A. to provide services in Canada should be withheld and remitted to the CRA by the payor, unless such payment is made to an exempt organization or subject to other exemptions.

With regards to registered charities, section 149(1)(f) of the Act exempts a registered charity from paying Part I tax. However, under section 105(1) of the Income Tax Regulations (the "Regulations"), "every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 per cent of such payment." Section 105(2) of the Regulations set out exceptions for fishermen's remuneration, payment made to a registered non-resident insurer defined by section 804 of the Regulations, and payment made to an authorized foreign bank in respect of its Canadian banking business. There may be additional exemption clauses in tax treaties. For instance, paragraph 1 in Article XXI of the Canada-US Tax Treaty permits that income derived from a religious or charitable organization should be exempt from tax in the U.S.A., if the religious or charitable organization is resident in Canada but only to the extent that such income is exempt from tax in Canada.

Consequences of Failing to Withhold and Remit Non-Resident Withholding Taxes

According to the CRA, a payor is generally required to remit the withheld tax on or before the 15th day of the month following the month the amount was paid to the non-resident. A payor is also required to fill out an NR4 slip if a payor is considered to have paid amounts exceeding $50 to non-residents under Part I or Part XIII of the Act. The NR4 slip is required even if a payor did not withhold tax on these amounts. In addition to submitting the NR4 slip to the CRA, a payor must give the payees their NR4 slips on or before the last day of March after the calendar year the slips apply to.

For example, if the payment was made to the non-resident independent contractor on January 1, 2023, then the payment should have been remitted to the CRA before February 15, 2023. A copy of the NR4 slip should be provided to the non-resident prior to March 31, 2024.

Failure to remit the non-resident withholding tax and failure to file the NR4 slip can result in penalties and interest. Interest may start accruing from the date that the tax payment was due. Penalties that the CRA can assess against a payor are calculated based on various factors, including but not limited to number of information return/slips that were filed late and whether the payor is assessed for the same penalty more than once in a calendar year.

Potential Relief Programs

Relief may be available to registered charities that are facing penalties and/or interest due to failure to withhold and remit Non-Resident Withholding Tax. A default option for registered charities to resolve prior tax non-compliance is to disclose the mistakes to the CRA Charitable Directorate. There is no Voluntary Disclosure Program available for registered charities and there is very little guidance from the CRA for the registered charities to correct non-compliance. The CRA's "Bringing charities back into compliance" page asks registered charities to provide "a complete and accurate description of the non-compliance including: the duration and extent of the charity's involvement, the amount of resources involved, and an explanation of how the non-compliance arose."

If a registered charity has been audited by the CRA and has been issued with penalties and interests, filing a taxpayer-relief request maybe the necessary next step. For the Taxpayer Relief Program, the CRA has discretion to grant relief to any period that ended within 10 calendar years before the year in which a request for relief is made. However, to apply to have penalties and interest cancelled or waived, a taxpayer is required to explain why the relief is being requested. Most common situations relief requests are based on include extraordinary circumstances, financial hardship, and actions by the CRA. You can read more about the Taxpayer Relief Requests here: "Barrs v The Queen: Taxpayer relief under S. 220(3.1)."

Additionally, there may be equivalent tax amnesty through the International Tax Services Office to provide similar reliefs as the Voluntary Disclosure Program. If you require assistance making requests for Taxpayer Relief or submissions to the International Tax Services Office, please consider contacting one of our knowledgeable Canadian Tax Lawyers.

Pro Tax Tips – Requesting Tax-payer Relief For Failure To Remit And/or File Taxes

Different relief programs may be available to a registered charity for failure to comply with Canadian tax laws. The Voluntary Disclosure Program, that is the most common relief program for Canadian taxpayers, is not available for registered charities. Instead, if the CRA has not contacted a registered charity for the non-compliance issues, the charity with prior non-compliance can reach out to the CRA Charitable Directorate and "confess" its mistakes. However, whether the "confession" is accepted by the CRA or not is at the CRA's discretion. Once the CRA has dealt with the non-compliance issues and imposed penalties and interests against a registered charity, the organization should seek Canadian tax lawyer advice on how to file a taxpayer relief request to waive or cancel applicable penalties and interests.

For legal tax advice, including how to make submissions to the CRA Charitable Directorate or for a taxpayer-relief request, contact our expert Toronto tax lawyers. If your organization is not a registered charity but a non-profit organization for tax purposes, you can read more about tax treatment of non-profit organization here: "Taxation for Non-Profit Organizations: Canadian Tax Lawyer's Guide."

FAQ

Is a Registered Charity Required to Withhold and Remit Non-resident Withholding Tax in Canada?

Generally, yes, a registered charity is required to withhold and remit non-resident withholding tax on payments made to foreign independent contractors, unless the payment is exempt under Canadian tax laws or any tax treaties. For example, paragraph 1 in Article XXI of the Canada-US Tax Treaty permits that income derived from a religious or charitable organization should be exempt from tax in the U.S.A., if the religious or charitable organization is resident in Canada.

What is the Consequence of Failing to Withhold and Remit Taxes for Payments Made to Non-residents?

According to the CRA, a payor is generally required to remit the withheld tax on or before the 15th day of the month following the month the amount was paid to the non-resident. A payor is also required to fill out an NR4 slip if a payor is considered to have paid amounts exceeding $50 to non-residents under Part I or Part XIII of the Act. The NR4 slip is required even if a payor did not withhold tax on these amounts. In addition to submitting the NR4 slip to the CRA, a payor must give the payees their NR4 slips on or before the last day of March after the calendar year the slips apply to.

Failure to remit the non-resident withholding tax and failure to file the NR4 slip can result in penalties and interest. Interest may start accruing from the date that the tax payment was due. Penalties that the CRA can assess against a payor are calculated based on various factors, including but not limited to number of information return/slips that were filed late and whether the payor is assessed for the same penalty more than once in a calendar year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.