Canada: New Developments In Canadian Withholding Tax Obligations — New Forms Signal The End Of The "Address Rule"

Earlier this year, the Canada Revenue Agency (CRA) issued new forms that can be used by persons paying amounts to non-residents that are subject to Canadian withholding taxes. Use of the forms is not mandatory and, if the only development were the release of the forms, there would be little to remark upon. However, the CRA also announced the end of the "address rule" used by Canadian payers in determining their withholding obligations effective December 31, 2011 and new diligence requirements. This note considers Canada's existing withholding regime, the proposed changes and the difficulties that Canadian payers will face in complying with these rules.

The Income Tax Act (Canada) (ITA) imposes a 25 per cent tax on certain payments made by Canadian residents to non-residents including interest, dividends, royalties and rents (referred to as Part XIII tax). In addition, a non-resident that disposes of "taxable Canadian property" is liable to tax under the ITA on any income or gain arising on the disposition and may be required to obtain a clearance certificate from the CRA under section 116 of the ITA (a section 116 certificate) by paying an amount on account of the non-resident's tax liability. Recent amendments to the ITA have narrowed the scope of payments subject to Part XIII tax by excluding interest paid to an arm's length person, where the interest is not "participating debt interest". In addition, the definition of taxable Canadian property has been narrowed including to exclude shares of a Canadian private company unless more than 50 per cent of the fair market of the shares was derived, directly or indirectly, from Canadian real property, resource property of timber property at any time in the preceding 60-month period.

As these taxes are imposed on non-residents, Canada imposes a withholding obligation. In the case of a person paying an amount subject to Part XIII tax, the payer is required to withhold the tax and remit it to the Receiver-General. If an agent for the non-resident receives an amount from which Part XIII tax should have been withheld without the withholding having been made, the agent is liable to make the withholding and remittance. A person who has failed to withhold Part XIII tax as required is liable to pay as tax on account of the non-resident the amount that should have been withheld (and is entitled to recover from the non-resident). A reporting obligation is imposed on persons paying amounts subject to Part XIII tax. In the case of taxable Canadian property, if a section 116 certificate is not delivered where required, the purchaser of the property is liable to pay 25 per cent of the purchase price on account of the non-resident vendor's tax liability (and is entitled to recover from the vendor) unless the purchaser, after reasonable inquiry, had no reason to believe the vendor was not resident in Canada. It is noteworthy that a reasonable inquiry "defence" is expressly provided in the context of a section 116 certificate but not in the context of Part XIII tax. For the purposes of this note, it is assumed that a reasonable inquiry defence is not available for Part XIII tax but the point has not been definitively established by the Courts.

Penalties may be assessed against a payer where an amount is not withheld as required and interest is payable at a prescribed rate from the date amount should have been withheld to date of payment to the Receiver-General.

The ITA contains certain "fairness provisions" under which the Minister of National Revenue may waive or cancel all or part of a penalty or interest payable, but not an amount payable as tax.

The provisions of a bilateral tax treaty between Canada and another country may limit Canada's ability to impose taxes on a person who is a resident of the other country for the purposes of the treaty. The treaty may require, as a condition of relief, that the recipient be the "beneficial owner" of the payment (in the case of interest, dividends and royalties) and, in the case of the Canada-United States tax treaty, satisfy a limitation on benefits provision. As a matter of administrative practice, Canada allows relief at source on payments otherwise subject to the 25 per cent Part XIII tax so that the payer may apply a lower rate of withholding. However, if a non-resident disposes of taxable Canadian property in respect of which a section 116 certificate is required, the non-resident must ordinarily apply for the certificate even if the gain is exempt from tax under the treaty although the CRA may issue the certificate without requiring any payment on the basis of the treaty exemption.

From the foregoing, it is apparent that a person making a payment that may be subject to Part XIII tax must determine if the recipient is a non-resident and, if so, is entitled to treaty benefits. Historically, the CRA relied on the so-called "address rule" under which the payer could accept the name and address of the payee as being that of the beneficial owner unless there is reasonable cause to suspect otherwise. The CRA provided a non-exhaustive list of circumstances that would give reasonable cause to question the beneficial owner: the payee is known to act, even occasionally, as an agent or nominee; the payee is reported "in care of" another person or "in trust"; or the mailing address provided for payment of interest or dividends is different from the registered address of the owner. The CRA permitted a financial intermediary located in a foreign country to apply the benefit of tax treaties between Canada and the beneficial owners' residence countries on a pooled basis if the foreign intermediary certified beneficial ownership and country of residence to the CRA. Of interest, special rules apply in the case of payments to Swiss nominees — the Canada-Switzerland treaty rate can be withheld by a Canadian payer because if the beneficial owner is a resident of a third country, the nominee makes the additional withholding which is in turn paid to Canada through an arrangement with the Swiss government. These policies were set out in Information Circular IC 76-12R6, "Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Countries with which Canada has a Tax Convention." However, the CRA did not exonerate a payer that followed the procedures set forth in the Circular but failed to withhold the correct amount. Rather, the Circular states that the payer is liable for any deficiency in the amount of tax that should have been withheld, penalties and interest.

Earlier this year, the CRA released three new forms that may be used to establish the identity of the beneficial owner of a payment. The base form is Form NR301—"Declaration of Eligibility for Benefits under a tax treaty for a Non-Resident Taxpayer." The other forms are Form NR302 — "Declaration of Eligibility for Benefits under a tax treaty for a Partnership with Non-Resident Partners" and Form NR303 — "Declaration of Eligibility for Benefits under a tax treaty for a Hybrid Entity." Form NR302 and Form NR303 are to be used by a partnership or hybrid entity (currently only relevant in the case of the Canada-United States tax treaty) to claim relief on some or all of a payment to be made by it based on the treaty eligibility of its partners or its members which would be established, in turn, through the provision of Form NR301 by each such partner or member.

Form NR301 requires that the payee completing the form provide information including its legal status, country of residence and the nature of payments to be received. The payee must certify that the information is true and correct, that the payee is the beneficial owner of the relevant payment and that, to the best of the its knowledge and based on the factual circumstances, it is entitled to the benefits of the relevant treaty on the relevant income (which implicitly takes into account the limitation on benefits rule in the Canada-United States tax treaty in the case of a resident of the United States). A completed form will expire on the earlier of a change in eligibility for treaty benefits, and three years from the year the form is signed and date. The form is delivered to the payer in the case of a payment subject to Part XIII tax. In the case of an application for a section 116 certificate, the form would be delivered to CRA along with the application. In the case of a partnership or hybrid entity, Forms NR302 or NR303 would also be used, as applicable, when applying for a waiver of withholding under Regulation 105 to the ITA in respect of fees, commissions and other amounts in respect of services performed by a non-resident in Canada.

If the only development were the release of the forms, there would be little to remark upon.

However, the CRA also released additional guidance with respect to the forms in "More Information on Forms NR301, NR302 and NR303" (April 19, 2011) and "Pending Update to IC 76-12 Related to Forms NR301, NR302 and NR303" (May 6, 2011). In the latter document, CRA announced a fundamental change to its previous policy and the end of the address rule effective as at the end of 2011. The CRA stated:

The payer must have recent and sufficient information to establish the identity of the beneficial owner for the purpose of the application of treaty benefits; whether they are resident in a particular country with which Canada has a tax treaty and whether they are eligible for treaty benefits under the tax treaty on the income being paid.

While forms NR301, NR302, and NR303 are not prescribed forms, the information they request is important for determining whether a tax treaty rate can be applied. Equivalent information can be accepted.

This represents a change from the Canada Revenue Agency's previous position that generally accepted the use of the payee's name and address for determining whether to apply treaty benefits. There will be a transition period until December 31, 2011, to allow payers to gather any additional information needed.

In addition, in "More Information on Forms NR301, NR302 and NR303," the CRA establishes a diligence requirement:

The payer should review the information provided by a non-resident on Form NR301, NR302, or NR303, or in another format, to make sure they have enough information to support that the non-resident is eligible for tax convention/treaty benefits on the income being paid.

To establish a withholding tax rate, the payer should question the information given and look at other information received from the non-resident, or known about the non-resident, if the payer knows or has reasonable cause to believe that the information on the form:
  • is not correct or is misleading;
  • contradicts information in the payer's files; or
  • is given without knowledge or consideration of the facts of a situation.

Readers may note some similarities with the rules applicable to a "qualified intermediary" for U.S. tax purposes.

Various industry organizations are expected to make submissions that the January 1, 2012 implementation date is too soon. Even if a payer elected not to obtain new forms from recipients of payments, it would still have to ensure that it has enough information to support that a non-resident payee is eligible for treaty benefits. It is not clear how a payer is to satisfy the requirement that the information given does not contradict other information in its files — does the reference to files mean all files, including paper files, or is it limited to electronically searchable files? In addition, payers such as financial intermediaries will have to put in place new account opening procedures to obtain the necessary information from payees on a going forward basis.

Industry submissions are expected to point out that the new CRA guidance does not expressly state that relief would be given under the "fairness provisions" from the imposition of a penalty and interest if a payer fails to withhold the correct amount but obtained the necessary form and performed appropriate due diligence.

There are a number of exceptions to the proposed changes including:

a. Payments made to CDS Clearing and Depository Services Inc. (CDS) on securities registered in the name of Cede & Co. are to be made without withholding tax as tax is to be withheld by CDS based on information received from the Depository Trust Company (DTC) and collected by DTC's participants.

b. educed withholding tax may be applied by a payer without obtaining the forms or equivalent information regarding beneficial ownership, country of residence, and eligibility for treaty benefits if all of the following are true:

  1. The payer knows that the payee is an individual, or the payee is an estate and the trustee has an address in the United States.
  2. The payer has a complete permanent address on file that is not a post office box or care-of address.
  3. The payer has no contradictory information.
  4. The payer has no reason to suspect the information is inaccurate or misleading.
  5. The payer has procedures in place so that changes in the payee's information (for example, a change of address or contact information that includes a change in country, or returned mail) will result in a review of the withholding tax rate.

c. The arrangements with Swiss nominees referred to above continue.

In addition, foreign intermediaries may continue to claim relief on a pooled basis on certifying that the income from specified property registered in its 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 specified Canadian withholding tax rate on amounts paid or credited in respect of such property.

In summary, payers of amounts subject to Canadian withholding tax are expected by CRA to do more in determining the residential status and entitlement to treaty benefits of payees. These changes are directed primarily at Canadian payers to ensure that the benefits of Canadian tax treaties are given only to non-residents that are entitled to them. The new forms are intended to assist payers in so doing, however, payers need to remain vigilant as a completed form provides no protection if incorrect. It is likely that significant changes will be required to the procedures and systems of financial institutions to comply with these changes.

These changes are not unique but are part of a wider trend to enhanced tax withholding and reporting.

The Treaty Relief and Compliance Enhancement (TRACE) project of the Organisation for Economic Co-operation and Development, for example, contemplates a system in which financial intermediaries will enter into agreements with source states to become "authorized intermediaries." An authorized intermediary will collect a standardized "investor self-declaration" from investors relating to the investors' residence and entitlements to treaty benefits. The authorized intermediary will be expected to perform certain due diligence in order to rely on an investor self-declaration. Authorized intermediaries will report payments and withholdings to the relevant source state. The TRACE proposals contemplate that a source state will exchange information with residence countries pursuant to exchange of information provisions in tax treaties to ensure that the amounts are being reported by investors in their residence countries.

The Foreign Account Tax Compliance Act (FATCA) regime to be implemented in the United States approaches the issue somewhat differently by requiring "foreign financial institutions" to report to the United States government with respect to accountholders that are U.S. persons and imposing a 30 per cent withholding requirement in respect of accounts of "recalcitrant" investors (i.e., if the institution cannot determine where or not the investor is a U.S. person). For details, see our March issue of the Tax Update.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions