The Canada Revenue Agency (CRA) has amended its administrative
position on Canadian withholding tax obligations on payments of
interest, dividends, royalties, etc., to non-residents to be
effective on January 1, 2012 (now extended to January 1, 2013). As
previously discussed in New Developments in Canadian Withholding Tax Obligations
— New Forms Signal the End of the "Address
Rule", the new guidelines impose greater due
diligence and reporting duties on persons paying amounts to
non-resident beneficial owners of Canadian securities (debt, equity
and trust securities), particularly where the non-resident wishes
to claim treaty benefits that reduce the rate of withholding.
In a recent technical interpretation,1 the CRA
considered whether administrative relief is available where
payments are made to a foreign financial intermediary (FFI) that
holds Canadian securities for Canadian resident beneficial owners.
An FFI may have included securities held by Canadian resident
holders in an "omnibus" account with those of
non-resident holders entitled to a 0% withholding rate by reason of
the application of Canadian domestic rules or a tax treaty.
The CRA's position is that administrative relief from
Canadian withholding tax would not be available for payments made
to an FFI in such circumstances. The reason for not providing
relief is that the CRA is concerned about tax compliance where a
Canadian resident beneficial owner is using a foreign agent or
nominee (i.e., the FFI). Thus, all payments to FFIs for underlying
Canadian resident beneficial owners will be subject to the full 25%
withholding tax.2 Further, the FFI will be required to
comply with Canadian tax reporting.3
Limited relief is available, however, to exempt entities such as
a registered pension plan that hold Canadian securities through an
FFI. The exempt entity would need to apply to the CRA to obtain a
letter confirming that no Canadian tax needs to be withheld by the
person paying the amounts to the FFI or by the FFI.4
CRA concludes with the statement that taxpayers who discover
that they are in breach of their withholding obligations may wish
to consider making a voluntary disclosure. Our Tax Group is
available to assist taxpayers that find themselves in this
1 CRA views, 2011-0419191E5, dated November 16,
2 Under Part XIII of the Income Tax Act
3 Forms T5 and T5 Summary.
4 Note that tax reporting by the FFI (Form T5) would
still be required.
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.
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