Withholding comes into play when either a Canadian makes a payment (falling under the scope of part XIII tax) to a non-resident partnership or when a partnership makes a payment to a non-resident member. Payments of dividends, rents, royalties and interest may also gain treaty relief.
Tax must be withheld and remitted by the 15th of the month following the month in which the payment is made. The partnership is also required to file a NR4 Summary and slips on a calendar basis if payments have been made during the year.
Generally the CRA will accept that the members of the partnership are the “beneficial owners” of the income and a reduced withholding tax rate may be applied to the payments. Some treaties (notably the US-Canada) permit a lower withholding tax rate on dividends if the beneficial owner meets an ownership threshold. The CRA will look through the partnership and determine the members are the beneficial owners and agree to a lower withholding tax rate. Care should be taken when lowering the rate on payments made to “disregarded entities” as treaty relief may not be extended if they are not taxed as corporation is their jurisdiction. I highly recommend you obtain a Form NR301/302/303 (depending on the situation) for your records and to support the reduction. A little more work is now required to support the residency of the recipient; name and address no longer are sufficient.
Interest payments no longer attract withholding tax unless the interest is paid to a non-arm’s length person or is paid on “participating debt” under revised paragraph 212(1)(b).
When too much tax has possibly been withheld, the partnership member may apply for a refund of the excess amount by using form NR7. This form must be file within two years of the end of the calendar year in which the amount was withheld (and 6 years for US due o treaty).
Also be aware of the deeming rule in subsection 212(13.1) which turns a non-resident partnership into a Canadian resident for purposes of Part XIII tax and withholding tax requirements.
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