Withholding Tax on Dividends, Interest & Royalties in Canada
When a Canadian payer remits amounts to a non-resident of Canada, Part XIII tax (commonly called withholding tax) is generally applies. This tax is deducted at source before the payment reaches the non-resident, meaning the recipient receives the funds net of Canadian tax.
Key Takeaways
- Standard WHT rate in Canada is 25% for dividends, interest, and royalties.
- Tax treaties can reduce withholding rates significantly (often to 15% or less).
- Part XIII tax applies to payments from Canadian sources to non-residents.
- Exceptions exist for arm's length interest, certain dividends, and more.
- NR6 returns must be filed by Canadian payers for certain interest payments.
- Non-compliance can result in penalties and shareholder-level taxation.
What Is Withholding Tax (Part XIII Tax)?
Part XIII tax is imposed under the Income Tax Act on amounts paid or credited by a Canadian resident to a non-resident. The payer (or payor) is responsible for withholding the tax and remitting it to the Canada Revenue Agency (CRA).
Unlike income tax, withholding tax is a final tax. The non-resident generally cannot claim deductions or credits against Part XIII tax unless provided by treaty.
Withholding Tax Rates
The standard (non-treaty) rates under Part XIII are:
| Type of Payment | Standard Rate |
|---|---|
| Dividends | 25% |
| Interest | 25% |
| Royalties | 25% |
| Management fees | 25% |
Treaty Benefits: Reducing Withholding Tax
Canada has tax treaties with over 90 countries. These treaties typically reduce the withholding tax rates:
Common Treaty Rates
- US residents: Dividends 15% (5% if ≥10% voting shares); Interest 15% (0% if arm's length); Royalties 15% (10% for certain IP)
- UK residents: Dividends 15% (5% for substantial holdings); Interest 15%; Royalties 15%
- EU residents: Typically 15% on dividends; 10-15% on interest and royalties
Example: Treaty Rate Benefit
A Canadian corporation pays $100,000 in dividends to a US shareholder.
- Without treaty: $25,000 withheld (25%) → US shareholder receives $75,000
- With US treaty (15%): $15,000 withheld → US shareholder receives $85,000
- Savings: $10,000
Exceptions to Withholding
Several exceptions can eliminate or reduce withholding tax requirements:
Dividends
- Inter-company dividends between Canadian corporations (100% exempt)
- Portfolio dividend exemption — certain dividends paid by foreign affiliates
- Related parties — check treaty requirements for non-arm's length dividends
Interest
- Arm's length interest — interest paid to an unrelated non-resident is generally exempt from WHT
- Interest on government debt
- Interest from certain financial institutions
Royalties
- Royalties for certain software — may qualify for reduced rates
- Film royalties — special rules may apply
Compliance Requirements
NR6 Returns
For interest payments to non-residents where the payor claims that the interest is exempt from Part XIII tax (typically arm's length interest), the payor must file an NR6 return (Undertaking to File a Return of Amounts Paid or Credited to Non-Residents) before making the first payment.
NR4 Returns
At year-end, payers must file NR4 returns (Statement of Amounts Paid or Credited to Non-Residents) reporting all amounts subject to Part XIII tax.
Remittance Deadlines
Withholding tax must be remitted to the CRA by the 15th of the month following the payment. Penalties apply for late remittance.
Planning Strategies
- Use treaty structures — route payments through jurisdictions with favourable treaties
- Ensure arm's length for interest — proper documentation is essential
- Consider corporate residence — non-residents may want to hold Canadian entities through non-Canadian resident corporations
- Document relationships — maintain transfer pricing documentation for intercompany transactions
