Payments to Non-Resident Financial Intermediaries — Update on Canadian Withholding Tax Obligations
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 predicament.
1 CRA views, 2011-0419191E5, dated November 16, 2011.
2 Under Part XIII of the Income Tax Act (Canada).
3 Forms T5 and T5 Summary.
4 Note that tax reporting by the FFI (Form T5) would still be required.