CRA extends transition period for treaty eligibility forms 


January 2012

Tax Bulletin

Certain amounts that are paid or credited by a Canadian resident to a non-resident of Canada, including dividends and royalties, are generally subject to Canadian tax under Part XIII of the Income Tax Act (Canada) (the "Act").1 Although the ultimate liability for Canadian Part XIII tax (commonly referred to as "withholding tax") rests with the relevant non-resident, it is the Canadian-resident payer of the subject amount that generally has the obligation to withhold and remit withholding tax on behalf of the non-resident. The general rate of withholding tax under the Act is 25 percent, but the applicable rate may be reduced by the terms of a tax treaty.

In the spring of 2011, the Canada Revenue Agency (the "CRA") released updated policy statements, and a new set of declaration forms, the stated purpose of which was to help Canadian residents determine whether it is appropriate to apply a reduced rate of withholding tax to payments made to non-residents.

Historically, the CRA had suggested that a payer could generally rely upon a non-resident recipient's name and address when assessing whether the non-resident was entitled to claim the benefit of a reduced rate of withholding tax under a tax treaty, unless there was reasonable cause to suspect that the beneficial owner of the payment was not entitled to claim the benefits of the particular treaty. The CRA originally stated that it would permit a transition period until December 31, 2011 to allow payers to gather any additional information that was necessary to establish a non-resident's eligibility for a treaty-reduced rate of withholding tax under the CRA's new pronouncements.

In late December 2011, the CRA extended the transition period to December 31, 2012 to allow payers further time to gather any additional information that is necessary to establish a non-resident's eligibility for a treaty-reduced rate of withholding tax and to perform procedural changes and system upgrades that may be required to adapt to the increased informational requirements under the CRA's new pronouncements.

the forms

Forms NR301, NR302 and NR303 (the "Forms")2 are declarations that are designed to be used by conventional non-resident taxpayers (e.g., corporations, individuals), partnerships with non-resident partners, and hybrid entities, respectively, to substantiate eligibility to claim the benefits afforded by a particular tax treaty. While the Forms are not prescribed forms, and Canadian resident taxpayers are not required by statute to obtain a completed Form or equivalent information before applying a reduced rate of withholding tax on amounts paid or credited to non-residents, it is likely that, as a practical matter, the CRA will request such Forms or equivalent information during an audit of a taxpayer's cross-border tax affairs.

For additional information on the Forms, including the information requested in the Forms, the CRA's position as to when the Forms should be filed, and a discussion of the reasons for filing the Forms, please see "CRA Releases "New" Treaty Eligibility Forms – Are there New Compliance Obligations to be Met Before Applying a Treaty Reduced Rate of Withholding Tax?".

the transition period

The CRA has stated that, during the transition period, Canadian resident payers can accept the name and address of the payee of an amount as the beneficial owner of the amount and withhold at the applicable treaty rate, except in circumstances where there is reasonable cause to question the appropriateness of accepting such information as proof of beneficial ownership. The CRA has provided the following examples of situations in which there is reasonable cause for the payer to question whether the payee is, in fact, the beneficial owner of the amount paid:3

  • the payee is known to act, even occasionally, as an agent or nominee (other than a Swiss agent or nominee);
  • the payee is reported as "in care of" another person, or "in trust", or the address of the payee is a post office box;
  • the mailing address provided for payment of interest or dividends is different from the registered address of the "owner";
  • the payee is a flow through entity such as a partnership or limited liability company (that is not taxed on its worldwide income under the laws of another country); or
  • there is reason to believe that a reduced rate of withholding will not apply due to the limitation on benefits provisions in the Canada-United States Income Tax Convention.

Generally, where the payer has any doubt as to the beneficial ownership of the subject payment, the CRA is of the view that a declaration (i.e., a Form) or similar information must be completed and forwarded to the payer. However, an exception from the requirement to obtain Form NR301 where the payer has doubts as to the beneficial ownership of an amount may be available in certain circumstances where the payer, agent or nominee has on file a certificate of beneficial ownership as described in the CRA's Information Circular IC76-12R.4

Payers cannot withhold at treaty-reduced rates where "information on file" reveals that the benefits of a particular treaty do not apply or that another rate is applicable. Presumably, "information on file" would include information relating to the ownership of the payer, or the payee's relationship with the payer, that would result in a treaty-reduced rate of withholding not being applicable, or another rate being applicable, in the circumstances. Payers must also await the issuance of a Letter of Exemption or written authorization from the CRA prior to applying a reduced rate of withholding tax where such documentation is required by the CRA.5

                                                          *  *  *

The extended transition period, and clarification of the information that will be accepted by the CRA as proof of beneficial ownership during the transition period, are welcome announcements by the CRA. It will be interesting to observe the manner in which the CRA begins to administer its new policies with respect to the application of treaty-reduced rates of withholding as the extended transition period draws to a close.

by Ashley Palmer and Michael Friedman

1 R.S.C. 1985 (5th Supp.), c.1.

2  Accessible at,,

3 CRA, Procedures during the transitional period, online: CRA; and CRA, Pending updates to IC76-12, Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada had a tax convention related to forms NR301, NR302, and NR303, online: CRA

4  CRA, Information Circular IC76-12R6 Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Countries with which Canada has a Tax Convention (2 November 2007), online: CRA

5   Supra note 3.

For more information on this topic, please contact:

Toronto     Michael Friedman      416.865.7914

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2012