Canadian Part XIII Non-Resident Withholding Tax: Rates and Refunds

Canada’s Part XIII non-resident withholding tax is a flat 25% levy on certain Canadian-source income — dividends, rents, royalties, pensions, and similar passive payments — that a Canadian payer must deduct before sending funds to a non-resident and remit to the Canada Revenue Agency. Tax treaties can drop that rate, often to 15%, 10%, 5%, or zero, but only when the recipient has given the payer documentation proving eligibility. The Canadian payer, not the foreign recipient, is legally on the hook for getting the amount right.

Who Is a Non-Resident for Part XIII Purposes

The CRA looks at residential ties first, not days on the calendar. The primary ties are a home in Canada, a spouse or common-law partner in Canada, and dependants in Canada. Secondary ties include Canadian bank accounts, a driver’s licence, provincial health coverage, and social memberships.¹

A separate deemed-residency rule pulls someone into the Canadian tax system if they spend 183 days or more in Canada during the year and don’t have significant residential ties, unless a tax treaty overrides that outcome. If you are a non-resident under these rules, Part XIII is the mechanism Canada uses to tax your Canadian-source passive income.¹

What Income Triggers Part XIII Withholding

Section 212 of the Income Tax Act lists the categories that trigger Part XIII when paid to a non-resident. The big ones are dividends from Canadian corporations, rent on Canadian real property, royalties for intellectual property or natural resource rights used in Canada, pension and retirement plan payments (including RRSP, RRIF, and DPSP distributions), annuities, management fees, and some estate or trust income.²

Interest Is Mostly Exempt

Since January 1, 2008, interest paid to arm’s-length non-residents has not been subject to Part XIII withholding. Ordinary commercial loans, bonds, and notes between unrelated parties are exempt. Withholding still applies in two situations: interest paid to a non-arm’s-length lender (essentially, a related party), and “participating debt interest,” where the amount of interest depends on revenue, profits, cash flow, commodity prices, or similar variable measures. Government and certain municipal debt qualify as “fully exempt interest” regardless of the parties’ relationship.²

Rent Withheld on the Gross Amount

Rent on Canadian real property is the harshest case. The payer withholds 25% of the gross rental payment, with no allowance for mortgage interest, property taxes, maintenance, or any other expense the landlord actually pays. Two relief mechanisms exist: Form NR6, which allows in-year withholding on net rental income, and a Section 216 election, which lets the non-resident file a Canadian return after year-end to recover the overpayment. Both are covered below.³

The 25% Default Rate and How Treaties Reduce It

The statutory Part XIII rate is 25% of the gross amount paid or credited.² Canada’s bilateral tax treaties reduce that rate for residents of treaty countries, usually to 15%, 10%, 5%, or 0% depending on the type of income and the recipient’s circumstances. The reduced rate applies at the time of payment only when the payer has documentation on file supporting the claim. Without that documentation, the correct course is to withhold at 25% and let the recipient apply for a refund.

Canada-U.S. Treaty Rates

U.S. residents receive the following reduced rates under the Canada-U.S. treaty:

Dividends are capped at 15%, dropping to 5% when the beneficial owner is a company that owns at least 10% of the voting stock of the Canadian payer.⁴

Interest that is still subject to withholding (non-arm’s-length or participating debt) is capped at 10%. Several interest categories are fully exempt under the treaty even between related parties, including interest on government-guaranteed obligations and interest on credit sales of equipment or merchandise.⁵

Royalties carry a general treaty rate of 10%. Copyright royalties for literary, dramatic, musical, or artistic works (other than film and television reproduction rights), payments for computer software, and payments for the use of a patent or industrial know-how are fully exempt, taxable only in the recipient’s country of residence.⁵

Beneficial Ownership and Flow-Through Entities

Treaty benefits belong to the beneficial owner of the income, not automatically to the entity that receives the payment. The CRA generally accepts the payee as the beneficial owner but will question that where the payee is a known agent or nominee, where payment is directed “in care of” or “in trust” for another person, where the mailing address differs from the registered owner’s address, or where the payee is a partnership, U.S. LLC, or other flow-through entity.⁶

Flow-through entities cause the most problems. A U.S. LLC is typically disregarded or treated as a partnership for U.S. tax purposes, but Canada treats it as a corporation. If the entity itself is not the beneficial owner and the underlying members haven’t documented their own eligibility, treaty benefits can be denied entirely. Partnerships with non-resident partners use Form NR302; hybrid entities use Form NR303. Getting the entity classification wrong leaves the payer withholding at the wrong rate and personally exposed for any shortfall.⁶

Documentation the Payer Needs Before Applying a Reduced Rate

The CRA doesn’t mandate a specific format for treaty documentation, but its declaration forms collect exactly the information needed to justify a lower rate.

Form NR301 is the standard declaration for individual non-residents and non-flow-through entities. It captures the recipient’s legal name, address, country of tax residence, and a certification that the recipient is the beneficial owner and eligible for treaty benefits. Partnerships use NR302; hybrid entities use NR303.⁷

Form NR5 lets a non-resident receiving Canadian pension or annuity income apply to the CRA for a reduced amount of withholding during the year. It requires a breakdown of Canadian income sources and a valid Canadian tax identification number. Once approved, the payer withholds at the amount specified by the CRA rather than the flat statutory rate. This matters most for retirees whose total Canadian income is low enough that 25% far exceeds their real liability.⁸

Form NR6 lets non-resident landlords request in-year withholding on net rental income rather than gross rent. Both the non-resident and the Canadian agent (typically a property manager) sign the form, and it must be filed before the first rental payment of the year it covers. Approval carries a condition: the non-resident must file a Section 216 return by the following June 30. Missing that filing lets the CRA reassess tax on the gross rental amount.⁹

Remitting and Reporting

The payer must remit the withheld tax so the CRA receives it on or before the 15th of the month following the payment. Remittance is considered received on the date it arrives at the payer’s Canadian financial institution or at the CRA.¹⁰ Options include the CRA’s “My Payment” portal, electronic transfer through a financial institution, and cheque. After a first remittance, the CRA sends Form NR76, a statement of account with a remittance voucher for future payments.¹¹

By the last day of March following the calendar year, the payer must file an NR4 information return, consisting of the Summary and an individual NR4 slip for each non-resident payee. Estates and trusts with non-calendar year-ends get 90 days after their year-end instead. When March 31 falls on a weekend or public holiday, the deadline shifts to the next business day. Late-filing penalties scale with the number of slips filed late, starting at $100 for one to five slips and rising to daily penalties capped between $500 and $7,500 depending on the volume.¹²

Payer Liability When Withholding Is Wrong

Under section 215 of the Income Tax Act, a payer that fails to deduct or withhold the required Part XIII tax becomes personally liable for the full amount that should have been withheld, plus interest and penalties. The CRA can assess the payer directly.¹³

The payer has a statutory right to recover the amount from the non-resident by deducting it from future payments or pursuing repayment. In practice, chasing a foreign recipient who has already received the gross payment is difficult. The safer approach when treaty eligibility is unclear is to withhold at 25% and let the non-resident apply for a refund of the excess.

Recovering Overwithheld Tax: Elections and Refund Claims

Part XIII is designed as a final tax, but two elections and one refund form let non-residents recover overwithholding.

Section 216: Filing a Return for Rental Income

A non-resident with Canadian rental income can elect under Section 216 to file a Canadian return reporting net rental income — gross rent minus deductible expenses such as mortgage interest, property taxes, insurance, repairs, and depreciation. If the Part XIII tax withheld exceeds the tax owed on the net amount, the CRA refunds the difference.⁹

Section 216 deadlines for 2025 income:

If NR6 was approved for 2025, the Section 216 return is due June 30, 2026. Missing this lets the CRA reassess on gross rents and pursue the Canadian agent for any shortfall.
If the property was disposed of in 2025 with capital cost allowance recapture, the return is due April 30, 2026.
Where no NR6 was filed, the general deadline is two years from the end of the year the rental income was paid or credited — December 31, 2027, for 2025 income.

Missing the applicable deadline invalidates the election. Deductions for that year are lost, and the 25% gross withholding stands as the final tax.⁹

Section 217: Pension and Similar Income

Non-residents receiving Canadian pension benefits, OAS, CPP/QPP, RRSP or RRIF payments, employment insurance benefits, retiring allowances, or death benefits can elect under Section 217 to be taxed at the same graduated rates Canadian residents pay, instead of the flat Part XIII rate.¹⁴ Graduated rates start below 25% but rise with income, so the election typically helps retirees with modest Canadian pension income and little other worldwide income, and does less for those with substantial income from other sources. Form NR5 is the tool for reducing withholding during the year in anticipation of a Section 217 election.¹⁵

Form NR7-R: Refund of Overwithheld Tax

Form NR7-R (Application for Refund of Part XIII Tax Withheld) recovers overwithholding caused by a treaty rate that wasn’t applied, a payer error, or a later-qualifying election. The applicant submits the NR4 slip showing the tax withheld along with an explanation of why the refund is due. The deadline is two years from the end of the calendar year in which the tax was remitted to the CRA. Tax withheld on a July 2025 payment must be claimed by December 31, 2027. After that, the refund right is gone regardless of how obvious the overpayment is.¹⁶

Claiming a U.S. Foreign Tax Credit for Part XIII Tax

U.S. taxpayers subject to Part XIII withholding can generally claim a U.S. foreign tax credit to avoid double taxation. The credit is calculated on Form 1116 on a country-by-country basis. If all foreign-source income is passive (most dividends, interest, and rental income qualify) and total foreign taxes paid don’t exceed $300, or $600 on a joint return, an election lets the taxpayer skip Form 1116 and claim the credit directly.¹⁷

The IRS only credits foreign taxes you were legally required to pay. If a treaty entitled you to a lower rate but you didn’t provide the paperwork and the Canadian payer withheld at 25%, the IRS credits only the amount you owed under the treaty. The excess is refundable by Canada, and the IRS treats the surplus as your responsibility to recover, not to credit. That is why filing the NR301 on the Canadian side matters twice over: it lowers Canadian withholding at the source and protects the full U.S. foreign tax credit.¹⁷

1
Canada Revenue Agency. Deemed Residents of Canada
2
Justice Laws Website. Income Tax Act RSC 1985 c 1 (5th Supp) – Section 212
3
Canada Revenue Agency. Rental Income and Non-Resident Tax – Filing and Reporting Requirements
4
Internal Revenue Service. Convention Between Canada and the United States of America
5
Department of Finance Canada. Convention Between Canada and the United States of America
6
Canada Revenue Agency. Beneficial Ownership and Tax Treaty Benefits
7
Canada Revenue Agency. More Information on Forms NR301, NR302, and NR303
8
Canada Revenue Agency. NR5 Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to Be Withheld
9
Canada Revenue Agency. Income Tax Guide for Electing Under Section 216
10
Canada Revenue Agency. When to Remit
11
Canada Revenue Agency. New Remitter
12
Canada Revenue Agency. NR4 – Non-Resident Tax Withholding, Remitting, and Reporting
13
Justice Laws Website. Income Tax Act RSC 1985 c 1 (5th Supp) – Section 215
14
Canada Revenue Agency. Electing Under Section 217 – Who Can Elect
15
Canada Revenue Agency. Electing Under Section 217
16
Canada Revenue Agency. Applying for a Refund of Part XIII Tax Overpayments
17
Internal Revenue Service. Instructions for Form 1116