Part XIII Tax on Canadian-Source Income for Non-Residents

Part XIII tax on Canadian-source income for non-residents is a flat 25% withholding tax that a Canadian payer must deduct from most passive payments before sending them abroad. It applies to dividends, rent, royalties, pensions, and similar income under section 212 of the Income Tax Act, and the obligation sits on the payer, not the recipient. If the payer fails to withhold, the CRA can hold that payer personally liable for the full amount, plus penalties and interest.¹ Treaties can bring the rate down, and non-residents can often file a Canadian return afterward to recover part of what was withheld.

What Income Is Covered

Section 212 lists the payments that trigger withholding when they flow from a Canadian source to a non-resident. The main categories are:²

Management or administration fees paid to a non-resident.
Dividends from Canadian corporations to non-resident shareholders.
Rent from Canadian real property, timber royalties, and payments for the use of patents, copyrights, trademarks, or trade secrets in Canada.
Distributions from Canadian estates or trusts to non-resident beneficiaries.
Superannuation, RRSP withdrawals, RRIF payments, deferred profit-sharing plan payments, and retiring allowances.
Old Age Security, Canada Pension Plan, and Quebec Pension Plan payments to individuals living abroad.
Interest paid to a related non-resident lender, and interest that varies with the borrower’s revenue, profits, or similar measures.

Ordinary interest paid to an unrelated non-resident lender is generally exempt. A Canadian company paying interest on a standard loan from a non-resident bank it deals with at arm’s length does not withhold, as long as the interest is not tied to the borrower’s revenue or profits.² When the parties are related, the full 25% applies.

The 25% Rate and Treaty Reductions

The default rate is 25% of the gross payment. No expenses are deducted before withholding; the tax comes off the full amount.³ Canada’s bilateral tax treaties can reduce or eliminate that rate depending on the recipient’s country of residence and the type of income.

The Canada–U.S. treaty is the most commonly used. Under it:

Dividends are generally taxed at 15%, dropping to 5% when the beneficial owner is a company controlling at least 10% of the voting stock in the payer.
Copyright royalties on literary, dramatic, musical, or artistic works, and royalties on computer software or patents, drop to 0%. Other royalties are generally capped at 10%.
Periodic pension payments are capped at 15% in the source country.⁴
Canadian social security benefits paid to a U.S. resident are taxable only in the United States under the most recent protocol.⁴

RRSP and RRIF payments show how the rules interact. A lump-sum RRSP withdrawal by a U.S. resident faces the full 25%. Once converted to a RRIF, periodic payments can qualify for the 15% treaty rate, provided the annual payout stays within thresholds tied to the account’s fair market value. Anything above those thresholds reverts to 25%.

Claiming a Treaty Rate With Form NR301

Treaty reductions are not automatic. The non-resident has to give the payer a completed Form NR301, Declaration of Eligibility for Benefits (Reduced Tax) Under a Tax Treaty for a Non-Resident Person, showing they are the beneficial owner of the income and resident in a treaty country.⁵ The payer reviews the form before applying any reduced rate. Without it, the payer must withhold the full 25%.³

A completed NR301 expires at the earliest of three events: the non-resident’s treaty eligibility changes, the applicable rate changes, or three years pass from the signature date.⁵ If the recipient’s mailing address moves to a different country, the CRA recommends collecting a fresh form.

What the Payer Has to Do

If you send money to a non-resident, you need a non-resident tax account with the CRA. You can open one through My Account, My Business Account, or Represent a Client, and the CRA issues an account number that appears on all filings.⁶

After withholding, remit the tax to the CRA by the 15th of the month following the month the payment was made or credited to the non-resident.⁷ Payment options include online banking, My Payment, or a mailed cheque with a remittance voucher.

After the calendar year ends, file an NR4 return by March 31. The return has one NR4 slip for each non-resident recipient plus an NR4 Summary that reconciles all the slips against your remittances.⁸ Each slip shows the gross income paid, the tax withheld, and a two-digit income code identifying the payment type. Filing is generally done electronically.

Penalties and Interest

If you pay a non-resident without withholding, the CRA can assess you for the full amount that should have been deducted, plus a 10% penalty. A second failure in the same calendar year rises to 20% if it was knowing or grossly negligent.¹

Withholding correctly but remitting late brings its own penalty, scaled to the delay:

1 to 3 days late: 3%.
4 to 5 days late: 5%.
6 to 7 days late: 7%.
More than 7 days late, or not remitted at all: 10%.

A second late remittance in the same calendar year can reach 20% if the CRA finds it was knowing or grossly negligent.¹

Missing the March 31 NR4 filing deadline triggers a separate penalty based on the number of late slips:⁹

1 to 5 slips: $100 flat.
6 to 10 slips: $5 per day, up to $500.
11 to 50 slips: $10 per day, up to $1,000.
51 to 500 slips: $15 per day, up to $1,500.
501 to 2,500 slips: $25 per day, up to $2,500.
2,501 to 10,000 slips: $50 per day, up to $5,000.
10,001 or more slips: $75 per day, up to $7,500.

Compound daily interest applies to unpaid amounts at the CRA’s prescribed rate, and interest accrues on unpaid penalties too.¹⁰

Reducing Rental Withholding With Form NR6

The 25% rate on gross rent is painful for landlords with heavy expenses. A property earning $3,000 a month but costing $2,500 to run still sees $750 withheld, far above the tax actually owed on the $500 of net income. Form NR6, Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property or Receiving a Timber Royalty, lets the Canadian agent withhold 25% on net rental income instead of gross once the CRA approves it.¹¹ The 15th-of-the-month remittance rule still applies.

Filing an NR6 commits the non-resident to filing a Section 216 return for that year. If the return is not filed on time, the CRA reassesses at 25% of gross rent for the whole year, minus what was remitted, plus penalties and interest.¹²

Filing a Canadian Return Under Section 216 or 217

Non-residents are not stuck with the 25% flat rate as their final tax bill. Two elective returns let you pay tax on net income at graduated rates and reclaim any excess withholding.

Section 216 for Rental and Timber Income

Section 216 covers rent from Canadian real property and timber royalties. You deduct legitimate expenses such as property taxes, insurance, maintenance, and mortgage interest, and pay tax on net income at the graduated rates that apply to Canadian residents.¹³

Filing deadlines depend on whether you used NR6:

With an approved NR6: file by June 30 of the year after the tax year.
Without an NR6: you have up to two years from the end of the year the rental income was paid or credited.
Property sold with capital cost allowance recapture: file by April 30 of the following year, whether or not NR6 was used.

If the tax calculated on the return is less than what was already withheld, the CRA refunds the difference.¹³

Section 217 for Pension and Benefit Income

Section 217 does the same job for Canadian pension and benefit income. Electing under this section lets you pay at graduated rates instead of the flat 25%.¹⁴ It helps most when your Canadian-source income is modest, such as a small CPP or OAS payment. The rate calculation looks at your worldwide income, so if total income from all sources is high, graduated rates may not save anything. Run the numbers before electing.

Getting Over-Withheld Tax Back

When too much Part XIII tax has been withheld, whether because a treaty rate should have applied, the income was exempt, or the payer made an error, the non-resident applies for a refund on Form NR7-R, Application for Refund of Part XIII Tax Withheld. The CRA must receive it within two years from the end of the calendar year in which the tax was remitted, and missing that window forfeits the refund.¹⁵

To have the refund deposited into a Canadian bank account, attach Form NR304, Direct Deposit for Non-Resident Tax Refunds. The name on the account must match the applicant or the authorized signer.¹⁵ Without it, the CRA mails a cheque to the address on file, which for a non-resident adds international mail time to the wait.

1
Canada Revenue Agency. NR4 – Non-Resident Tax Withholding, Remitting, and Reporting
2
Justice Laws Website. Income Tax Act – Section 212
3
Canada Revenue Agency. Rates for Part XIII Tax
4
Internal Revenue Service. United States – Canada Income Tax Convention
5
Canada Revenue Agency. More Information on Forms NR301, NR302, and NR303
6
Canada Revenue Agency. New Remitter
7
Canada Revenue Agency. When to Remit
8
Canada Revenue Agency. NR4 Slip
9
Canada Revenue Agency. NR4 – Non-Resident Tax Withholding, Remitting, and Reporting – Section: Late-Filing Penalties
10
Canada Revenue Agency. Interest Rates for the First Calendar Quarter
11
Canada Revenue Agency. Filing and Reporting Requirements
12
Canada Revenue Agency. Important Reminder About Form NR6
13
Canada Revenue Agency. Income Tax Guide – Electing Under Section 216
14
Canada Revenue Agency. Electing Under Section 217
15
Canada Revenue Agency. Applying for a Refund of Tax Overpayments