Part XIII Withholding Tax: Rates, Treaty Claims & Section 216/217

Canadian payers must deduct Part XIII withholding tax at 25% of the gross amount before sending certain payments to non-residents, but tax treaties and specific elections can lower that rate or shift the tax onto net income instead. The default hits dividends, rents, royalties, pensions, management fees, and trust distributions the moment they are paid or credited. Getting to a lower rate almost always depends on filing the right form before the payment goes out.

Which Payments Get Taxed at 25%

Section 212 of the Income Tax Act sets the categories. Dividends from Canadian corporations, rents on Canadian real property, royalties on patents, trademarks, copyrights, and industrial know-how, management and administration fees, timber royalties, and pension-type income all fall inside Part XIII. So do distributions from Canadian estates and trusts to non-resident beneficiaries — treated as trust income for withholding purposes regardless of what the underlying income was inside the trust.¹

Pension-type income covers a wide range: superannuation and employer pension payments, RRSP withdrawals, RRIF payments, and deferred profit-sharing plan distributions are all caught when paid to a non-resident.

Interest Is the Main Exception

The rule people misread most often is interest. Most interest paid by a Canadian borrower to an unrelated non-resident lender is exempt from Part XIII withholding entirely.² The 25% only bites when the parties are related (non-arm’s length) or when the interest is “participating debt interest” — a return that moves with the borrower’s revenue, profits, or production.¹ So bonds from an unrelated Canadian issuer typically pay you in full; a loan to your own Canadian corporation does not.

Treaty Rates and How to Claim Them

Canada’s tax treaties cut the 25% rate on most payment types, and in some cases eliminate it. The reduction available to you depends on the treaty with your country of residence.³

The Canada–U.S. treaty is the most-used example. Under its current terms:

Direct-investment dividends (company beneficial owner holding at least 10% of voting stock): 5%.
Portfolio dividends: 15%.
Interest: capped at 10%, though most arm’s length interest is already exempt under domestic law.
Royalties: most, including software royalties, are fully exempt; certain classes face a 10% cap.
Pensions: generally taxed in the recipient’s country of residence, with a maximum 15% source-country rate.⁴

Other treaties carry different rates. Check the specific treaty your country has with Canada before assuming any figure.

Forms NR301, NR302, and NR303

The lower rate is not automatic. To apply it, the Canadian payer needs documentation before the payment goes out. Individuals and corporations file Form NR301, the “Declaration of eligibility for benefits (reduced tax) under a tax treaty for a non-resident person.” It asks for your name, address, foreign tax identification number, the type of income, and a certification of treaty eligibility.⁵

Partnerships with non-resident partners use Form NR302, and hybrid entities use Form NR303. They serve the same purpose but account for income flowing through to multiple beneficial owners in different countries.⁶

Treaty benefits only reach the beneficial owner of the income. Agents, nominees, payments held “in care of” or “in trust” for someone else, and mismatched addresses can prompt the payer to look further before applying a lower rate.⁷

Rental Income: The Section 216 Election

Default Part XIII treatment of Canadian rental income is harsh. The 25% applies to gross rent, with nothing subtracted for mortgage interest, property taxes, repairs, insurance, or management fees. On a property renting for $3,000 a month that costs $2,500 a month to carry, the withholding is $750 against actual profit of $500.

Section 216 lets you shift the tax to net rental income. File Form NR6 with the CRA before January 1 of the tax year, or before the first rental payment is due. Once approved, your Canadian agent withholds 25% of the estimated net amount and remits it by the 15th of the month following each rental payment.⁸

The election commits you to filing a Canadian return, Form T1159, for that year.⁹ With an approved NR6, the T1159 is due June 30 of the following year, even if you owe nothing or show a loss. Miss that date and the election is voided; the CRA reassesses on gross rent.¹⁰

Missed the NR6 window? You can still file a Section 216 return after the fact to recover the difference between gross and net taxation, generally within two years from the end of the year the rent was paid or credited.¹⁰ Filing NR6 in advance is better for cash flow; the retroactive route is the fallback.

Pension Income: The Section 217 Election

If Canadian pension income is most or all of what you receive from Canada, the flat 25% (or a treaty-reduced rate) can be worse than what a Canadian resident with the same income would pay. Section 217 lets you file a Canadian return and have that income taxed at graduated rates, with access to federal non-refundable credits like the basic personal amount.

Eligible income includes Old Age Security, CPP and QPP benefits, most superannuation and employer pension payments, RRSP and RRIF withdrawals, Employment Insurance benefits, retiring allowances, and deferred profit-sharing plan income. OAS supplements and a few other narrow categories are excluded.¹¹

To reduce the withholding during the year rather than waiting for a refund, file Form NR5. Once approved, it stays valid for five years. In exchange, you commit to filing a Section 217 return by June 30 of the following year. Miss the filing deadline and you become liable for the full tax that would have been withheld, minus whatever your payer already deducted.¹²

Section 217 does not always save money. Graduated rates are calculated with reference to your worldwide income, so a non-resident with substantial income from other sources can end up paying more than the flat 25%. Run the math before electing.

How the Tax Is Withheld and Reported

The Canadian payer deducts Part XIII tax at the moment income is paid or credited. There is no option to pay later; the money comes off the top. The payer must remit what was withheld to the CRA by the 15th of the following month, with the next business day counting as on time when the deadline falls on a weekend or holiday.¹³

After each calendar year, the payer issues an NR4 slip, the Statement of Amounts Paid or Credited to Non-Residents of Canada.¹⁴ Slips must reach both you and the CRA by the last day of March following the calendar year.¹⁵ Hold onto them. You will need the NR4 for any refund claim, any Section 216 or 217 return, and any foreign tax credit claim in your home country.

Getting Back Tax That Was Over-Withheld

Over-withholding happens routinely. A financial institution applies the full 25% because your NR301 was not on file. A pension administrator does not know you qualify for a treaty rate. The fix is Form NR7-R, the Application for Refund of Part XIII Tax Withheld, filed with your NR4 slip attached.¹⁶

The deadline is firm: the CRA must receive your NR7-R no later than two years from the end of the calendar year in which the tax was remitted.¹⁶ Tax over-withheld on a July 2025 dividend has to be claimed by December 31, 2027. Extensions are rare. Partnerships can also use NR7-R to recover excess withholding allocated to their partners.⁶ Processing typically takes several months.

U.S. Residents: Foreign Tax Credit

Canadian tax you paid on cross-border income is not lost to you. Under the Canada–U.S. treaty, the United States allows a credit against U.S. income tax for the appropriate amount of income tax paid to Canada.⁴ You claim it on IRS Form 1116, with your NR4 slip as backup. The credit is capped at the share of your U.S. tax attributable to foreign-source income, so if Canadian income is a small piece of your total, the credit is limited accordingly. Excess credit can generally be carried back one year or forward ten.¹⁷

A simplified path exists for smaller amounts. If your total creditable foreign taxes for the year are $300 or less ($600 on a joint return), all your foreign income is passive, and the taxes appear on a payee statement like a 1099-DIV, you can claim the credit directly on your return without Form 1116.¹⁷ For many U.S. residents with a modest Canadian dividend or pension, that keeps the paperwork manageable.

1
Justice Canada. Income Tax Act RSC 1985 c 1 (5th Supp) – Section 212
2
Canada Revenue Agency. Non-Residents of Canada
3
Canada Revenue Agency. Rates for Part XIII Tax
4
Internal Revenue Service. United States – Canada Income Tax Convention
5
Canada Revenue Agency. NR301 Declaration of Eligibility for Benefits (Reduced Tax) Under a Tax Treaty for a Non-Resident Person
6
Canada Revenue Agency. More Information on Forms NR301, NR302, and NR303
7
Canada Revenue Agency. Beneficial Ownership and Tax Treaty Benefits
8
Canada Revenue Agency. Rental Income and Non-Resident Tax – Filing and Reporting Requirements
9
Canada Revenue Agency. T1159 Income Tax Return for Electing Under Section 216
10
Canada Revenue Agency. Electing Under Section 216 – When to File a Return
11
Canada Revenue Agency. Electing Under Section 217 – Who Can File
12
Canada Revenue Agency. Important Reminder if You Filed Form NR5
13
Canada Revenue Agency. When to Remit
14
Canada Revenue Agency. NR4 Slip
15
Canada Revenue Agency. Distributing NR4 Slips to Recipients
16
Canada Revenue Agency. Applying for a Refund of Tax Overpayments
17
Internal Revenue Service. Publication 514, Foreign Tax Credit for Individuals