Non-Resident Taxation

Non-Resident Taxation

Last update: December 9, 2016

25% Withholding Taxes on RRIF’s and other Income for Non-Residents

In 2012, CRA ("Revenue Canada" to us older folks) began advising Canadian financial institutions to take 25% withholding tax on RRIF, LIF, pension and similar payments to Canadian Non-Residents living in Mexico, instead of the lower 15% as allowed by the tax treaty between Mexico and Canada. The solution is to file a Declaration of Eligibility (form NR301) for the lower 15% rate. The NR301 must be filed with your financial institution, not with CRA directly. You should also know that the NR301 needs to be filed every three (3) years…so don’t forget to set up a system whereby you file the form on time, every time.

 

Unfortunately, not all banks, financial institutions and brokerage houses are up to speed on this requirement and discussion with some Canadian Non-Residents living in Mexico reveals that not all financial advisors have informed their clients of the need to file the Declaration. That means some non-residents may get a nasty surprise when their advisor becomes aware of the requirement and then collects the back taxes that were missed as required by CRA.

 
Types of Income Affected

The NR301 is required for all income subject to Part XIII withholding tax, and that is a long list:

  • Investment income, such as dividends
  • Pensions from Canada
  • Retirement Allowances
  • CPP and QPP
  • OAS
  • Annuities
  • RRIF, LIF and similar payments from registered retirement accounts
  • Royalties
  • Estate income (testamentary trusts)
  • Other trust income
  • Rental Income

At this time, there is no news to indicate that CRA is checking all of those sources. It appears that they have started with income being generated by banks, insurance companies and investment houses such as RRIF's and annuities, for example. It also means that dividends, including those within mutual funds, will attract 25% under this new policy.

 

CPP and OAS - comments

The move by CRA to start requiring non-residents to declare their legibility for tax treaty benefits may signal increased vigilance by CRA over non-resident status. There is no news at this time to indication at this time about how OAS and CPP payments may be affected, but it is fair to assume that those programs would send out announcements should Canadians need to file a NR301 with them to protect the 15% withholding tax rates on OAS and CPP payments. We will watch for any news and post it to the site should anything develop in that regard.

 

Getting Refunds of Over Payment

If you are caught in a situation whereby your bank or investment house has taken 25% withholding taxes instead of 15%, you will have to file an NR7-R request for a refund of over-payment of taxes, and perhaps file a Canadian Income Tax Return under Section 217 of the Income Tax Act in order to get a refund. If this applies to you and you need help, TioCorp can arrange for your Canadian Non-Resident Income Taxes to be filed. The deadline for a Section 217 Income Tax Return is June 30th each year.

To access forms, go to our CRA Form page.

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Filing a Non-Resident Tax Return

The Act provides for a withholding tax of 25% on Canadian pension benefits paid to a non-resident of Canada. The non-resident withholding tax deducted represents the final Canadian tax obligation on this type of income. The rate of withholding tax may be reduced or eliminated by a tax convention between Canada and the individual's country of residence, and for Mexico the rate is 15%.

Under Section 217 of the Act, a non-resident may elect to file a Canadian income tax return, within six months of the end of the year in which Canadian benefits are received, reporting pension benefits and similar types of income received from Canada. This allows the non-resident to claim non refundable tax credits, and to pay tax on that income at the same rates as applicable to the residents of Canada. The non-resident tax withheld from the elective income may be claimed as a tax credit on the return. If an individual makes an election under Section 217, and the tax calculated on the return is less than the tax withheld, the excess will be refunded. For more information, see T4145 – Electing Under Section 217 of the Act.

For many low-income non-residents, such as those receiving CPP, OAS and little else, they can expect to receive a tax refund of all or at least a good portion of what has been withheld. It is worth the effort and low cost of having someone prepare a S217 Tax Return for you if you don't have the skills to do it yourself.

 

FACTA - Foreign Account Compliance Tax Act

In 2010, the US passed the Foreign Account Tax Compliance Act (FACTA) which required foreign financial institutions to share information on US residents who had accounts in foreign countries. Then they began negotiating with foreign countries to get these countries to comply. It impacts Canadians in Mexico. Keep reading.

On November 19, 2012, Mexico and the United States signed an Intergovernmental Agreement (IGA). The agreement includes reciprocal reporting obligations beteen the United States and Mexico.

On February 5, 2014, Canada and the USA reached an agreement on how they will co-operate and share information. Read more.

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