Recent Developments on Canadian Dividends and Non-Resident Tax

Overview of Non-Resident Withholding Tax on Canadian Dividends

Non-resident taxpayers who receive dividends from Canadian sources rely on applicable tax treaties to request a reduction of the statutory 25% non-resident withholding tax, often to a lower rate (typically 15%). Traditionally, taxpayers would inform payers of their residency status, resulting in the application and remittance of the withholdings at a reduced rate to the Canada Revenue Agency (CRA). The relevant dividend and non-resident tax amounts are reported on Form NR4, which is issued to the recipient. However, the criteria for satisfying foreign residency requirements and qualifying for the treaty rate have varied among brokerage firms and Canadian corporations.

CRA Audit Findings and Increased Scrutiny

Through audits, the CRA identified that payers often lacked adequate processes to confirm tax residency and eligibility for the treaty rate. This gap led to further assessments by the CRA against payers for the difference in tax rates, along with penalties and interest, since payers are jointly and severally responsible for withholding non-resident tax.

New Documentation Requirements Effective October 1, 2025

Beginning October 1, 2025, payers must apply the full 25% non-resident withholding tax to residents of Barbados, Guyana, Ireland, Malta, Singapore, and the United Kingdom, regardless of treaty provisions, unless they have obtained and verified specific documentation.

Acceptable Documentation

The CRA has outlined several examples of documentation that may be used to establish residency and support the application of a reduced treaty rate:

• A written statement from the taxpayer confirming residency and that funds were remitted to their home country.

• A letter from the foreign tax authority confirming both residency and that the income was taxed in that country.

• A copy of the foreign tax return and notice of assessment.

• A bank statement or similar evidence showing that funds were physically remitted to the country of residence.

Current Challenges and CRA Guidance

Despite the CRA’s guidance, questions persist over what constitutes sufficient proof of residency and how rigorously CRA officials will enforce the requirements. The lack of clarity and the increased administrative burden may prompt payers to adopt a conservative approach, applying the 25% non-resident tax by default.

Refund Process for Over-Withholding

Depending on the individual’s home country and whether a full 25% foreign tax credit can be claimed, affected taxpayers may file Form NR7-R, Application for Refund of Part XIII Tax Withheld, to request a refund of the tax differential. However, the documentation required for a successful refund application remains uncertain.

Professional Advice

Taxpayers are advised to consult with their tax professional to understand how these changes may affect their specific circumstances. The team at Trowbridge is available for questions and guidance.