Payments to a Partnership with a Non-Resident Member
Should there be part XIII withholding payments in respect of a
Canadian-resident partner when the partnership has one or more
non-resident members? Form NR-302 (“Declaration of Eligibility for
Benefits (Reduced Tax) Under a Tax Treaty for a Partnership with
Non-Resident Partners”) says that this is not required, contrary to the
usual CRA position and, arguably, the law.
Paragraph 212(13.1)(b) provides that if a person resident in Canada pays
or credits an amount to a partnership, the partnership is deemed to be a
non-resident person unless the partnership is a “Canadian partnership.”
Because the definition of this term in section 102 requires that all
the partners be residents of Canada, even one non-resident partner
triggers a requirement for part XIII withholding. The plain meaning of
the paragraph appears to be that withholding is required in respect of
payments to a partnership with one or more non-resident partners,
regardless of a Canadian-resident partner’s relative entitlement to such
income. The CRA’s longstanding interpretation is set out in paragraph 7
of Interpretation Bulletin IT-81R1 (“Partnerships—Income of Non-Resident Partners”; archived):
Where tax is to be withheld under Part XIII because a
partnership is deemed by paragraph 212(13.1)(b) to be a non-resident
person, the withholding applies to the full amount of the payment even
though some members of the partnership are residents of Canada. The
portion of such tax withheld that is attributable to a resident member
of the partnership may be claimed by him as a credit against the tax
otherwise payable under Part I of the Act.
The CRA confirmed this position in the specific situation of rental
payments to a partnership: 25 percent withholding from the payment is
required, and “not only from the non-resident’s proportionate share”
(CRA document no. 2012-0450491E5, March 27, 2013).
The CRA permits a reduction of the withholding rate in respect of a
non-resident partner that is entitled to the benefit of a bilateral tax
treaty between Canada and the partner’s country of residence (CRA
document no. 2004-0074241E5, July 19, 2005), as required under ITAR
10(6) and possibly paragraph 110(1)(f). However, no reduction is
permitted in respect of payments to a resident partner, even for amounts
that may not be taxable to the partner.
In 2010, the CRA released new forms to assist Canadian payers in
determining the appropriate rate of withholding for payments made to
non-residents. Form NR-302 is to be used when the payee is a
partnership, enabling payers to determine the appropriate blended rate
of withholding tax payable in respect of partners that have differing
(or no) tax treaty entitlement. Part III of worksheet A explicitly
provides that the rate to be used in respect of a partnership interest
owned by a resident of Canada is 0 percent, without any indication that
this position is directly in conflict with the CRA position noted above.
It seems prudent for payers to withhold in such situations, as is
required by the law and the CRA position. However, if a payer does not
withhold, form NR-302 might possibly offer some defence in court or to
support an application under the fairness provisions, although the CRA
is not bound by a published policy when it does not properly give effect
to the legislation (see, for example, Canada (Attorney General) v. Picard, 2014 FCA 46, at paragraph 21).
It is hoped that the CRA will use the yet-to-be-released Income Tax
Folio on part XIII withholding to clarify its position on this matter.
Dentons Canada LLP, Toronto