As the payer of the dividends, the corporation has an obligation to withhold income taxes at the applicable rate, remit these amounts to the Receiver General and file the applicable information returns.
The general rate of withholding on dividends paid to non-residents of Canada is 25%. However, this rate is often reduced if the dividends are paid to a resident of a country with which Canada has a tax treaty. The treaty rate is typically between 5% and 15% depending on various factors. For example, the Canada-U.S. tax treaty reduces the withholding tax rate to 15% on most dividends paid to residents in the United States. This rate is reduced further to 5% if the dividends are paid to a corporation resident in the United States, and that corporation owns at least 10% of the voting power in the Canadian corporation paying the dividends.
You will need to open a non-resident account with Canada Revenue Agency if this is the first time that you are withholding tax on payments to non-residents. A non-resident account number will be issued to you and all remittances can be made to this account. Remittances are due by the 15th day of the month following the month the dividends are paid or credited to the non-resident.
The NR4 summary and slip(s) must be prepared to report the dividends paid to non-residents and the withholding taxes remitted. This information must be submitted to Canada Revenue Agency by the end of March following the calendar year in which the dividends were paid. The slips must be distributed to the non-resident recipients of the dividends at this time also. The company will be subject to penalties for late-filed slips or slips that are not distributed to the recipients. These penalties vary depending on the total number of slips.
You must keep complete and up to date records for all your shareholders to ensure you are withholding at the correct rate and remitting the correct deductions. You need to verify who the beneficial owner of the dividend is, their residency for tax purposes, and whether they are eligible for treaty benefits. If you are unsure of this information, you can request the recipient to complete a declaration form to verify their eligibility for treaty benefits. The corporation is liable for all withholding tax payments if you fail to properly deduct. The corporation can also be subject to a failure to deduct penalty calculated as 10% of the withholding tax that you failed to deduct, as well as a late-remitting penalty ranging from 3% to 10% of the amount remitted late.
Payments made to non-residents are subject to additional reporting requirements to ensure taxes are withheld prior to the funds leaving the country. It is important that you understand your obligations to prevent unnecessary penalties and interest.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA