What Is Part XIII Withholding Tax Canada? Complete Guide
Part XIII withholding tax is a 25 percent federal tax on certain kinds of income that Canadian payers send to non residents. It covers dividends, rent, royalties, pensions, and some interest and management fees. The payer holds back the tax from each payment and sends it to the CRA by the 15th of the following month. A tax treaty between Canada and the recipient’s country can lower the rate, often to 15 percent or less.
For most passive income, Part XIII tax is the final tax, so the non resident doesn’t need to file a Canadian return. Rental income and pensions are the main exceptions.
What Is Part XIII Withholding Tax in Canada?
Part XIII of the Income Tax Act sets the rules for taxing passive income that leaves Canada for people and companies living abroad. Canada can’t easily collect tax from someone who lives in another country, so it collects tax at the source. When a Canadian bank, corporation, tenant, or pension plan pays certain income to a non resident, it has to hold back 25 percent before the money leaves Canada. The CRA calls the person making the payment the payer, and the payer is legally responsible for getting the withholding right.
The tax applies to the gross amount paid, not the profit. If a Calgary corporation pays a $10,000 dividend to a shareholder living in the United Kingdom, the starting point is $2,500 of tax withheld. There are no deductions for expenses unless the non resident makes a special election. That’s why understanding Part XIII withholding tax in Canada matters to both the payer and the person receiving the money.
Part XIII is different from the regular Part I tax that Canadian residents pay on their T1 returns. Residents report investment income from T5 slips and pay tax at graduated rates, as our guide on T5 Slip in Canada explains. Non residents don’t get a T5. They get an NR4 slip that shows the gross income and the Part XIII tax withheld.
Which Income Is Subject to Part XIII Tax?
Part XIII tax covers passive income, the kind you earn from owning something rather than from working.
1. Investment and Rental Income
Dividends from Canadian corporations are the most common type of income subject to Part XIII tax. Rent from Canadian real estate, royalties for using property or intellectual property, and income from Canadian trusts and mutual funds are also covered. Management fees paid to a related non resident fall under Part XIII as well.
Most interest paid to a non resident at arm’s length has been exempt since 2008. Interest paid to a related person, and participating interest that rises with profits, is still taxed. Rental income is a special case, because owners can choose to pay tax on net income instead. Our guide on Tax Tips for Non-Residents with Canadian Rental Income explains how that works.
2. Pensions, Benefits, and Retirement Withdrawals
Canadian pension payments to former residents who moved abroad are subject to Part XIII tax. That includes company pensions, RRSP and RRIF withdrawals, annuities, and Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. The rate depends on the type of payment and the treaty with the recipient’s country.
People who leave Canada often don’t realize their RRSP withdrawals face withholding at the source. A former Calgary resident now living in Australia who takes $20,000 from an RRSP can face 25 percent withholding unless a treaty rate applies. Our guide for Canadians Working Abroad explains how leaving Canada changes your residency status and your tax.
How Tax Treaties Reduce the 25 Percent Rate?
Canada has tax treaties with over 90 countries, and most of them lower the Part XIII rate for their residents. Under the Canada and United States treaty, the rate on most dividends drops to 15 percent. It falls to 5 percent when a US company owns at least 10 percent of the voting shares of the Canadian corporation. Royalties usually drop to 10 percent or less. CPP and OAS paid to US residents are taxed only in the United States, so no Canadian tax is withheld at all.
To get a treaty rate, the non resident has to give the payer a completed Form NR301, which declares their country of residence and their right to treaty benefits. Partnerships use Form NR302, and certain hybrid entities use Form NR303. Without a valid form on file, the payer has to withhold the full 25 percent.
Payers are expected to review these forms and confirm they look reasonable. If the CRA later finds that the recipient didn’t qualify for the treaty rate, it can collect the missing tax from the payer. Calgary corporations with shareholders in the US, UK, or India should update NR301 forms every three years, or sooner if a shareholder moves.
Payer Responsibilities Under Part XIII
The Canadian payer, not the non resident, carries most of the compliance burden for Part XIII tax.
1. Withholding and Remitting the Tax
The payer has to withhold the correct tax when the income is paid or credited, not when the year ends. The tax is due to the CRA by the 15th of the month after the payment. Payers send these amounts under a special non resident account number that starts with NR, which they can request from the CRA.
A property manager collecting rent for an overseas owner, or a corporation paying dividends to a foreign shareholder, both count as payers. If no agent is involved, the tenant becomes the payer. Clean records help you track each payment, and our Bookkeeping Checklist for Small Businesses in Calgary shows how to keep them organized.
2. NR4 Slips and Penalties
By March 31 each year, payers have to issue an NR4 slip to each non resident and file an NR4 Summary with the CRA. The slip shows the income code, the gross amount, the tax withheld, and the recipient’s country. Payers filing more than five slips have to file them online.
A payer who fails to withhold becomes liable for the full tax owed, plus a penalty of 10 percent of the amount that should have been withheld. Repeat failures in the same year bring a 20 percent penalty. Late remittances also bring penalties and interest that compounds daily. These costs land on the Canadian payer, even though the income went to someone else.
Part XIII Tax vs Other Non Resident Tax Rules
This table shows how Part XIII compares with the other main tax rules that apply to non residents.
| Rule | What It Covers | Rate | Who Withholds |
|---|---|---|---|
| Part XIII tax | Dividends, rent, royalties, pensions | 25 percent or treaty rate | Canadian payer |
| Section 216 election | Net rental income from Canadian property | Graduated rates | Owner files a return |
| Section 217 election | Pensions, CPP, OAS, RRSP payments | Graduated rates | Recipient files a return |
| Section 116 | Sale of Canadian real estate | 25 percent or more holdback | Buyer’s lawyer |
| Regulation 105 | Fees for services done in Canada | 15 percent | Canadian client |
Sections 216 and 217 let non residents file a Canadian return and pay tax at regular rates instead of the flat Part XIII rate. Landlords use Section 216 with Form NR6, which our guide on NR6 Approval for Rental income in Canada explains in detail. Retirees with smaller pensions often use Section 217 to get some of their Part XIII tax back.
If too much tax was withheld, a non resident can apply for a refund on Form NR7 R within two years after the end of the calendar year of the payment. Selling real estate is a separate process, covered in Capital Gains Tax on Real Estate in Alberta. Corporations paying dividends abroad should also read How to File Corporate Taxes in Alberta.
Our team in Calgary provides Personal Tax Returns in Calgary, Bookkeeping in Calgary, and Calgary Financial Statements for non residents and the Canadian businesses that pay them. We handle NR4 slips, NR301 reviews, Section 216 and 217 returns, and refund claims. We work with clients in the Beltline, Downtown Calgary, and across Alberta, and with owners living overseas.
FAQs
Q. What is Part XIII withholding tax in Canada?
It’s a 25 percent tax on passive income like dividends, rent, royalties, and pensions paid to non residents. The Canadian payer withholds it and sends it to the CRA.
Q.2 Can a tax treaty reduce Part XIII tax?
Yes. Most treaties lower the rate, often to 15 percent on dividends, if the non resident gives the payer a completed Form NR301.
Q. When is Part XIII tax due?
The payer has to remit it by the 15th of the month after the payment. NR4 slips are due by March 31 each year.
Q. Is interest paid to non residents subject to Part XIII tax?
Interest paid at arm’s length is usually exempt. Interest paid to a related person, and participating interest, is still taxed.
Q. How can a non resident get a refund of Part XIII tax?
If too much was withheld, file Form NR7 R within two years after the end of the year of the payment. Landlords and retirees can also file Section 216 or 217 returns.