What Is Part XIII Withholding Tax Canada? Complete Guide

Part XIII withholding tax Canada is the mechanism CRA uses to collect tax from non-residents who receive passive income from Canadian sources. Every time a Canadian payer sends rental income, dividends, interest, pension payments, or royalties to a non-resident, the payer must withhold 25% of the gross amount and remit it directly to CRA before the balance reaches the recipient. The non-resident never sees that 25% unless they take specific steps to recover it.

Understanding how Part XIII works, which income it covers, which treaty rates reduce it, and which CRA elections override it is essential for any non-resident with Canadian income. This guide covers all of it in one place.

What Is Part XIII Tax and Who Pays It?

Part XIII of the Income Tax Act imposes withholding tax on passive income paid or credited by Canadian residents to non-residents of Canada. The tax is not self-assessed by the non-resident. It is withheld at source by the Canadian payer, which means the bank, corporation, pension administrator, landlord, or tenant handles the remittance before the non-resident receives anything.

The standard Part XIII withholding rate is 25% of the gross payment. This rate applies unless a tax treaty between Canada and the non-resident’s country of residence reduces it. Canada has tax treaties with over 90 countries that reduce Part XIII rates on specific income types. The most commonly used treaty is the Canada US Tax Treaty, which reduces the withholding rate on dividends to 15% for arm’s length shareholders, on pension payments to 15%, and eliminates withholding entirely on certain interest payments between arm’s length parties.

Part XIII tax is a final tax in most cases. The non-resident does not need to file a Canadian tax return simply because Part XIII was withheld. The withholding closes the Canadian tax obligation on that income unless the non-resident chooses to make a specific election that overrides the flat rate with a graduated calculation.

Income Covered Under Part XIII Withholding Tax

Part XIII applies to a defined list of passive income types paid from Canada to non-residents. Not all Canadian-source income falls under Part XIII. Active business income and employment income earned in Canada fall under Part I of the Income Tax Act, not Part XIII, and require a different filing approach.

Passive income subject to Part XIII withholding includes dividends paid by Canadian corporations, interest paid to non-arm’s length non-residents, rental income from Canadian real estate, royalty payments, pension and superannuation payments, Old Age Security and Canada Pension Plan benefits, RRSP and RRIF withdrawals, annuity payments, management fees, and estate and trust income distributed to non-resident beneficiaries.

Arm’s length interest payments to non-residents are generally exempt from Part XIII withholding under the exemption introduced in 2008, which eliminated withholding on most arm’s length interest. Non-arm’s length interest, meaning interest paid between related parties such as a Canadian subsidiary paying interest to its foreign parent, remains subject to the 25% withholding unless a treaty reduces it.

How the 25% Rate Gets Reduced Through Tax Treaties?

Canada’s tax treaty network covers more than 90 countries and each treaty specifies reduced withholding rates for particular income categories. The reduced rates replace the standard 25% for residents of the treaty country when the recipient qualifies under the treaty’s residency provisions.

Income Type	Standard Part XIII Rate	Canada US Treaty Rate	Canada UK Treaty Rate
Dividends (arm’s length)	25%	15%	15%
Dividends (substantial shareholding)	25%	5%	5%
Interest (non-arm’s length)	25%	0%	0%
Pension payments	25%	15%	25%
Royalties	25%	0%	0%
OAS and CPP	25%	15%	25%
RRSP and RRIF withdrawals	25%	15% (periodic) / 25% (lump sum)	25%

To claim a treaty rate, the non-resident must provide the Canadian payer with a completed NR301 form confirming treaty eligibility. Payers who withhold at the standard 25% rate when a reduced treaty rate applies can be held liable for the over-remittance if they did not collect the required treaty eligibility documentation from the recipient.

Part XIII Tax on Canadian Rental Income and the NR6 Solution

Rental income paid to non-resident property owners sits squarely within Part XIII. A tenant paying rent to a non-resident landlord is legally required to withhold 25% of the gross rent and remit it to CRA by the 15th of the month following payment. Most tenants are unaware of this obligation, which creates significant compliance risk for both parties. If the tenant fails to withhold, CRA holds the tenant liable for the unremitted amount plus interest.

The CRA NR6 Form provides a practical solution. The non-resident landlord submits an NR6 application to CRA before January 1 of the rental year or before the first rental payment is received. The NR6 estimates net rental income after eligible expenses and requests that withholding be calculated on the net amount rather than the gross rent. Once CRA approves the NR6, the tenant withholds 25% of the estimated net income monthly instead of 25% of gross rent, which dramatically reduces the monthly cash outflow for the landlord.

Approving the NR6 creates a mandatory obligation to file a Electing Under Section 216 return by June 30 of the following year reporting actual net rental income and reconciling the withholding already remitted.

Part XIII Tax on Dividends From Canadian Corporations

Non-residents who own shares in Canadian corporations receive dividends subject to Part XIII withholding at 25% unless a treaty reduces that rate. Canadian corporations have a legal obligation to withhold the applicable rate before paying dividends to non-resident shareholders and remit the withheld amount to CRA using Form PD7A or through CRA’s My Business Account portal.

Non-residents who own shares in a Canadian Controlled Private Corporation and receive dividends face particular planning considerations. The small business deduction that reduces corporate tax inside the CCPC creates retained earnings taxed at a low corporate rate, and distributing those earnings as dividends to a non-resident shareholder triggers Part XIII on the full dividend amount. Our blog on Canadian Controlled Private Corporations explains how CCPC structure affects tax at both the corporate level and the shareholder level for non-resident owners.

Non-resident shareholders in publicly traded Canadian companies receive dividends net of withholding automatically through their broker or custodian. The withholding appears on an NR4 slip issued by February 28 of the following year showing the gross dividend and the Part XIII tax withheld at source.

NR4 Slips and CRA Reporting Obligations for Canadian Payers

Every Canadian payer who remits Part XIII withholding must issue an NR4 slip to the non-resident recipient by February 28 of the year following payment. The NR4 shows the gross income paid, the withholding tax deducted, and the income code identifying the type of payment. Non-residents use the NR4 when filing Section 216 or Electing Under Section 217 returns to reconcile the withholding credited against the tax calculated under the election.

Canadian payers also file an NR4 summary with CRA reporting total payments made to non-residents during the year. Failure to file NR4 slips on time carries a penalty of $100 per slip with a minimum penalty of $1,000 and a maximum of $7,500 per failure depending on the number of slips and the lateness of the filing.

Recovering Excess Part XIII Withholding

Non-residents who had more Part XIII tax withheld than they actually owe have two main paths to recover the excess. The first is through a specific election such as Section 216 for rental income or Electing Under Section 217 for pension and RRSP income, which replaces the flat withholding rate with a graduated calculation and generates a refund of the difference.

The second path applies when withholding was applied at the wrong rate, such as when a payer withheld at 25% instead of the applicable treaty rate. In that case, the non-resident files Form NR7-R, Application for Refund of Part XIII Tax Withheld, with CRA within two years of the end of the calendar year in which the withholding was deducted. CRA reviews the application, confirms treaty eligibility, and refunds the over-withheld amount. This two year deadline is strict and cannot be extended.

For non-residents selling Canadian property, the withholding mechanism shifts from Part XIII to Part I through the process of getting Certificate of Compliance under Section 116 of the Income Tax Act. Our blog on T2062 and T2062A explains how that process works and why the certificate must be obtained before the sale closes to avoid a 25% holdback on the full sale price.

Tax Return Filers PC manages Part XIII compliance, NR6 applications, NR4 reconciliation, treaty rate claims, and Cross Border Tax Filing in Windsor, Departure Tax Return filings in Calgary, Certificate of Compliance applications in Mississauga, and Section 216 and Section 217 elections across Canada for non-residents managing Canadian income from every source type covered under Part XIII.

Conclusion

Part XIII withholding tax in Canada operates as a silent deduction that most non-residents discover only after their income has already been reduced at source. The 25% flat rate is the starting point, not the final answer. Tax treaties reduce it for residents of treaty countries. The NR6 reduces it on rental income during the year. Section 216 and Section 217 elections replace it entirely with a graduated rate calculation after year end. Form NR7-R recovers it when the wrong rate was applied. Each of these tools has a deadline and a specific form, and missing any of them costs real money that CRA is not obligated to return on its own.