Withholding Tax Rates to Non-Resident Trusts & Their Beneficiaries

“The CRA has revised their policy on payments to non-resident trusts.”

In 1987, the CRA issued a Technical Interpretation dealing with the withholding tax rate on interest and dividends paid to non-resident trusts whose beneficiaries were residents of Canada, the United Kingdom and the United States. The CRA took the position that the withholding tax rate on the payments to non-resident trusts should be based on the residence of the beneficiaries. Since Canada had tax treaties with the United Kingdom and the United States, the reduced withholding tax rate was allowed.

In a recent Technical Interpretation (2004-0099401I7), the CRA changed its position. The CRA now states that the maximum withholding tax rate of 25% must be applied if the recipient trust is resident in a non-treaty country. The withholding tax rate will depend on whether there is a treaty with the trust’s country of residence. This could be a significant cost in certain situations.

The CRA did state, however, that it may “look through” a trust that could be considered to be acting as an agent for the beneficiaries. This would appear to be (for example) where the trust is there for creditor proofing purposes. It appears that most trusts will now be subject to the withholding tax rate applicable to the residence of the trust.

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Cadesky Tax