Part XIII Withholding After You Leave Canada: The 25% Default, the Payments It Hits, and the Treaty Rates That Replace It

Short version: Part XIII Withholding Explained: Canada's Non-Resident Tax

Part XIII is the non-resident's tax system for Canadian passive income, and the emigrant meets it as a series of surprises on statements from institutions that were, until the departure date, simply issuing T-slips. The regime: a person who ceases to be a Canadian resident stops filing a Canadian return on worldwide income and is instead subject to Part XIII tax — a flat 25% withheld by the Canadian payer on specified types of income paid or credited to the non-resident — which is a final tax (no return, no deductions, no credits) unless a specific election permits filing; the payer is liable for the withholding, remits it to the CRA, and reports it on an NR4 slip to the recipient. The payments it hits, and the treaty rate for a US resident with a valid NR301 declaration on file with the payer: dividends from Canadian corporations — 25% statutory, reduced to 15% under the treaty (5% for a US corporate shareholder owning at least 10% of the voting stock); interest — 25% statutory, reduced to 0% under the treaty for arm's-length interest (most bank and bond interest; interest paid to related parties has its own rules, and the domestic exemption for arm's-length interest paid to non-residents means much Canadian interest is not withheld at all); rent from Canadian real property — 25% of the gross rent, with the section 216 election allowing a return on net income and the NR6 undertaking reducing withholding to 25% of net rent in advance (the rental guides); pension payments from Canadian employer plans — 25% statutory, reduced to 15% under the treaty on periodic payments; RRSP withdrawals — 25% (lump sums are not periodic; no treaty reduction); RRIF payments — 25% statutory, reduced to 15% under the treaty on the portion that qualifies as periodic (the greater of twice the minimum or 10% of the year-opening balance, within the treaty's periodic definition — amounts above that threshold stay at 25%); CPP and OAS — not subject to Part XIII for a US resident (taxable only in the US under the treaty's social security article), though OAS carries the non-resident's recovery-tax return the clawback guide covers; annuities — 25% reduced by the treaty on periodic payments; trust distributions — 25% with the treaty's rates by character; and management fees, royalties, and certain other payments each with their own statutory and treaty rates. The declarations and elections that manage the regime: Form NR301 — the non-resident's declaration of treaty eligibility given to each Canadian payer (not to the CRA), without which the payer withholds at 25% even where the treaty rate is 15% or 0%; it expires after three years and must be renewed with every payer — the omission that costs emigrants the most in over-withholding, recovered only through a refund application (Form NR7-R, within two years of the end of the year of withholding — the 1042-S guide's Canadian counterpart); the section 216 election for rental income (net income return, NR6 for prospective reduction); the section 217 election for pension, RRSP, RRIF, and similar income (graduated-rate return, NR5 for prospective reduction — the section 217 guide); and the NR6 and NR5 undertakings that make the elections prospective so that cash is not over-withheld. The US side of each payment: the Part XIII tax is a foreign income tax creditable on the US resident's return against the US tax on the same income — fully usable where the treaty rate applied (15% on dividends and pensions is below most US rates on that income), partly stranded where 25% was withheld on income the US taxes lightly (the Canadian interest withheld at 25% because no NR301 was on file, against US tax at ordinary rates — usually recoverable through the NR7-R rather than the credit), and unavailable where the withheld amount exceeds the US tax on the income (the lump-sum RRSP withdrawal withheld at 25% against US tax on the distribution after basis recovery, which can leave part of the 25% uncredited — the reason periodic RRIF payments at 15% beat lump sums). The emigrant's Part XIII setup, executed in the departure season: an NR301 delivered to every Canadian payer (banks, brokers, pension plans, the RRSP/RRIF institution, the corporation paying dividends) with the calendar entry to renew every third year; the section 216 and NR6 machinery for any rental; the section 217 analysis and NR5 for pension and RRIF income where graduated rates would beat the withholding; the RRIF structured for periodic payments within the treaty's definition; and an annual review of the NR4 slips against the expected rates, because an NR4 showing 25% on dividends is a missing NR301, and an NR7-R refund claim has a two-year clock.

Key takeaways

• Non-residents are taxed at source, not by return: Part XIII imposes a flat 25% on Canadian passive income paid to non-residents — withheld by the payer, reported on an NR4, and final unless an election permits filing.
• The treaty rates for a US resident: dividends 15% (5% for qualifying corporate shareholders), arm's-length interest 0%, periodic pensions and RRIF payments (within the periodic definition) 15%, RRSP lump sums 25% (no reduction), rent 25% of gross or 25% of net under NR6, CPP and OAS not subject to Part XIII at all.
• The NR301 is the switch: delivered to each payer, renewed every three years — without it, 25% applies regardless of the treaty, and the over-withholding is recovered only by NR7-R within two years.
• The elections that replace flat withholding: section 216 (rent, net income) with NR6; section 217 (pensions, RRSP/RRIF) with NR5 — prospective reductions that keep cash from being over-withheld.
• Credits on the US side: treaty-rate withholding is fully creditable; 25% withheld for want of an NR301 is a refund claim, not a credit; and RRSP lump sums at 25% can strand credit against US tax after basis recovery — periodic RRIF payments at 15% are the structure.
• Set it up in the departure season and audit the NR4s annually: the two disciplines that decide whether Part XIII costs 15% or 25% on the same dollars.

The emigrant's Part XIII checklist

List every Canadian payer of passive income (banks, brokers, dividend-paying corporations, pension plans, RRSP/RRIF institutions, tenants or property managers). Deliver an NR301 to each; calendar the three-year renewal. Set up NR6 and section 216 for any rental. Run the section 217 test on pension and RRIF income; file NR5 where it wins. Structure RRIF payments within the periodic definition. Each March, reconcile the NR4 slips: any 25% where 15% or 0% should apply triggers an NR301 to the payer and an NR7-R for the year. The checklist is the departure engagement's most durable deliverable, because Part XIII runs for the rest of the emigrant's life.

Worked example

An Ottawa couple retires to Naples and, in year one, sets up nothing. Their NR4 slips show: 25% on C$18,000 of Canadian dividends (should be 15% — no NR301 at the broker); 25% on C$4,000 of GIC interest (should be 0% — no NR301 at the bank, and the bank's systems default to withholding on non-residents without one); 25% on C$36,000 of RRIF payments (should be 15% on the periodic portion — no NR301 at the institution, and the payment schedule wasn't reviewed against the periodic definition); 25% on gross rent from their Ottawa condo (C$30,000 — the section 216 return on net income would cut it substantially, and no NR6 was filed); and their CPP and OAS correctly untouched. Year-one over-withholding: roughly C$9,000 across the four items. The repair: NR301s delivered to all three institutions with renewals calendared; NR7-R refund claims filed for the year-one over-withholding on dividends, interest, and the RRIF (within the two-year window); the section 216 return filed for the rental with NR6 for future years; the RRIF payment schedule restructured within the periodic definition; and the section 217 test run on the RRIF (their modest world income makes the graduated computation competitive — the NR5 goes in). Year two's NR4s: 15% on dividends, 0% on interest, 15% on the periodic RRIF payments, 25% of net rent under NR6, and a section 217 return that refunds part of the RRIF withholding. US side both years: the Canadian tax credited against US tax on the same income — cleanly in year two; in year one, the 25% on interest against US tax at their bracket was partly stranded until the NR7-R recovered it. The Part XIII regime was identical both years; the paperwork was the difference between C$9,000 and nothing.

Official sources

"Non-residents have to pay a 25% tax on amounts that are taxable under Part XIII," a rate that "can be reduced to a lower rate or an exemption can be given under the provisions of the Income Tax Act or a bilateral tax treaty between Canada and another country." — Canada Revenue Agency, Non-residents of Canada, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/non-residents-canada.html

Form NR301 is a declaration by a non-resident taxpayer of eligibility for treaty benefits, provided to the Canadian payer so that the reduced treaty rate of Part XIII tax is withheld. — Canada Revenue Agency, NR301 Declaration of eligibility for benefits (reduced tax) under a tax treaty for a non-resident person, https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/nr301.html

Practitioner note

Part XIII is the non-resident's lifelong tax system for Canadian passive income, and the departure season is when it is either set up or left to default at 25% on everything. Our checklist delivers the NR301 to every payer with the three-year renewal calendared, installs the section 216 and 217 machinery with their prospective undertakings, structures the RRIF within the periodic definition, and audits the NR4s each March — because the regime never changes, and the difference between 15% and 25% on the same dollars is entirely paperwork.

See also: For the retire-in-Canada-or-the-US comparison, account by account, see the retire-in-Canada-or-the-US comparison, account by account; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the Part XIII setup — payer inventory and NR301 delivery with renewal calendar, section 216/NR6 and section 217/NR5 elections, RRIF periodic-payment structuring, annual NR4 reconciliation, and NR7-R refund claims for over-withheld years. See cross-border pricing or book a call.