GENERAL RULES

Basic Rules

Under Canada's Income Tax Act, non-residents of Canada may be subject to Canadian tax on certain Canadian-source income.

Generally, such non-residents may be subject to tax under either Part I or Part XIII of the Income Tax Act.

Part I Taxation

Income taxed under Part I is subject to taxation at graduated tax rates similar to those that apply to Canadian residents. In addition, in computing the income that is taxed, certain applicable expenses may be allowed.

Generally, a non-resident will only be subject to tax under Part I on the following sources of income:

• Income from employment in Canada,
• Income from carrying on business in Canada, or
• Taxable capital gains from the disposition of "taxable Canadian property"

However, certain types of income that would otherwise be taxable under Part XIII may be subject to tax under Part I if the non-resident so elects.

These types of income are:

• Canadian real estate rental income (section 216), and
• Certain pension and similar payments (section 217)

A non-resident liable for tax under Part I must file the applicable Canadian tax return.

In the case of income that would otherwise be subject to tax under both Part I and Part XIII (e.g. interest income earned in connection with a business carried on in Canada), the income will only be subject to tax under Part XIII unless such income pertains to a business carried on through a permanent establishment in Canada, in which case it will only be taxable under Part I.

In certain cases, income taxable under Part I may be offset by losses incurred in other years.

 

Rates Of Part I Tax-Individuals (Other Than Trusts)

The following basic rates of federal tax will apply to non-resident individuals (other than trusts) who are subject to tax under Part I, for the 2007 taxation year.

*All amounts to be indexed for inflation in subsequent years

Furthermore, an additional tax equal to 48% of the basic tax computed above will be payable on any income that is not considered to be "earned in a province". This will most commonly arise in situations where Canadian-source rental income is taxed on a net basis under section 216 or where the only source of "taxable income earned in Canada" is taxable capital gains from the disposition of "taxable Canadian property". In most cases, this additional tax is in lieu of any provincial tax on such income. In cases where this tax applies, this will mean that highest marginal tax rate will amount to 42.92%

For income earned in the Province of Quebec, the federal tax may be reduced by a special abatement equal to 16.5% of the basic federal tax.

In very rare cases, non-resident individuals may be eligible for certain tax credits, normally only available to Canadian residents, in computing the amount of taxes payable.

Rates Of Part I Tax-Estates & Trusts

Non-resident testamentary trusts (including estates) are subject to the same graduated rates of federal tax applicable to individuals, as discussed above, on any income taxable under Part I.

Non-resident inter vivos trusts will be subject to a basic rate of 29% on all amounts taxable under Part I.

In addition, non-resident trusts will be subject to the same surtax and additional tax, as discussed above, as other non-resident individuals.

Rates Of Part I Tax-Corporations

Non-resident corporations are subject to a 31% federal tax on all income taxable under Part I. To the extent that the income taxable under Part I is considered to be earned in a province, a reduction in the federal tax payable equal to 10% of such eligible income will be applied, thus resulting in a net tax rate of 21%.

In addition, a surtax of 4% applies,  resulting in an effective federal tax rate of 22.12%

However, certain income earned by a non-resident corporation will not be considered to be earned in a province for this purpose, and therefore, will not be eligible for the 10% abatement. This will most commonly apply to Canadian-source rental income with respect to which a section 216 election is filed; and taxable capital gains from the disposition of "taxable capital property" where a business is not carried on through a Canadian permanent establishment.

In certain cases, provincial income taxes will also be applicable, as discussed below.

Part XIII Taxation

Income taxable under Part XIII of the Act is subject to a 25% tax rate unless the rate is reduced under the terms of one of Canada's tax treaties.

The gross amount of such income is taxed at the 25% rate-no deductions are allowed.

Such tax should be withheld at source-there is no return for the non-resident to file. If an agent receives such income on behalf of a non-resident without tax being withheld, that agent is responsible for withholding and remitting the Canadian tax.

Among the most common types of income which are subject to tax under Part XIII are the following:

• Interest from Canadian sources
• Dividends paid by corporations resident in Canada, and
• Royalties from Canadian sources

Generally, Part XIII tax will only apply to amounts paid or credited to the non-resident by a Canadian resident. However, in certain cases, a non-resident payer is treated as being a Canadian resident for this purpose, particularly if the payment relates to a business carried on in Canada.

Provincial Taxation

In general, a non-resident will only be subject to provincial taxation on income derived from employment in that province, or from carrying on business through a permanent establishment in that province. However, in certain cases, provincial taxes may apply to taxable capital gains earned by a non-resident .

Rates Combined With Provincial or Territorial Tax-Individuals (Including Estates & Trusts)

In the case of non-resident individuals (including estates and trusts) subject to provincial or territorial taxation, such taxes have now changed from a "percentage of federal tax" to a tax on income basis.

The following are top marginal tax rates for 2007:

Rates Of Tax-Corporations

In the case of corporations subject to provincial taxation on income from carrying on business in a province, the rates of tax (which are applied to such income)  for calendar 2007 taxation years are as follows:

In cases where two rates are shown, the lower rate will only be available with respect to eligible manufacturing and processing profits.

In addition, non-resident corporations may be subject to Ontario tax if they owned real property timber resource property, or timber limit in Ontario the income from which arose from the sale or rental thereof or is a or is a royalty. This will be the case even if the activities do not constitute a business carried on through a permanent establishment in Ontario.