Withholding Tax Obligations: Proposed Amendments to Subsections 212(13.1) and 212(13.2)

On August 9, 2022, the Department of Finance released draft legislative proposals regarding the application of part XIII tax when the payer or payee is a partnership. The proposals broaden the circumstances in which a partnership is deemed to be a person under subsection 212(13.1) and is therefore required to withhold part XIII tax on certain payments to non-residents, pursuant to subsection 212(1). The amended rules are expected to become effective sometime after September 30, 2022, the date on which the consultation period ends. No set effective date has been provided.

Withholding Tax Obligations: The Current Legislation


According to subsection 212(1), various payments made by a “person” resident in Canada to a non-resident “person” are subject to a 25 percent withholding tax (the rate may be reduced under an applicable tax treaty). Under the Act, the definition of “person” does not normally include a partnership; however, various provisions treat a partnership as a person for certain purposes of the Act. For example, subsection 96(1) requires a taxpayer to compute its income from a partnership as if the partnership were a separate person resident in Canada. Subsection 212(13.1) provides for a number of situations where a partnership is deemed to be a person for the purposes of part XIII tax.

More specifically, paragraph 212(13.1)(a) deems a partnership to be a person resident in Canada in respect of payments made by the partnership to non-residents when those payments are deductible in computing the partnership’s Canadian-source income. Under this provision, the withholding tax obligations of a partnership are linked to the partnership’s Canadian-source income.

When a partnership owns only foreign assets, such as shares of an FA, and does not have any Canadian-source income, the conditions of paragraph 212(13.1)(a) may not be met. In such circumstances, part XIII tax will not apply to payments made by the partnership that would, if they were made by a person resident in Canada, attract part XIII tax (even though such payments, if made through the allocation of the partnership income to its partners, may indirectly be deducted by persons resident in Canada). The CRA has confirmed this result in certain statements regarding interest paid by a partnership that did not have Canadian-source income; however, the CRA has also said that it may consider Canadian-resident partners of the partnership to have the obligation to withhold if the partners may be considered (according to the laws under which the partnership was formed, the terms and conditions of the partnership agreement, and the loan agreement) to be the payers of the interest on the debts of the partnership. (See CRA document nos. RCT-0246, November 12, 1980; 2003-0039231E5, May 25, 2004; and 2004-0072131C6, May 7, 2004.)


The withholding tax obligations of non-resident persons are outlined in subsection 212(13.2). The current provision deems a non-resident person to be a person resident in Canada in respect of payments made to another non-resident person to the extent that those payments are deductible in computing the non-resident payer’s Canadian-source income.

The current provision does not contemplate or specify the withholding tax obligations of non-resident persons that have made an election under section 216 of the Act. When a non-resident person makes such an election, it can file a part I income tax return as if it were a resident of Canada and can pay part I tax on the net income derived from the rental of real or immovable property in Canada (or from timber royalties), instead of paying a flat 25 percent withholding tax rate (or, possibly, a reduced rate under the applicable tax treaty) on the gross rental income.

Furthermore, when a payment made by a non-resident person to a partnership (other than a Canadian partnership) is deductible in computing the non-resident person’s taxable income earned in Canada from a source that is neither a treaty-protected business nor a treaty-protected property, subsection 13(13.2) does not deem the non-resident person to be a person resident in Canada for the purposes of part XIII tax.

Proposed Amendments: Broadening Withholding Tax Obligations


Deeming Rules: Paragraph 212(13.1)(a)

The proposals amend paragraph 212(13.1)(a) to deem a partnership to be a person resident in Canada in respect of the portion of payments made by the partnership to a non-resident person that is deductible in computing a partner’s share of the partnership’s income or loss, to the extent that the partner’s share is taxable under part I of the Act. A partner’s share will be taxable under part I if the partner is a person resident in Canada or if the partner is a non-resident person and the share is included in the partner’s taxable income earned in Canada or is income that results from a section 216 election. This amendment removes the link to Canadian-source income of the partnership and shifts the focus to the income of a member of the partnership that is subject to part I tax. This amendment thus ensures that part XIII tax applies to partnerships in a wider array of circumstances; it clarifies that a partnership may have withholding tax obligations when making payments to a non-resident even if the partnership does not have Canadian-source income.

The proposed rules may also result in withholding tax obligations for foreign private equity entities that have one or more partners resident in Canada. For instance, a foreign private equity partnership with one or more partners that are resident in Canada may now have a withholding tax obligation on management fees paid to a non-arm’s-length foreign manager if treaty relief is not available. The proposed rules may also affect tiered structures in which a foreign fund partnership, which owns subsidiary foreign partnerships and the subsidiary partnership, pays interest to the fund partnership with the objective of reducing foreign-country taxation. To the extent that one or more partners of the fund partnership are resident in Canada, there will be a withholding tax obligation.

Even if the withholding tax obligation would apply only to the portion of the partnership income that is allocated to the partner resident in Canada, the proposed rules are likely to create some complications for the foreign private equity partnerships. As currently drafted, the proposed rules do not provide relief for partners that are exempt from part I tax, and they may result in withholding tax obligations even when Canadian partners are dealing at arm’s length with the payee or have de minimis standing in the private equity structure.

Interpretive Rules: Subsection 212(13.11)

The proposals further amend subsection 212(13.1) by adding subsection 212(13.11) so as to provide three interpretive rules for the purposes of paragraph 212(13.1)(a):

  1. Paragraph 212(13.11)(a) provides that if a partnership pays or credits an amount to another partnership (other than a Canadian partnership), the other partnership is deemed to be a non-resident person in respect of that amount. This rule ensures that payee partnerships with non-resident members are captured as non-resident persons under paragraph 212(13.1)(a).
  2. Paragraph 212(13.11)(b) provides a lookthrough rule for tiered partnerships that ensures that paragraph 212(13.1)(a) is applied at the appropriate member level, which is the top-tier level.
  3. Paragraph 212(13.11)(c) clarifies that a person’s membership interest in a partnership, for the purposes of paragraph 212(13.1)(a), includes that person’s interest to the extent that it is held directly or indirectly through another partnership.


Non-Residents: Subsection 212(13.2)

Subsection 212(13.2) extends the application of withholding tax under part XIII of the Act if a payment made by a non-resident person to another non-resident person is deducted against the payer’s taxable income earned in Canada.

The amendments to subsection 212(13.2) are twofold. First, subsection 212(13.2) will apply to a non-resident person that makes a payment to a partnership other than a Canadian partnership. In such circumstances, the provision will deem the non-resident payer to be a person resident in Canada and the partnership to be a non-resident person. Second, the provision will apply when a non-resident has filed an election under section 216. This second amendment broadens the provision so that it is not tied to the existence of the payer’s Canadian-source income.

It is worth noting that the proposals also amend subsection 212(13.3) so as to deem an authorized foreign bank to be a person resident in Canada for the purposes of subsection 212(13.1), paragraph 212(13.11)(a), and subsection 212(13.2), to the extent that the bank holds a membership interest in a partnership in the course of its Canadian banking business.

The proposals also amend paragraph 212(13.1)(b) for the sake of consistency with the proposed rules in paragraph 212(13.11)(a) and subsection 212(13.2).

Part XIII Tax Where the Payer Is a Partnership

Under the current legislation, paragraph 212(13.1)(b) deems a partnership, other than a Canadian partnership, to be a non-resident person in respect of amounts credited or paid to the partnership from a person resident in Canada. Accordingly, part XIII tax currently applies to payments from a person resident in Canada to a non-resident partnership. Because of the introduction of paragraph 212(13.11)(a) and the amendments to subsection 212(13.2), paragraph 212(13.1)(b) has also been amended.

Following the amendment, the deeming rule will no longer apply when the payer is a partnership or non-resident person deemed to be a person resident in Canada under either paragraph 212(13.1)(a) or paragraph 212(13.2)(b).

Concluding Observations

The proposed amendments to subsections 212(13.1) and 212(13.2) broaden the potential application of withholding tax obligations under part XIII. In particular, amendments to paragraph 212(13.1)(a) broaden the scope of the provision to include partnerships that do not have Canadian-source income; this should prevent the avoidance of Canadian withholding tax through the use of “shell” partnerships with non-Canadian-source income. Non-residents that have filed a section 216 election will have withholding tax obligations on payments made to other non-residents, and on payments made to partnerships other than Canadian partnerships. These amendments, as currently drafted, may also have adverse impacts on the structuring of private equity funds if one or more Canadian partners are involved. It will be interesting to see whether the Department of Finance will consider a de minimis rule or an arm’s-length requirement in order to help address the complexity involved in complying with the proposals.

Cynthia Morin and Suhaylah Sequeira
PwC LLP, Toronto

International Tax Highlights

Volume 1, Number 3, November 2022

©2022, Canadian Tax Foundation and IFA Canada

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