December 11, 2008

In 2008, a number of credit unions and other financial institutions withheld non-resident tax, in error, from payments of interest to non-resident members.  Errors arose because income tax legislation was passed late in 2007, providing an exemption from this tax, beginning January 1, 2008.  The new exemption was not well publicized.
 
The following discussion applies not only to interest paid on deposits but also to dividends paid on credit union shares, because credit union dividends are deemed by the Income Tax Act to be interest.  However, there is no change to withholding tax requirements when amounts are withdrawn from a registered product, such as an RRSP or RRIF.
 
A non-resident can claim a refund of taxes withheld in error on Canada Revenue Agency form NR7.  However, this form requires detailed information and verification by the payer financial institution.  It would be burdensome for a number of individual recipients to prepare the form, obtain certification from their credit union, and individually await repayment by CRA.  Use of NR7 is not recommended.
 
CRA officials in the International Tax Services Office in Ottawa have confirmed an easier procedure.  CRA will refund, to credit unions, taxes withheld in error and remitted to CRA.  A letter is required from each affected credit union specifying the amount of taxes requested to be refunded, the circumstances of the request, and a guarantee that the amounts refunded will be reimbursed to members from which the tax was withheld in error. 

A sample letter that will comply with CRA requirements is available here.  The letter should be reproduced on the credit union's letterhead, applicable blanks filled in, and faxed to CRA in Ottawa at the number on the letter.  An e-mail address will not be provided.  Additional information can be requested at (613) 952-2344 or (800) 267-3395.

A credit union may wish to reimburse members for these taxes before the end of 2008, even if the refund has not yet been received from CRA.   This will ensure that the interest payment and the correct net tax withholding occurs in the same year and is reported on the same form NR4.
 
In 2008 and future years, form NR4 will still be required to report payments of interest to non-residents, even though no tax is withheld.

Questions regarding this matter can be referred to Gary Rogers, Vice President, Financial Policy at rogersg@cucentral.com or (416) 232-3439.