How Canada’s Withholding Tax Affects Dividends, Rent and Freelance Payments

Navigating cross-border finances can feel overwhelming, especially when it comes to understanding Canada withholding tax. If you’re a U.S. expat earning income from Canadian sources—whether through dividends, rental properties, or freelance work—knowing how withholding tax works is essential for staying compliant and maximizing your after-tax income. In this guide, we’ll break down the basics, explain how the US-Canada tax treaty can help, and provide practical steps to manage your tax obligations with confidence.

Understanding Canadian withholding tax: Basic concepts and rates

Canada withholding tax is a tax that Canada imposes on certain types of income paid to non-residents. The idea is simple: when a Canadian entity pays income to someone who lives outside Canada, a portion of that payment is withheld and sent directly to the Canada Revenue Agency (CRA). This ensures that Canada collects tax on income earned within its borders, even if the recipient lives elsewhere.

Key points to know:

• The standard Canada withholding tax rate is 25% for most types of passive income paid to non-residents.
• This tax typically applies to dividends, interest, royalties, rental income, and certain service payments.
• The actual rate you pay may be reduced by tax treaties, such as the US-Canada tax treaty.

Example: If you’re a US resident and receive $1,000 in dividends from a Canadian company, the company will generally withhold $250 (25%) and remit it to the CRA, unless a treaty rate applies.

Understanding these basics is the first step to managing your cross-border tax responsibilities and avoiding surprises at tax time.

Canadian withholding tax on dividend payments for non-residents

Dividends are a common source of income for U.S. expats with Canadian investments. By default, Canada imposes a 25% withholding tax on dividends paid to non-residents. However, thanks to the US-Canada tax treaty, U.S. residents often benefit from a reduced rate.

How the treaty helps:

• The US-Canada tax treaty generally reduces the withholding tax on dividends to 15% for US residents.
• If you own at least 10% of the voting stock of the Canadian company, the rate may drop to 5%.

Practical example:

• You receive $2,000 in dividends from a Canadian corporation.
• With the treaty, only $300 (15%) is withheld, instead of $500 (25%).

What you need to do:

• Provide the Canadian payer with a completed Form W-8BEN to claim the treaty benefit.
• Report the gross dividend income on your US tax return. You may be eligible for a foreign tax credit for the Canadian tax withheld.

Understanding these rules helps you keep more of your investment income and avoid double taxation.

Rental income withholding tax requirements in Canada

If you own rental property in Canada as a U.S. expat, you’ll encounter Canada withholding tax on your rental income. Here’s how it works:

• By default, Canadian payers (such as tenants or property managers) must withhold 25% of the gross rental income and remit it to the CRA.
• This withholding is based on the total rent received, not just net profit.

Options to reduce your tax burden:

• You can elect to file Form NR6 with the CRA, allowing you to have tax withheld on your net rental income (after expenses) instead of the gross amount.
• At year-end, you file Form T1159 to report your actual rental income and expenses. If you overpaid, you may receive a refund.

Example:

• You earn $12,000 in annual rent from your Canadian property.
• Without the NR6 election, $3,000 (25%) is withheld, regardless of your expenses.
• With the NR6 election, withholding is based on your net income, potentially lowering your upfront tax.

Taking these steps can help you manage cash flow and ensure you’re not overpaying Canadian taxes on your rental property.

Freelance and service payment withholding tax rules

Freelancers and service providers are increasingly working across borders, and Canada withholding tax can apply to payments for services performed in Canada by non-residents.

Key facts

• If you perform services physically in Canada, Canadian payers may be required to withhold 15% of your payment and remit it to the CRA.
• This applies to a wide range of services, including consulting, performing arts, and technical work.
• If your services are performed entirely outside Canada, withholding tax generally does not apply.

What to watch for

• If you’re a U.S. expat providing services in Canada, you may be able to claim a refund or exemption if your income is exempt under the US-Canada tax treaty (for example, if you spend fewer than 183 days in Canada and meet other criteria).
• You’ll need to file a Canadian tax return to claim a refund of any excess withholding.

How the US-Canada tax treaty reduces withholding tax rates

The US-Canada tax treaty is a powerful tool for U.S. expats, as it can significantly reduce the Canada withholding tax you pay on various types of income.

Treaty benefits include:

• Dividends: Reduced to 15% (or 5% for certain shareholders)
• Interest: Often reduced to 0% for U.S. residents
• Royalties: Typically reduced to 10%
• Pensions and annuities: Special rates may apply

How to claim treaty benefits:

• You must provide the Canadian payer with a valid Form W-8BEN to certify your US residency and claim the reduced rates.
• If excess tax is withheld, you can file a Canadian tax return to request a refund.

Essential tax forms: W-8BEN and W-9 for cross-border payments

Navigating Canada withholding tax often comes down to paperwork. Two forms are especially important for US expats:

Form W-8BEN

• Used by non-Canadian residents (including U.S. citizens) to certify foreign status and claim treaty benefits.
• Must be provided to Canadian payers to reduce withholding tax rates on dividends, interest, and royalties.
• Needs to be updated every three years or when your circumstances change.

Form W-9

• Used by U.S. persons to provide their taxpayer identification number (TIN) to US payers.
• Not typically used for Canadian payers, but important for U.S. tax reporting.

Get expert guidance on Canada withholding tax

Cross-border tax rules can be complex, but you don’t have to navigate them alone. Our team of expat tax specialists is here to help you understand Canada withholding tax, maximize treaty benefits, and ensure full compliance—so you can focus on what matters most.

Frequently Asked Questions