How do I report interest income whose non-resident tax was not withheld?

Question

I'm a former resident of Canada who kept their Canadian bank account upon leaving Canada several years ago. It seems that my bank either did not receive or did not act upon my change of address notification and so they didn't apply the usual 25% tax withholding on interest payments to non-residents. These interest payments were my only Canadian-source income.

For the first few years after I left Canada, this was not a problem (AFAIK) as the interest payments were negligible. That is, the interest amounted to a few cents per year, and the Canada Revenue Agency generally doesn't charge or refund a balance of less than $2.

However, for 2021 I earned about $20 in interest from the bank account, so in theory $5 should have been deducted by the bank. I called the bank (at which I've since closed the account) and they told me it's too late for them to do this.

How should I go about reporting the income? Should I just file a normal non-resident return and enter $20 on the "Interest and other investment income" line? Or is the situation more complicated than this? Do I need to call the CRA and/or a professional tax adviser for advice?

Answer 1

Major changes to paragraph 212(1)(b) – Elimination of withholding tax on arm's length interest paid or credited to non-residents effective January 1st, 2008.

Prior to the amendments, paragraph 212(1)(b) was structured so that interest payments were taxable, other than those set out in a series of subparagraphs. In a significant revision of the non-resident withholding tax, paragraph 212(1)(b) of the Act was amended.

The new provision exempts from tax any interest payments that a payer resident in Canada makes to a non-resident recipient with whom the payer deals at arm's length, other than those payments ("participating debt interest") that are in effect a distribution of profits or the like. As well, interest on certain debt obligations ("fully exempt interest") is exempt even if it is paid to a non-arm's length person or might be considered "participating debt interest". This retains an important aspect of the previous rule.

Interest payments that a payer resident in Canada makes to a non-resident recipient with whom the payer deals at non arm's length will be taxed at the statutory Part XIII tax rate of 25% or the reduced rate of Part XIII tax eligible under a tax convention between Canada and the beneficial owner's country of residence, where applicable.