As we reported in the Dec. 6 CE Weekly, the Canada Revenue Agency (CRA) has introduced a new rule that requires residents of countries with which Canada has a tax treaty to certify that they are resident in that country in order to continue to have non-resident tax withheld from dividends paid by Canada-based corporations at the “tax treaty” rate.

This rule is slated to take effect Jan. 1, 2012. If the CRA is not provided the verification it seeks, it will withhold from dividends paid to US owners of shares in Canada-based companies at a rate of 25 percent rather than 15 percent, as is contemplated by the Convention Between the United States of America and Canada with Respect to Taxes on Income and Capital, or the US-Canada tax treaty, and accompanying conventions and explanatory notes.

This marks a change from the previous CRA view that merely residing in such a country was sufficient to qualify for the treaty tax rate.

Broker-dealers and clearing agent on the US side of the border are seeking an extension of the Jan. 1, 2012, effective date in order to provide time to craft a single solution for American firms. The CRA, through a spokesman, confirmed this morning “that the CRA has been in contact with officials regarding the possibility of an extension.” According to the CRA, “Canadian payers” and withholding agents have been notifying both direct clients and financial intermediaries they pay of the new guidance. We have confirmed that at least two brokerage firms, Pennaluna and Fidelity, are working through the Securities Industry and Financial Markets Association (SIFMA), along with their clearing agent, National Financial Services Inc, which is owned by Fidelity, on crafting an industry-wide solution.

The CRA concedes that there is no provision in the Income Tax Act, the Canadian equivalent of the Internal Revenue Act, or any of Canada’s tax treaties that specifies what information is to be collected by a payer or agent before a reduced withholding tax rate can be applied. According to the CRA, “The new forms provide important information and guidance for payers.”

The CRA has issued its rule, which is available here, and provided a form for “Canadian payers,” which can be found here. (“Canadian payers” in this context refers to Canada-based dividend-paying corporations, which are required to remit the appropriate tax withheld to the CRA. This is accomplished through the Canada-based company’s transfer agent.)

Cross-border negotiations likely focus on the fact that the new rule does not specifically require use or submission of the form. US firms would prefer to maintain current procedures for verification through US-based Depositary Trust Corporation (DTC), for example, that utilizes their own account opening and certification procedures and the resulting documentation.

We continue to monitor this situation, on both sides of the border. If you’re an investor who holds Canada-based dividend-paying corporations in accounts with major brokerages such as Fidelity and including niche brokerages such as Pennaluna & Company, it’s unlikely you’ll be affected by this new rule. At this point it’s probably not necessary to contact your broker to make sure they’re on top of this issue. Brokerages, transfer agents and clearing houses on the US side of the border are aware of the issue.

The bottom line is that if you have an existing account, your brokerage probably has enough information and sufficient means to provide the verification the CRA in Canada requires. Of course there may be particular account types or specific CRA requirements that dictate a different registration procedure depending upon discrete circumstances. In the main, however, this should take place with nary a ripple on “beneficial owners” portfolios.

Beneficial owners’ shares are held in what’s called “street name” because their stock is registered in the name of their brokerage firm on the issuer’s books. Such brokerage holds stock in “book entry” form.

If you’re a “registered shareholder”–the stock you own is registered in your name on the underlying company’s books, which is kept by the company’s transfer agent, and you’re in physical possession of a certificate that represents your ownership interest–it’s likely you’ll have to submit additional information. Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE), for example, issued a press release last week and notified its shareholders of the impending change, a proactive step it took because of the fact that a significant proportion of its shareholder base is comprised of individual investors as opposed to institutions.

According to Penn West:

Registered non-resident shareholders whose names appear on the records of the registrar and transfer agent of Penn West will receive a form directly from Penn West’s transfer agent requesting information to confirm tax treaty eligibility. Until such form is completed and returned to Penn West’s transfer agent, any applicable Tax Treaty Rate will not be applied. To qualify for any applicable Tax Treaty Rate on Penn West’s fourth quarter dividend of $0.27 per share payable on January 13, 2012, registered non-resident shareholders must return such form to Penn West’s transfer agent on or before December 30, 2011.

Non-registered, non-resident shareholders’ eligibility for any applicable Tax Treaty Rate will be determined by each shareholder’s broker and not by Penn West or its transfer agent. Non-registered shares are generally held in a brokerage account and are thus registered in the name of the investor’s broker or a depositary. Certain brokers may require additional information or certifications in order to determine a non-registered shareholder’s eligibility for any applicable Tax Treaty Rate. Non-resident, non-registered shareholders are encouraged to contact their brokers or other tax, legal or financial advisors in the event that they have any questions or concerns in this regard.

Registered shareholders of Penn West stock should complete and remit this form as soon as possible. If you are a registered shareholder of any other Canada-based dividend-paying corporation, whether it was ever a trust or not, complete any such forms if they’ve already been forwarded to you. If you are a registered shareholder of a dividend-paying Canadian corporation and haven’t received such notification as Penn West has provided, it might be a good idea to send an e-mail or phone an investor relations representative at the relevant company.