The client
A Timmins household exited a $150,000 private first mortgage, interest-only at 9.5%, funded by a relative living abroad, in a country with no Canadian tax treaty. Every dollar of interest paid to that relative was, in law, taxable in Canada from the day the mortgage funded.
Private mortgage principal
$150,000
Interest-only, funded by a relative abroad
Private rate
9.5%
Illustrative, not a quote
Lender's residency
Non-resident, non-arm's-length
Country with no Canadian tax treaty
Withholding remitted to date
$0
Never withheld across the whole term
Household income
$6,100/mo
Existing car loan $210/mo
The problem
Under Part XIII of the Income Tax Act, interest paid by a Canadian resident to a non-resident is generally exempt from withholding tax when the two are dealing at arm's length. A relative is not arm's length. Interest paid to a non-arm's-length non-resident lender is taxed at 25% at source — and the duty to withhold and remit it falls on the Canadian borrower as payor, not on the lender.
What Part XIII actually required, and what happened instead
- ▸The borrower, as payor, was required to withhold 25% of every interest payment and remit it to CRA
- ▸No tax treaty applied to reduce the rate, since the lender's country of residence has none with Canada
- ▸Nobody withheld or remitted a dollar of it across the whole private term
A private lender living abroad is easy to treat like any other family loan, and this one funded and performed exactly like an ordinary interest-only private mortgage in every other respect. The withholding duty doesn't announce itself; it surfaces only when someone actually checks where the lender lives and how the two parties are related.
The numbers
Interest actually paid over three years, at 9.5% interest-only on $150,000, is what the 25% withholding tax applies against — a private, family-funded loan of exactly the kind captured in Canada's own data on mortgage market share by lender type.
| Sizing the unremitted liability | Amount |
|---|---|
| Interest-only payment (monthly) | 1,188 |
| Interest paid, 3 years | $42,768 |
| Part XIII withholding tax owed (25%) | $10,692 |
| Sizing the exit refinance | Figure |
|---|---|
| Private mortgage principal | $150,000 |
| Unremitted withholding tax, added to the payout | +$10,692 |
| New refinance balance | $160,692 |
| Rate & payments | Figure |
|---|---|
| Contract rate, new A-lender (illustrative, not a quote) | 5.05% |
| Minimum qualifying rate | 7.05% |
| Monthly P&I at the qualifying rate | 1,130 |
| TDS | Figure |
|---|---|
| Housing costs (P&I + tax + heat) | 1,490 |
| Car loan | 210 |
| Total Debt Service vs. the 44% cap | 27.9% ✓ |
The solution
A mortgage broker licensed under Ontario's Mortgage Brokerages, Lenders and Administrators Act treated the withholding gap as a liability to quantify and clear, not a problem to leave for CRA to find later.
First, confirmed the lender's country of residence and the family relationship, establishing both that no tax treaty reduced the rate and that the arm's-length exemption did not apply.
Second, quantified three years of unremitted tax against the interest actually paid, arriving at $10,692 rather than guessing at a rounder figure.
Third, sized the $10,692 into the exit refinance so it was paid at closing, and arranged proper withholding on any interest still owing before the private mortgage's discharge.
The outcome
The exit refinanced at 5.05% on the full $160,692, with TDS at 27.9%, once the unremitted withholding tax was quantified and cleared as part of closing instead of surfacing later as a CRA assessment against the borrower directly.
Because this is a refinance with no change of ownership, no provincial land transfer tax applies.
What to take from this file
- 01Interest paid to a non-arm's-length non-resident lender is taxed at source, even between relatives. The arm's-length exemption that protects most private lending does not apply within a family.
- 02The withholding duty falls on the Canadian borrower, not the foreign lender. CRA can assess the shortfall directly against the payor if it is never remitted.
- 03No tax treaty means the full 25% rate applies. Confirm the lender's country of residence before assuming any treaty-reduced rate.
- 04Quantify the exposure against interest actually paid, not a rounded guess. The figure is knowable and belongs in the exit refinance, not left as an open question.
- 05A private mortgage that performs perfectly can still carry a real, separate tax exposure. Ask who the lender is and where they live, every time.
Sources
Every regulatory figure in this file traces to one of these primary sources. Client details and anything that varies by lender are illustrative, as flagged below.
- ▸OSFI — Minimum qualifying rate for uninsured mortgages — the minimum qualifying rate — greater of contract rate + 2% or 5.25%.
- ▸CMHC — CMHC Reviews Underwriting Criteria — GDS 39% / TDS 44% maximums and the 600 credit-score floor for insured files.
- ▸Provincial/territorial mortgage-broker legislation fetched directly (bclaws.gov.bc.ca, legisquebec.gouv.qc.ca, fcaa.gov.sk.ca, web2.gov.mb.ca, nslegislature.ca, assembly.nl.ca) plus FCNB's own site for NB and CanLII's index for PE — see notes for per-province method — provincial mortgage regulators and licence titles.
Illustrative in this file — lender-specific, not rules:
- ▸9.5% private interest-only rate — private rates are negotiated per file; not a quote.
- ▸5.05% new-lender contract rate — rates move daily; not a quote.
- ▸three years of unremitted withholding tax — the exact period depends on when the private mortgage funded and when the exposure is discovered; three years is this file's own figure, not a rule.
Authority & provenance
How this case file was built
We publish the origin, the verification method and the reviewer for every case file, so you can judge how far to trust it before you rely on it with a client.
Where it comes from
Derived from files handled by Treadstone’s fulfillment desk and from scenarios contributed by partner brokerages. Names, employers, exact amounts and dates are changed so no client or file is identifiable.
Provenance: Composite — a pattern seen repeatedly on fulfilled files, not a single transaction.
What is verified
Every regulatory figure traces to a primary source listed above and was checked against it on the date shown. The arithmetic is recomputed by machine on every rebuild.
Anything that varies by lender is labelled illustrative rather than stated as a rule.
Who reviewed it
Reviewed for Canadian regulatory accuracy before publication, and re-checked whenever a cited rule changes.
Reviewed by: Nicholas Parson, Treadstone Associates — reviews every case file before publication.
This case file is professional reference material for licensed mortgage professionals. It is not advice to a borrower, and it is not a lender commitment. Insurer rules, qualifying rates and provincial taxes change — confirm the current position with the insurer, regulator or lender before you rely on any figure here in a live file.