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Introduction
The Tax Court ofCanada in 3792391 Canada Inc. v The King, 2023 TCC 37,found the tenant to be liable for a failure to withhold and remittax on rental payments made to the tenant's non-residentlandlord. The Honourable Justice St-Hilaire found that despite thetenant having no knowledge that the landlord was a non-resident,the tenant was still liable for the failure to withhold tax fromrental payments made to the non-resident landlord.
What Is Part XIII Withholding Tax?
Part XIII of the Income Tax Act, RSC, 1985, c 1(5th Supp) imposes a statutory scheme that imposes taxon non-residents who receive property income from Canadian residents. Since the non-residents are not locatedwithin Canada, the Act requires the Canadian residents to withholda portion of the payment made to the non-resident, insteadremitting that amount to the Canada Revenue Agency("CRA") as tax which is owed by the non-resident.
The amount withheld and remitted by Canadian residents whenmaking payments to non-residents ensures that the non-residentswill comply with Canadian tax laws. Withholding tax guaranteesnon-resident compliance because non-residents must properly file atax return in order to reclaim any tax withheld that goes beyondwhat the non-resident owed for that calendar year.
For non-resident landlords, paragraph 212(1)(d) imposes a 25%withholding tax on the gross amount of rent received from a tenantfor the right to use any property in Canada owned by thenon-resident landlord. Non-residents may choose to make an electionunder section 216, allowing for the 25% withholding tax to insteadapply on the net amount of income received from properties inCanada. The section 216 election means that expenses incurred inmaintaining the property will be deducted in calculating the taxowed for a given year.
Subsection 215(6) places the burden on the tenant to collect andremit this tax to the CRA, as failure to do so will result in thetenant being liable for that tax, plus the resulting penalties andinterest for failing to remit. Since paragraph 212(1)(d) sets thestandard withholding rate at 25%, this means that if you owe $1000a month in rent, you should pay $750 to your landlord and remit$250 to the CRA. However, this rate may be reduced if there is atax treaty between Canada and the non-resident's country ofresidence.
Withholding On Net Rental Income (Form NR6)
If as a landlord you elect under section 216, you can elect tohave tax withheld on your net rental income instead of the gross amount.
To have non-resident tax withheld on your netrental income, you (or each non-resident who is a member of apartnership) and your agent have to complete Form NR6, Undertaking to File an Income Tax Returnby a Non-Resident Receiving Rent from Real or Immovable Property orReceiving a Timber Royalty, and send it to the CRA forapproval.
3792391 Canada Inc. v The King
In the case of 3792391 Canada Inc., David Siscoe was ashareholder of 3792391 Canada Inc, the company which operatesSiscoe Gym. David Siscoe entered into a lease agreement with theproperty owner Anjar Investments Ltd. ("Anjar") in 1996.Later, in 2006, without informing David Siscoe or 3792391 CanadaIce., Anjar sold the property to Sebastiana Trimarchi.
In 2010, 3792391 Canada Inc. entered a new three-year lease forthe property with Sebastiana. 3792391 Canada Inc. made rentalpayments to Sebastiana on behalf of Siscoe from 2011 to 2016,without withholding or remitting any Part XIII tax. Unbeknownst toSiscoe or 3792391 Canada Inc., Sebastiana was a non-resident ofCanada, meaning that the occupying tenant was required to withholdand remit Part XIII tax from the rental payments being sent toSebastiana.
The Minister of National Revenue assessed 3792391 Canada Inc.for failure to withhold and remit Part XIII tax on the rent that3792391 Canada In. paid to Sebastiana, plus interest and penaltiesthat resulted from that failure to remit. This was despite the factthat David Siscoe did not know that Sebastiana was a non-residentfor tax purposes.
David Siscoe argued that knowledge is a requirement for theliability imposed under section 215(6) to apply. The Tax Court ofCanada found that there is no such knowledge requirement forsection 215(6) to apply, and that the three requirements are:
- a resident of Canada has failed to withhold and remit tax;
- that tax is Part XIII tax; and
- an amount was paid to a non-resident.
The Tax Court further explains that since section 215(6) is acharging provision, and not a penalty provision, a Canadianresident required to remit under section 215(6) is not entitled toclaim a due diligence defense.
The Tax Court found that David Siscoe and 3792391 Canada Inc.were clearly residents of Canada, and paying rent to Sebastiana,meaning that since Sebastiana was a non-resident, 3792391 CanadaInc. was liable under subsection 215(6). This means that theCanadian tenant was held liable for both the unpaid tax amount, andthe interest and penalties resulting from the failure to remit.
The Impact Of No Knowledge Requirement
The Tax Court determining that there is no knowledge requirementfor a tenant to be held liable, solidifies the obligation upontenants to find out if the property is owned by a Canadianresident. If tenants becomes aware that the rent paymentspreviously made were to a non-resident, it is important to consulta knowledgeableincome tax lawyer to ensure that all compliance obligations aremet.
Pro Tax Tips – Do Your Due Diligence!
As the Tax Court of Canada made it clear in 3792391 CanadaInc. v The King that knowledge is not required to be liableunder subsection 215(6). If you or your business are about to enterinto a new lease, research and investigate the tax residence statusof your landlord or lessor to determine if your landlord is anon-resident. If your landlord is a non-resident, find out whetherthey have made an election under section 216, and inquire about theimplications of signing a lease with a non-resident by consultingwith a top Canadian tax lawyer.
If you discover that your current landlord is a non-resident,you should consult with a Canadian tax lawyer about yourwithholding obligations and penalties that could apply to you.
If you are facing CRA tax audits regarding a failure to remit withholding tax on your rent, you should engage with one of ourexpert Canadian tax lawyers. Our knowledgeable Canadian tax lawyerscan provide legal taxadvice and assist you with fighting unreasonable CRAdecisions.
FAQ
How Do I Know If I Can Be Held Liable For WithholdingTax On My Rent?
If you are a Canadian resident and pay rent to a non-resident,you may have to withhold and remit a portion of your rent paymentsto the CRA. To find out if your landlord is a non-resident, you canask your landlord for a "certificate of residence" fromthe CRA. Additionally, watch out for red-flags such as: a foreignaddress or phone number, insisting on communicating at odd hours(possibly aligning with a different time zone), requests to payrent to a foreign bank account or to someone other than yourlandlord, and the persistent use of local representative in theirstead.
How Much Withholding Tax Do I Have To Pay If My LandlordIs A Non-Resident?
The standard withholding rate is 25%, meaning that if you owe$1000 a month in rent, you should pay $750 to your landlord andremit $250 to the CRA. However, this rate may be reduced if thereis a tax treaty between Canada and the non-resident's countryof residence. It is best to consult with a knowledgeable Canadiantax lawyer to understand how much you should be withholding basedon your situation.
How Do I Remit The Withholding Tax To TheCRA?
To remit the withholding tax, you must complete form NR76 andsend it along with the tax payment to the CRA. Payment can be madeonline, through mail, or through partnered Canadian Financialinstitutions.
