A recent decision by the Tax Court of Canada highlights the importance of tenants verifying the residency status of their landlords and complying with any obligations to withhold tax under Part XIII of the Income Tax Act (the “Act”). In 3792391 Canada Inc v The King, 2023 TCC 37, the court held that a taxpayer was liable for failing to withhold and remit 25% tax on the rental payments it made to a non-resident landlord even though the taxpayer did not know that the landlord was a non-resident for tax purposes.
Facts
Mr. Siscoe was the shareholder of 3792391 Canada Inc. (the “Appellant”), which operated a gym in Montreal. He entered into a lease for his personal residence with Anjar Investments Ltd. (“Anjar”) in 1996. In 2006, Anjar sold the leased property to one of its shareholders, Sebastiana Trimarchi. Mr. Siscoe testified that he did not know Ms. Trimarchi was the new owner of the property. In 2010, Mr. Siscoe signed a 3-year lease for the property with Ms. Trimarchi identified as the landlord/lessor. The Appellant began paying Mr. Siscoe’s rent in 2011 (as was accounted for in the shareholder loan account). It made the following rental payments to Ms. Trimarchi during the taxation years under appeal:
|
Taxation Year
|
Gross Rent
|
|
2011
|
$16,650
|
|
2012
|
$33,650
|
|
2013
|
$33,900
|
|
2014
|
$33,900
|
|
2015
|
$33,900
|
|
2016
|
$22,600
|
The Minister of National Revenue (the “Minister”) assessed the Appellant under subsection 215(6) for failure to deduct or withhold Part XIII tax payable under paragraph 212(1)(d) on rent paid to a non-resident, as well as interest and penalties pursuant to subsections 227(8) and (8.3).
Legislation
Paragraph 212(1)(d) in Part XIII of the Act imposes a 25% tax on gross rents paid for the use or right to use in Canada any property owned by a non-resident. To ensure amounts are collectible by the CRA, subsection 215(1) makes the Canadian resident payor responsible for withholding and remitting the Part XIII tax to the Receiver General of Canada. Where a taxpayer fails to withhold an amount as required by section 215, subsection 227(8) imposes a penalty equal to 10% of the amount that should have been deducted or withheld, or 20% of that amount if the failure was made knowingly or under circumstances amounting to gross negligence.
Parties’ Positions
The Appellant argued that it had rebutted the Minister’s conclusion that Ms. Trimarchi was a non-resident and that even if she was a non-resident, it should not be held liable for failure to withhold Part XIII tax because it did not know that she was a non-resident. It also argued that a due diligence defence should be available with respect to the obligation to withhold and remit Part XIII tax.
The Respondent argued that there is no “knowledge” requirement for liability under Part XIII and that the only requirements for section 215 to apply are (1) that a Canadian resident has failed to withhold and remit tax, (2) on an amount taxable under Part XIII, (3) that they paid to a non-resident. The court agreed.
Holding
The court was satisfied, on a balance of probabilities, that Ms. Trimarchi was a non-resident of Canada, and the Appellant had failed to withhold and remit tax under Part XIII on its rental payments made to her. With respect to the Appellant’s argument that a due diligence defence should be available, the court agreed that such a defence may be made against the imposition of penalties under subsection 227(8) but that no due diligence defence is available to relieve a Canadian resident payor of their liability under section 215.
Takeaways
Although the Act is clear that a Canadian resident who pays an amount on account of rent to a non-resident must withhold and remit 25% of that amount to the Receiver General, the application in this case shows the potential harsh impacts of Part XIII where a tenant of a residential rental property fails to confirm their landlord’s residency status. With a shortage of affordable rental housing, increased government attention on underused properties owned by non-residents, and the power imbalances that may arise in certain landlord/tenant relationships, it seems possible that other residential tenants may find themselves in similar situations either because they did not know of their obligations to withhold under the Act, or they did not know that their landlord was a non-resident.
Currently, the Ontario Residential Tenancy Agreement (Standard Form of Lease) does not require a landlord to disclose their residency status. While a disclosure in the standard form of lease would help – and would at least alert tenants to their obligations when entering into a lease agreement with a non-resident – tenants should still take active steps to determine their landlord’s residency status so they can ensure they remain compliant and reduce the likelihood of being assessed penalties if they are not.
Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.