A recent ruling from the Tax Court of Canada may have significant ramifications for commercial and residential tenants and landlords on rental agreements in Canada. Under existing Canadian tax rules, tenants renting from non-resident landlords must withhold at source up to 25% of their rent and remit the taxes withheld at source to the Canada Revenue Agency (CRA). The ruling will send shivers down the spines of tenants who will now need to take extra steps to determine if their landlord is a resident or non-resident.
In 3792391 Canada Inc. v. The King (2023 TCC 37), the tenant, who was unaware that their landlord was not a resident of Canada for tax purposes, did not withhold at source, was made to pay their full rent, and was then found liable for withholding taxes, penalties and interest. Moreover, the court’s decision concluded that a due diligence defence is not available with respect to a tenant’s withholding taxes when paying a non-resident.
The current ruling, if not overturned by a higher tax court, is expected to have a broad ripple effect that may ultimately come to impact all landlords directly or indirectly, as more and more potential tenants and their legal advisors seek assurances that they are dealing with Canadian resident landlords before paying rent in full without withholding at source.
At the date of this GGFL news release, the court case is not under appeal with the Federal Court of Appeal.
Impact on Tenants
If the landlord is a non-resident, the onus will be on the tenant to ensure that withholding taxes on the rent is withheld at source and remitted to the CRA and reported on a NR4 slip. The increased risk for withholding taxes, penalties and interest from this court decision should have a broad impact to renters across the country. According to the Canadian Housing Statistics Program, in 2020 there were 187,325 non-resident homeowners in Ontario alone .
To determine if a landlord is a resident or non-resident, tenants should be seeking direct evidence which, for example, may include copies of a Canadian tax return or a tax residency certificate. As a result of this ruling, solely relying on a standard clause in a lease confirming the landlord’s residency status is not advisable for purposes of a tenant managing their risk for withholding taxes. In the absence of proof of residency, tenants and their legal advisors may consider holding back 25% of their rent in escrow or in trust until residency is confirmed. Any unilateral decision by the tenant to withhold at source without the consent of the landlord may be a cause for legal dispute; the ramifications of which should be considered by the tenant and their legal advisor in the context of the rental agreement in place, and of applicable contract law. Moreover, increased disputes between tenants, landlords and their respective legal advisors around whether sufficient evidence for tax residency exists or has already been provided by the landlord to the tenant are also anticipated to increase in response to this court decision.
Impact on Canadian Resident Landlords
While the withholding tax rule will have no impact on their collected rents, Canadian resident landlords should be prepared to provide proof of residency to prospective tenants. Applying for a certificate of residency is one solution that should satisfy prospective tenants. Full details on how to apply can be found on the Government of Canada’s website. Individuals, corporations and trusts are all eligible to apply.
Impact on Non-Resident Landlords
Non-resident landlords can anticipate an increase in enquiries about residency status and for tenants to withhold at source up to 25% of their rent. A portion of funds withheld at source and remitted to CRA may be returned to landlords who file an annual Canadian tax return. The return, known as a Section 216 return, allows non-residents to pay taxes on their net rental income net of expenses, and any withholdings at source that are in excess of the taxes calculated under the Section 216 return are refunded to the non-resident landlord. Moreover, the issue of withholdings at source by tenants and the related tax obligations, reporting and risks that tenants face can be avoided altogether by setting up a Canadian corporation that is the legal and beneficial owner of the properties being rented.
