An Overview of Tax Implications in Canadian Property Rentals
With moving day (July 1st) fast approaching, and most tenants not being aware of specific tax rules in Canada, we wanted to take the opportunity to advise everyone of inevitable potential tax consequences while renting a property.
Non-Resident Withholding Tax Filing Obligations, Responsibilities, and Withholding Requirements
Most tenants are not familiar with their filing obligations and their responsibility to withhold funds and perform administrative duties, such as filing certain slips and information returns in a timely manner with the Canada Revenue Agency if you are renting from a Canadian tax non-resident. When a non-resident receives rental income from a real property in Canada, the payer, who may be a tenant or a property management company, is required to withhold and remit 25% of the gross rent to the Canada Revenue Agency.
Responsibilities of Property Managers and Agents
As described in the Income Tax Act, where a property manager or agent is collecting rent on behalf of a non-resident landlord it then becomes the responsibility of that person (or company) to address the administrative aspects of rents from non-residents, not the tenants. If there is no property manager involved, and it is silent in the agreement that you, as the tenant, are responsible for the administrative details, including being required to send applicable withholdings to the Canada Revenue Agency directly, the administrative duties would fall to the landlord.
Legal Precedent, Consequences, Penalties, and Interest
Recently the TCC concluded in 3792391 Canada Inc. V The King, to apply subsection 215(6) for failure to withhold and remit part XIII tax on rent paid to the landlord by the tenant. The tenant was therefore liable to withhold and pay the necessary taxes. The taxpayer argued that it had not taken steps to ensure compliance with withholding obligations under the Act because it had no reason to believe that the recipient of the payments was a non-resident. The court found that this was not enough to meet the standard of a high degree of diligence. The Court did not accept the due diligence defense that the tenant argued within their defense. The onus then shifts to the taxpayer to ensure that they are exercising reasonable care to comply with the Act and ensuring the landlord is, in fact, a Canadian tax resident. Subsections 227(8) and (8.3) also impose penalties and interest on the resident payer on the tax due. Failure to remit, late or no remittance is subject to a fine of 10% of the required withholding amount and 20% for repeat offenders, plus interest.
Ensuring Compliance and Verification
As a result of this case, the consequences of failing to comply with a Part XIII tax obligation can be severe and few remedies are available. Therefore, while it may be difficult to determine a payee’s residence in some cases, a payer should always take active steps to verify. For example, payers should not rely solely on unsworn statements but should make their own inquiries to determine a recipient’s residency status.
Seeking Expert Guidance and Assistance
To learn more, we invite you to reach out to UpCounting Services today to embark on a journey toward confident and strategic decisions.