By Perry Crous, Articled Student.
Are you sending rent payments to a non-Canadian account? Did your landlord give you overseas contact details? Do you suspect your landlord might live outside of Canada? These are red flags that you could be at risk of a nasty surprise from the Canada Revenue Agency if you haven’t been withholding 25% of the rent. A tenant was found retroactively liable for over $40,000 of his landlord’s unpaid taxes, compounded interest and penalties by the Tax Court in January 2024.
To understand how this could happen, we need to look at Part XIII of the Income Tax Act, which concerns tax on Canadian income of non-residents.
The law
Generally, non-residents are required to pay an income tax of 25% on any of a range of payments they receive from Canadian residents, including rent. This is an obligation on the landlord.
The issue for the tenant comes from the withholding and remittance provisions of the Act. To facilitate collection of the tax from persons who may be overseas and difficult to reach, s 215 requires the person paying the amount on which income tax is payable to withhold the amount of the tax and remit it to CRA on behalf of the non-resident person. In other words, the Act puts responsibility for paying the recipient’s tax on both the recipient and the person paying (in a tenancy, the tenant). S 215(6) makes the person paying liable to pay on behalf of the non-resident person the whole of the amount that should have been withheld.
Unfortunately, many people are unaware of this shared obligation and consequent liability.
Determining residency
Even if a person is aware of the potential obligation to withhold tax if the recipient is a non-resident, determining whether a person is a resident of Canada for tax purposes is not always straightforward.
There is no definition of “resident” or “residence” in the Income Tax Act. Instead, the determination is a question of fact to be made based on a range of factors that show where a person “in the settled routine of their life, regularly, normally or customarily lives”. This is an issue on which legal advice is frequently sought.
The 2024 decision
In the 3792391 Canada Inc. v The King case, the tenant was renting a home from a Canadian corporation. The tenant testified that he was unaware that the property was sold in 2006 to an individual until the lease was renewed in 2010 with the new landlord identified. The tenant then paid the new landlord $174,600 in rent over the next six years. The tenant was not informed of and did not inquire into the new landlord’s residency. The new landlord was a resident of Italy.
In the appeal, the tenant sought to challenge the determination that the landlord was a non-resident. The court found that it was more likely than not that the landlord was a non-resident during the relevant period.
The tenant also unsuccessfully argued that knowledge was required for the requirement to withhold tax to apply, and that there should be a defence of due diligence. In other words, because he did not know, and had no reason to believe, the landlord was a non-resident, the requirement should not apply. The court noted that the landlord’s email address ended in “.it”, the phone number on the 2010 lease was Italian, and one email contained language the tenant recognized as most likely Italian. This confirmed that the tenant had not shown the required “high level of due diligence” in inquiring into the new landlord’s residency – more than asserting that he “had no reason to believe that the landlord was a non-resident”.
However, the court also held that even had the tenant carried out a “high degree of due diligence” in seeking to determine the landlord’s residency, this is not a defence to liability for the withholding tax, only any applicable penalties.
Takeaways from the decision
The Tax Court’s decision confirms that where a landlord is a non-resident and a tenant fails to withhold the tax payable on rent, the tenant as well as the landlord is liable for the tax, regardless of what the tenant knew of the landlord’s residency.
Further, where the tenant is unable to show a “high level of due diligence” in inquiring into the landlord’s residency status, they are also liable for interest and penalties.
As the judge notes, this may have harsh consequences. The tenant was ultimately faced with a CRA assessment of over $80,000 in unpaid taxes, interest and penalties.
Policy issue
Issues with withholding tax on payments to non-resident recipients is commonly encountered in areas such as purchase and sale of real estate or businesses. As a result, it is standard practice for purchasers to require from the seller either a warranty that they are a Canadian resident or provide a certificate from the CRA that the tax has been paid, otherwise the purchaser withholds the tax amount for payment to CRA.
But there are some crucial differences between a typical residential tenant and a typical purchaser of a home or business. The power imbalance between tenant and landlord is widely accepted and forms part of the context and justification for the prescriptive requirements of the Residential Tenancies Act.
| Purchaser of Home or Business | Residential Tenant |
| Represented by lawyer | Does not typically seek legal advice prior to signing residential tenancy agreement |
| Bespoke contract drafted by lawyers, typically includes seller’s representation on residency | Standard template form that does not include any reference to landlord’s residency |
| Wealthy, often has some legal understanding | Many are not wealthy or familiar with the law |
| Relative equality of bargaining power – purchaser can insist on residency disclosure | Inequality of bargaining power – often difficult for tenant to add terms to tenancy agreement or make inquiries of the landlord |
The usual response to the harsh consequences of s 215(6) are that the person potentially required to withhold tax should conduct due diligence to determine the recipient’s tax residency. Examples include:
- conducting a Land Titles search to check for non-Canadian contact information;
- requesting that the landlord supply a “certificate of residency” from the Canada Revenue Agency;
- including a representation and indemnity clause in the tenancy agreement regarding the landlord’s tax residency and any associated obligations;
- inquiring into any requests to pay the rent to someone other than the landlord; and
- non-resident landlords incorporating a Canadian corporation as the landlord, to avoid attracting the tax on the payment from the tenant to the landlord.
For the reasons given above, and considering the current housing crisis facing Canadians, this seems a poor response. The expectations imposed on tenants, many of whom are living paycheque-to-paycheque and struggle to find housing, are onerous.
First, tenants must be conscious of their obligation to withhold tax under s 215 of the Act. The results of a random survey on this might be illuminating, especially given the complete absence of any mention of the obligation on the Residential Tenancy Board website, in the standard Residential Tenancy Agreement template, or in the Residential Tenancy Act (BC) itself.
Second, the tenant must determine whether their landlord is a non-resident for tax purposes. As mentioned above and illustrated by the factors considered in the decision, this is not always a straightforward question. There is no requirement on landlords to be cooperative. And even where the tenant shows a “high level of due diligence” in making inquiries, this is no defence to getting it wrong.
Third, where the landlord is a non-resident, the tenant must withhold 25% of the rent and remit it to the Canada Revenue Agency. Again, there is no requirement under provincial legislation for a landlord to be cooperative. Presumably a tenant could expect to succeed in a Residential Tenancy Board hearing for non-payment of rent where they can point to their s 215 obligation to withhold, but this hardly seems ideal.
Finally, where a tenant was required and failed to withhold rent, they must pay the sum plus any applicable penalties and interest when assessed by CRA. Tenant’s insurance does not cover unpaid withholding tax. A tax bill in the tens or potentially hundreds of thousands of dollars would be ruinous for many tenants, who could be looking at bankruptcy.
What can be done?
It should be noted that the percentage of home ownership by non-residents in British Columbia is small: in 2020 4.7% of BC properties had one or more non-resident owners (6.2% in Vancouver). Nonetheless, while the likelihood of being hit by lightning is low, the potential severity is extremely high. That they were extremely unlucky is little consolation to those in the position of the tenant in the decision.
The good news is that there is a straightforward solution, because the obligation to withhold is on the person paying the non-resident. This means that where the landlord is acting through an agent such as a property management company, the agent takes on the responsibility for withholding the tax amount. In New Zealand, the residential tenancy legislation was amended to require a landlord who is out of New Zealand for longer than 21 consecutive days to appoint and ensure they have an agent in New Zealand. Similarly, provincial legislatures could introduce a requirement for non-resident landlords to appoint a property manager or Canadian resident as their agent to receive rental payments, shifting the burden of withholding on to that agent.
