Written By Zachary Thacker and Michelle Yung
In 3792391 Canada Inc. v The King, 2023 TCC 37, the Tax Court found a tenant taxpayer to be liable for failure to withhold taxes on rental payments made to their non-resident landlord, despite the taxpayer being unaware that their landlord was factually a non-resident for Canadian tax purposes. The decision raises caution that tenants should inform themselves of their landlord's residency status or act to protect themselves from the outset of their leases, as otherwise, they may incur significant tax liability.
Part XIII of the Tax Act
Generally, Part XIII of the Income Tax Act (Canada) (the Tax Act) levies a tax on certain types of income paid to non-residents by a resident of Canada.1 Paragraph 212(1)(d), for example, imposes a 25 percent withholding tax on gross rent paid for use or right to use any property in Canada owned by a non-resident individual.2 To ensure compliance with Part XIII, the onus is placed on the Canadian resident payer to withhold and remit appropriate amounts when making payments to non-residents. Under subsection 215(6), for example, a tenant who fails to withhold and remit the appropriate amount is liable for that tax under Part XIII, as well as for any penalties and interest accrued thereunder.
The case involved 3792391 Canada Inc. (the Appellant), and Siscoe, a shareholder of the Appellant. In May 1996, Siscoe entered into a lease for his personal residence with Anjar Investments Ltd. (Anjar). In 2006, unaware to Siscoe, the leased property was sold by Anjar to Trimarchi. In 2010, Siscoe entered into a three-year lease for the property with Trimarchi as the landlord. From 2011 to 2016, the Appellant made rental payments to Trimarchi on behalf of Siscoe and no Part XIII tax was withheld from these payments. Siscoe asserted that at all times, he was unaware that Trimarchi may have been a non-resident of Canada.
The Minister assessed the Appellant under subsection 215(6) for failure to withhold and remit Part XIII tax on the rental income received by Trimarchi for the 2011 to 2016 taxation years, including interest and penalties, on the basis that Trimarchi was a non-resident of Canada.
The Court first conducted a residency analysis of Trimarchi, finding that she was a non-resident of Canada for the 2011 to 2016 taxation years in question.
The central issue, which the Appellant contended, was that in order for section 215 of the Tax Act to be applicable, the resident Canadian payer must have knowledge that the payee was a non-resident of Canada. The Court, however, in reviewing the legislative history of subsection 215(6), found that there was no knowledge requirement when the withholding provision was initially introduced, and no knowledge requirement has been added to the text since. That, if Parliament wanted to limit a payor's liability to circumstances where they had knowledge, Parliament would have expressly done so within the provision. Based on this analysis, the Court held that subsection 215(6) is "devoid of any requirement that the payer have knowledge that the payee is a non-resident." As such, having concluded that Trimarchi was a non-resident of Canada, despite lack of knowledge, the Appellant was found liable for failing to withhold and remit the Part XIII tax payable on the rent paid to Trimarchi, in addition to liability for penalties and interest.
In disallowing any reliance by the Appellant on a due diligence defence for Part XIII liability, the Court held that the general obligation to withhold and remit tax under subsection 215(6) cannot be interpreted as providing for the allowance of a due diligence defence on the part of the taxpayer. Although a due diligence defence may have been available to the Appellant solely for the penalties and interest imposed, the Court found that no such sufficient diligence was established. This was notwithstanding the fact that Trimarchi provided a Canadian address on the 2006 deed of sale for the property, which the Court maintained was not sufficient for the Appellant to rely on for determining the residency status of Trimarchi. Citing Kau v R, 2018 TCC 156, the Court stated that such a statement as to residency is not conclusive, intentionally or not, and should not be unconditionally accepted where there is no further inquiry as to whether the address provided was in fact indicative of residence.
As seen in the case, the realities of Part XIII of the Tax Act can be harsh, and it is increasingly important for tenants, both commercial and residential, to protect themselves when entering into leases.
In situations where it may be difficult to determine the residency status of a landlord, tenants should ensure they conduct sufficient due diligence as to landlord residency. For example, where a statement is provided by the landlord as to their residency status, tenants should not solely rely on such a statement. Rather, tenants should conduct their own further inquiry to determine whether the statement provided is truly indicative of the landlord's residency status.
Further, when entering into leases, tenants should ensure that the agreement contains sufficient protective covenants and representations from the landlord in relation to Part XIII of the Tax Act. Covenants and representations from the landlord may include, among others:
- the treatment of Part XIII and withholding taxes;
- the residency status of the landlord; and
- an obligation on the landlord to notify the tenant if residency status changes, either if the landlord's residency changes or upon the transfer of the lease to a new assignee non-resident landlord.
Depending on the comparative negotiating power of the tenant, it may also be prudent for the tenant to seek an indemnity from the landlord for any liability arising from Part XIII and withholding taxes, and any related penalties and interests.
If you have any questions regarding the potential implications of this decision, or any other commercial leasing matters, please contact a member of Bennett Jones Commercial Real Estate group or Tax group.
1 Unless otherwise noted, all statutory references herein are to the provisions of the Tax Act.
2 The percentage rate of withholding is subject to and may be reduced under applicable treaties between Canada and the non-residents country of residence.
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