Understanding Tenant Tax Withholding Responsibilities and the Risks of Non-Compliance with Part XIII of the Income Tax Act
Tenants have a very important obligation under Part XIII of the Income Tax Act that is often overlooked. A recent federal court decision (3792391 Canada Inc. v. The King) sheds light on the potential consequences tenants may face if they do not meet this Part XIII Income Tax Act obligation. This article outlines the nature of the obligation, highlights key takeaways from the federal court decision, and provides strategies to ensure tenants are protecting themselves from liability for non-compliance with Part XIII of the Income Tax Act.
The Obligation to Withhold
Generally, tenants (of both commercial and residential properties) have an obligation to withhold a portion of rent (the "Part XIII Tax") from their landlords and remit it to the Canada Revenue Agency if the landlords are not Canadian residents.1
If the tenant pays rent to an agent on behalf of the landlord, such as a property management company, the agent is responsible for withholding the Part XIII Tax from the landlord.
The amount of Part XIII Tax tenants must withhold and remit is variable depending on the circumstances. Non-residents must pay a 25% tax on amounts that are taxable under Part XIII so in some cases, tenants or agents must withhold and remit 25% of the rent owed to the landlord. However, this rate may be reduced, or the parties may be eligible for an exemption under the provisions of the Income Tax Act or a bilateral tax treaty between Canada and another country.2 In any case, the tenant or agent is responsible for withholding and remitting Part XIII tax at the correct rate.
3792391 Canada Inc. v. The King
In a recent federal court decision, a tenant who failed to withhold and remit Part XIII Tax was found retroactively liable for the amount that should have been remitted for six years in addition to penalties and interest under the Income Tax Act.
In this case, the tenant signed a lease agreement with a Quebec corporation in 1996. In 2006, the Quebec corporation sold the property occupied by the tenant to one of the corporation's Italian shareholders without expressly notifying the tenant. When it came time for the tenant to renew the lease with the new landlord, the tenant did not question the new landlord's residency and failed to note the importance of the information indicating the landlord may not be a Canadian resident (for example, the email address of the landlord ended in ".it" not ".ca").
The court found that the law requires the tenant to carry out a "high degree of due diligence"3 when determining the residency of the landlord and as evident from this case, failure to do so may result in consequences.
It is important to note that proper due diligence does not serve as a defence for non-remittance entirely. Even if a tenant meets the due diligence standard required by the court but they fail to remit the appropriate Part XIII Tax, their due diligence may only afford them a defence against the Income Tax Act's penalty provisions, not the amount they were required to remit. In other words, the tenant may still be held liable for the unpaid Part XIII Tax.
This decision is an important reminder for tenants or agents to maintain accurate records of the residency of their landlords and withhold and remit Part XIII Tax as required.
Key Takeaways and Next Steps
As a tenant, in order to mitigate the risk of Part XIII Tax non-compliance, here are some strategies you may consider adopting:
- Conduct a Land Titles Search to check your landlord's contact information for a non-Canadian address, phone number, email address, etc.
- Ask your landlord for a "certificate of residency" from the Canada Revenue Agency.
- Include a representation and indemnity in your lease agreement regarding your landlord's tax residence and any associated obligations. The nature of this provision may vary depending on your lease agreement. If you require assistance with this, a member of the Segev team can help.
- Be cautious of any requests to pay the rent to someone other than your landlord. This may indicate a change in ownership of the property or a change in your landlord's residence.
Overall, it is imperative for tenants to be aware of their responsibilities and take proactive steps to avoid potential onerous and costly outcomes.
Footnote
1 Income Tax Act, RSC 1985 c. 1 (5th Supplement) at Part XIII s. 215.
2 Government of Canada, "NR4 – Non-Resident Tax Withholding, Remitting, and Reporting" (November 14, 2023), online: Government of Canada < https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4061/nr4-non-resident-tax-withholding-remitting-reporting.html>.
3 3792391 Canada Inc. v. The King, 2023 TCC 37 at para 43.
Originally published February 23, 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
