Dec 19, 2024
Introduction To Non-Resident Withholding Tax
When non-residents receive income from Canadian sources, such as dividends, interest, royalties, or rental income, the Canadian government imposes a withholding tax on this income. The payor (e.g., a corporation or individual in Canada) is responsible for deducting the tax from the payment and remitting it to the Canada Revenue Agency (CRA) on behalf of the non-resident. This withholding tax requirement is a way of shifting the risk and burden of collection to the payer rather than the non-resident. The CRA will have to expend potentially much more time and resources seeking a tax debt from a non-resident recipient of payments, whereas it is simple to place the burden on a Canadian resident payor and seek the tax debt from him or her personally. The standard withholding tax rates are typically 25% for most types of income. These rates can be reduced if there is a tax treaty between Canada and the non-resident’s country of residence. Tax treaties often lower or completely eliminate the withholding rate to prevent double taxation and promote cross-border investment. For the non-resident payee, he or she will receive a refund for the excess tax remitted by the payor once they have . Non-residents might need to complete certain forms, such as Form NR301 (Declaration of Eligibility for Benefits Under a Tax Treaty), to benefit from reduced tax rates under a tax treaty. If rent is paid to a person other than the landlord, such as a property management company or other agent, that agent is responsible for the withholding tax.
Tenant withholding requirements-3792391 Canada Inc. v. The King
The implications of the payor having the responsibility to remit the 25% withholding tax on behalf of the non resident can be unexpected and devastating. A recent decision from the Tax Court of Canada ruled against a Montreal tenant in the case of 3792391 Canada Inc. v. The King, ordering the tenant to pay six years worth of tax plus interest and penalties since he failed to withhold 25% of his monthly rent payments to his non-resident landlord. The CRA was not able to collect from the non-resident landlord, and since the burden is on the payor to remit the withholding tax, the tenant was ultimately held responsible for the unremitted tax.
The court determined that the law obligates the tenant to exercise a “high degree of due diligence” when assessing the landlord’s residence. It’s crucial to understand that adhering to due diligence does not completely absolve the tenant from the responsibility of remitting withholding taxes. Even if a tenant meets the court’s due diligence requirements, he or she must still pay the correct amount of withholding tax. Due diligence may only protect the tenant from penalties under the Income Tax Act but does not eliminate his or her liability for the unpaid withholding tax.
Residence And Withholding Tax Are Complex Issues
A discussion of how residence is determined will not be included in this article but suffice to say it is always clear and straightforward. It involves a holistic analysis of several factors, including the length of stay in Canada and case law determining if a person is “ordinarily” resident in Canada. There are also different rules for individuals, corporations, and trusts. This can lead to an ambiguous status of residency in some cases. See this article for more details on determining residence.
Understanding non-resident withholding tax is crucial for non-residents earning income from Canadian sources to ensure compliance and potentially benefit from tax treaty provisions. It helps in managing tax liabilities and avoiding issues with the CRA. If you’re a non-resident dealing with Canadian income or if you have concerns about a person’s residency status, it’s a good idea to consult with one of our top Canadian tax lawyers to navigate the specifics of tax residency determination, withholding tax, and any applicable treaties.
Pro Tax Tip: Get A Certificate of Residence From Your Landlord
If you are not certain about your landlord’s tax residence, request a CRA certificate of residence from your landlord. This will ensure that you can be certain about your landlord’s tax residence while the landlord maintain confidentiality in their income tax returns and other tax information. However, a landlord’s tax residence status can vary over the term of the lease. It is prudent for tenants to include a clause in the lease requiring a landlord to notify them if their tax residence status changes, as well as a representation and indemnity regarding tax obligations associated with the landlord’s tax residence status.
FAQ
Can I still be held liable for withholding tax for a non-resident landlord if I was not aware he or she was non-resident?
Yes, ignorance as to a person’s status as a non-resident is not a defense to liability to remit withholding tax. For this reason, it is important to perform and document due diligence in all cases where one is not certain and request a certificate of residence.
What are some red-flags to look out for regarding changes in a landlord’s tax residence status?
If you have a payment arrangement with a Canadian resident landlord and he or she suddenly asks you to pay rent to another entity, this may indicate that his or her tax residence status has changed. Similarly, if the landlord’s living arrangements have changed and he or she has moved to a different county and spends little to no time in Canada with no permanent residence in Canada, it is possible his or her tax residency status has changed. It is prudent to inquire further into this and consult with an expert Canadian tax lawyer to ensure you will not be held liable for unremitted withholding tax.
DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
