Draft legislation to exempt tenants from deducting and withholding tax on residential rent paid to non-resident landlords

Subsection 215(1) of the Income Tax Act (the “Act”) imposes on Canadian tenants the obligation to withhold and remit Part XIII tax on residential rent paid to non-resident landlords. The applicable tax rate is 25% of the gross rent paid, subject to being reduced pursuant to the terms of a tax treaty between Canada and a foreign country. Where the tenant pays rent to an agent of the landlord (a property management company, for example), the agent and not the tenant has the withholding and remittance obligation pursuant to subsection 215(3) of the Act.

Tenants who fail to withhold and remit Part XIII tax as above are personally liable to pay the tax with penalties and interest. This can lead to unexpected and dire circumstances for individual tenants, who often are not in a position to determine whether the landlord is a non-resident or seek recourse against them. Further, no due diligence defence is available; the personal liability exists even if the tenant argues that they reasonably believed – based on representations or documents – that the landlord was a Canadian resident for tax purposes (as recently confirmed in the Tax Court of Canada judgment of 3792391 Canada Inc. v. The King, 2023 TCC 37).

On August 12, 2024, the Government released draft legislation (accompanied by explanatory notes) aiming at exempting individuals from withholding and remitting Part XIII tax in respect of rent paid for the use of a “residential property” (new subsection 215(1.2)). Assuming no paying agent described in subsection 215(3) is used, the remittance obligation then shifts to the non-resident landlord (subsection 215(1.3)). Notably, the individual paying the rent does not need to be the tenant for the exemption to apply (parents can pay the rent on behalf of their children, for example). The new provisions, if enacted, would be effective as of August 12, 2024.

Prepared by: Vivian Esper

Vivian is an is an associate working out of the Vancouver office of Thorsteinssons LLP. Vivian’s practice focuses on tax dispute resolution with the Canada Revenue Agency and Tax Court of Canada.  Her practice also includes tax planning involving individuals,… more »

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