WITHHOLDINGS ON RENT PAID TO NON-RESIDENTS LANDLORD

In a March 30, 2023 Tax Court of Canada case (3792391 Canada Inc. vs. HMK, 2021-1804(IT)I), the taxpayer had been assessed for failure to withhold taxes on rent paid on Canadian real estate to a non-resident.

Penalties and interest were also assessed. The rents paid from 2011 to 2016 totaled $174,600.

The information known to the taxpayer was limited to an Italian telephone number on the lease document (with a Canadian number), the landlord’s email address ending with “.it” rather than “.ca” or “.com” and some Italian writing at the bottom of an email, not necessary to the information relevant to the taxpayer. The taxpayer argued that he did not know that the landlord was a non-resident, and that a due diligence defence should apply.

Taxpayer loses

The Court first noted that a non-resident is subject to a 25% flat tax on gross rent received on Canadian property (Paragraph 212(1)(d)). The Canadian resident paying the rent is required to withhold and remit this tax (Subsection 215(2)) and is liable for the tax if this is not done (Subsection 215(6)). Penalties and interest also apply (Subsections 227(8) and (8.3)).

The Court then noted that the withholding requirement exists regardless of whether or not the taxpayer knows that the landlord is non-resident. Further, there is no due diligence defence in respect of the tax withholding. As such, the taxpayer was liable for the tax not withheld. The Court stated that a due diligence defence could apply to penalties and interest. However, the taxpayer provided no evidence of any efforts to

confirm the landlord’s residency. The absence of any reason to question the landlord’s residency was insufficient – due diligence requires taking positive steps to ensure compliance.

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