Paying Rent While Collecting Taxes?

Newcomers to a new country typically, after "getting settled," first rent a place to live, and only consider buying property once their life is more established and they have sufficient financial means.

However, being a tenant in Canada involves more than just paying rent on time and keeping the rental property in good condition — it turns out you may also need to do some work on behalf of the tax authorities. Failing to fulfill this duty could even result in penalties from the Canada Revenue Agency (CRA).

This isn't scaremongering — it's a reflection prompted by a recent decision, 3792391 Canada Inc. v. The King, 2023 TCC 37 (CanLII).

This case concerned the application of the withholding tax regime for rental income paid to non-resident landlords under Canada's Income Tax Act. The case was brought on appeal by 3792391 Canada Inc. (the "Appellant"), disputing assessments issued by the CRA for the 2011 to 2016 taxation years.

The appellant had been renting a residential unit in Quebec since 1996. Ten years later, the unit was sold to a new owner. In 2010, the appellant signed a new three-year lease with the new landlord. The lease indicated that the landlord had signed the document in Italy, while also providing a Quebec address, a Canadian phone number, and an international phone number. The appellant stated that, at the time of signing the lease, it had not paid particular attention to this information.

As it turns out, under the Income Tax Act, when a landlord is a non-resident, the tenant is required to withhold 25% tax before paying rent.

In 2018, the CRA issued a notice of assessment to the appellant, stating that it had failed to withhold and remit tax on rent paid to a non-resident landlord as required, and was therefore liable for the outstanding tax, interest, and penalties.

The central issue in the case was whether the landlord was a non-resident of Canada between 2011 and 2016. If she was a non-resident, then the appellant was required, under the legislation, to withhold 25% tax from the rent.

The court emphasized that the purpose of this regime is to ensure Canada can effectively collect tax from non-residents. Since non-residents are often not physically present in Canada, without a withholding system the government would find it very difficult to enforce collection.

A critically important legal question in the case was: must a tenant actually know that the recipient is a non-resident before being liable for the withholding tax obligation?

The appellant argued that it simply had no idea the landlord was a non-resident, and should therefore not be penalized. It contended that if the law did not require knowledge, this would produce an extremely unfair outcome for ordinary tenants.

The court, however, flatly rejected this argument. It held that the wording of the Income Tax Act is entirely clear, and contains no requirement of "knowledge" or "ought to have known." The judge stated that if Parliament had intended to include a knowledge requirement, it could easily have written that explicitly into the statute — but in fact, no such provision exists.

The court also examined the relevant legislative history. As far back as 1933, Canada had already established a withholding regime for rental and royalty income paid to non-residents, with the purpose of preventing non-residents from evading Canadian tax obligations. The judge held that the entire design of the system is intended to require Canadian payers to assist the government in collecting tax, and that the payer's obligation is therefore one of a highly strict nature.

As for the penalty issue, the court acknowledged that, in theory, a "due diligence defence" can be raised against penalties for violations of the Income Tax Act. In other words, if a taxpayer has taken highly reasonable measures to ensure compliance, they may potentially be relieved of the penalty.

However, in this case, the appellant made no inquiries whatsoever, and took no steps at all to confirm whether the landlord was a non-resident. The court found that this fell far short of constituting due diligence.

The court ultimately dismissed the appeal, but made no order as to costs.

The significance of this case lies in reaffirming that Canada's non-resident withholding tax regime is a highly strict liability system. As long as the payee is ultimately found to be a non-resident, the Canadian payer may be held liable for the withholding and remittance obligation — and "not knowing" generally cannot serve as a valid excuse. This ruling serves as a cautionary lesson for tenants and other payers in Canada.