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Know Your Landlord: How You Could Be Held Liable for Your Landlord’s Income Tax

January 4, 2024

In a recent ruling (3792391 Canada Inc. v. The King), the Tax Court of Canada underscored a vital lesson for tenants: the importance of knowing who their landlord is. This decision highlights the often-overlooked responsibilities tenants face when leasing property from non-resident landlords, a scenario that can transform tenants into inadvertent tax collection agents for the Canada Revenue Agency (CRA).

If you’re a commercial or residential tenant leasing property in Canada, you should be aware of the implications of this ruling. Let’s go through your obligations to your landlord and the CRA, then examine how you can take steps to navigate these often murky waters with confidence and legal compliance.

A Tenant’s Obligation to Withhold

If you pay rent to a landlord for the commercial or residential use of real property situated in Canada, and your landlord is a non-resident of Canada, then you’re generally required to withhold at source 25% from the rent paid to your landlord and remit the amount withheld to the CRA. When your non-resident landlord files their Canadian income tax return, the remittances you make are effectively treated as installments payments against your landlord’s Canadian income tax payable for the year.

Effectively, this rule deputizes tenants and makes them tax collectors for non-resident landlords. Note that “non-resident” means a person that is not a resident of Canada for income tax purposes. This is different from a person’s resident status for immigration purposes.

3792391 Canada Inc. v. The King

In this court case, the tenant signed a lease agreement with a Quebec corporation in 1996. Even though the lease agreement was with the Quebec corporation, the tenant initially paid the rent to one of the Quebec corporation’s shareholders, and later to that shareholder’s brother. 

In 2006, the Quebec corporation sold the real property to another of the corporation’s shareholders (“Shareholder X”), but did not inform the tenant of this change. In 2010, the lease expired and the tenant entered into a new lease agreement which identified Shareholder X as the landlord/lessor of the property. The new lease agreement contained some conflicting information that should have caused the tenant to question whether they were dealing with a non-resident, but they did not[1]

Other than when the new lease agreement was made, the tenant very rarely saw Shareholder X.  In addition, the tenant corresponded with Shareholder X via email and Shareholder X’s email address ended in “.it”, indicating that it was an Italian email address.

Upon audit, the CRA determined that Shareholder X was a non-resident of Canada and assessed the tenant for the amounts that he should have withheld from the rent payments, penalties for failing to remit the required withholdings, and interest charges. 

The Tax Court of Canada’s Decision

The tenant appealed to the Tax Court of Canada. The court agreed with the CRA that Shareholder X was a non-resident of Canada and noted that:

  • A tenant who pays rent to a non-resident landlord must make the required withholdings from the rent payment at source and remit the withholdings to the CRA or they will be liable for the amounts they failed to remit. There is no due diligence defence against an assessment for amounts not withheld.
  • A tenant may raise a due diligence defence against any penalties assessed for failing to remit the required withholdings; however, the tenant in this case did not exercise due diligence.

Key Takeaways and Steps to Take

The court’s decision highlights the importance of conducting appropriate due diligence on any prospective landlord, paying attention to small details that might indicate that your landlord is a non-resident, and being wary of any changes to the arrangement. There are several steps that you as a tenant can take to reduce your risk:

  • Conduct a land titles search to determine who is the owner of the property and review the owner’s contact information for a non-Canadian address, phone number, email address, etc. 
  • Be cautious if the lessor under the lease agreement is somebody other than the owner of the property. If your landlord is not the owner of the property and is sub-letting the property to you, then it’s the landlord’s tax residence that matters, not the owner’s tax residence.
  • Understand what type of legal entity your landlord is (e.g., an individual, trust, partnership, or corporation), as the criteria for evaluating tax residence varies depending on the type of entity.
  • Pay attention to details in your lease agreement (e.g. contact information for the landlord and for the landlord’s advisors, place of signing, etc.).
  • Discuss all your findings with your DMCL advisor.
  • Consider asking your landlord to request a “certificate of residency” from the CRA.
  • Document the efforts you made to determine that your landlord was a Canadian tax resident. This may help in raising a due diligence defence against a penalty assessment for failing to make the required withholdings.
  • Request that the lease agreement includes a representation from your landlord as to their tax residence, and an indemnity from your landlord in favour of the tenant in case that representation is not correct. The exact language of the representation will depend on what type of legal entity your landlord is—so discuss with your DMCL advisor to ensure the language is accurate.
  • Pay rent to the landlord named in the lease agreement and not to anyone else. A request to pay the rent to someone other than the named landlord could indicate a change in ownership of the property, or a change in your landlord’s residence.
  • If there is any doubt, make the required withholdings and remit them to the CRA in a timely manner, and file an NR4 information return no later than March 30 of the following calendar year. Doing so could cause tension between you and your landlord, so this should only be done as a last resort.

This decision serves as a crucial reminder of the responsibilities that come with leasing property, especially when dealing with non-resident landlords. By staying informed and prepared as a tenant, you can ensure compliance with tax regulations and safeguard yourself against unforeseen financial and legal challenges. If you’re at all unsure about your obligations as a tenant, talk to your DMCL advisor and they’ll make sure you have everything covered so you can use your lease with peace of mind.

[1] E.g., the landlord gave a Canadian address but signed the agreement in Italy, and gave 2 phone numbers, one Canadian and one foreign.

Article written by Stewart Bullard, CPA, CA