Know Your Landlord (Part 2): Changes to Withholding Tax for Rent Paid to Non-Resident Landlords for Residential Rentals

Earlier this year, we wrote about the Tax Court of Canada’s 2023 decision in 3792391 Canada Inc. v. The King. In that decision, the court upheld an assessment issued by the CRA to a tenant of a non-resident landlord. Under the Income Tax Act, persons paying rent to a non-resident of Canada for the use of real property situated in Canada are generally required to withhold 25% from that payment and to remit the amount withheld to the CRA. Effectively, this rule deputizes tenants and makes them tax collectors for non-resident landlords.

Unfortunately, if the person paying the rent doesn’t withhold the required amount from the non-resident, they can be held liable for the amount that should have been withheld and remitted to the CRA.

The Tax Court of Canada’s decision

This is exactly what happened in 3792391 Canada Inc. v. The King. 3792391 Canada Inc.’s shareholder leased a condominium unit for use as his personal residence, and caused the corporation to pay rent to the landlord on his behalf. However, the shareholder was unaware that the landlord was a non-resident of Canada, and the corporation did not make the required withholding.

The CRA became aware of the rent payments during an audit and assessed the corporation for the amount that should have been withheld from those payments, plus penalties and interest. The corporation appealed the assessment to the Tax Court of Canada, but the court upheld the assessment as it was in accordance with the rules in the Income Tax Act.

The aftermath

In the spring of 2024, the court’s decision started receiving a lot of negative press in the national media[1]. Although this rule serves a valid purpose[2], it’s unreasonable to expect the average Canadian to be aware of this rule or to determine whether their landlord is a non-resident of Canada. 

A business that is negotiating the terms of a commercial lease could reasonably be expected to seek legal and tax advice before entering into the lease. An individual who‘s simply looking for a place to live cannot reasonably be expected to do so, and in many cases would not be able to afford the cost of such professional advice. 

In reaction to the criticism, the Minister of National Revenue (“the Minister”) posted the following statement on X (formerly known as Twitter) on May 17, 2024:

“I want to reassure Canadians that the Canada Revenue Agency does not intend to collect any portion of any non-resident landlords’ unpaid taxes from individual tenants. It is incorrect to state otherwise.

The recent case at the Tax Court of Canada (3792391 Canada Inc. v. The King) was an extremely rare situation. This law has existed for nearly a century, and there is not a single instance of an assessment made to an individual tenant in the last decade.

The CRA does not expect individual tenants to withhold 25% of the rent from their landlords.”

I am working with my colleague, the Minister of Finance, to provide absolute clarity on the law and to ensure that tenants have the certainty they need and deserve, but I can assure Canadians that it does not, and will not, apply to them.” (emphasis added)

While there are a number of problems with the Minster’s statement, the bottom line is that the Minister hinted that a change in the rules would be forthcoming.

The August 2024 legislative proposals

On August 12, 2024, the Department of Finance released draft legislative proposals to implement various income tax measures. The proposals included the changes alluded to by the Minister.

The proposals make two changes to the rules:

1. An individual (other than a trust) who pays rent to a non-resident person for the use of a “residential property” in which an individual resides is not required to withhold an amount from the payment of that rent.

The words “other than a trust” mean that the person paying the rent must be a natural person to qualify for this exception (i.e. a human being). 

A “residential property” means all or any part of a house, apartment, condominium unit, cottage, mobile home, trailer, houseboat, or other property, located in Canada, the use of which is permitted for residential purposes under applicable law.

The rule does not require the person paying the rent to reside in the residential property. It merely requires that the rent is paid so that an individual can reside in the residential property. Thus, a parent paying residential rent on behalf of their child can qualify for this exemption.

2. Where the individual paying the rent is not required to withhold an amount from the payment of rent because of the foregoing rule, the non-resident person who is entitled to the rent payment is required to remit 25% of the rent received to the CRA, and to submit a remittance form.

Where the non-resident person who is entitled to the rent payment appoints an agent to receive the rent on their behalf, they are not required to comply with this rule. However, the agent will generally be required to make a remittance to the CRA under existing rules.

If enacted, the new rules will be effective as of August 12, 2024.

The takeaway

The proposals are a welcome change to a rule that unreasonably applied to ordinary Canadians looking for a place to live. However, it’s important to remember that the changes are limited in scope and generally only provide relief to natural persons who pay rent for the use of a residential property as a residence.

If the residential property is used for some other purpose, or if a corporation, trust, or partnership pays the rent on its own behalf or on behalf of such a natural person, then the payment will not qualify for the proposed exemption.

If you currently rent a residential property and are wondering if this exemption applies to you, contact your DMCL advisor and they’ll make sure you have clarity in your obligations to the CRA.

[1] See for example, Globe and Mail. (2024, October 10). Foreign landlord fails to pay taxes, CRA goes after tenant. The Globe and Mail.

[2] i.e., providing the CRA with a mechanism to collect income tax on a non-resident landlord’s Canadian source rental income, something that the CRA would otherwise be unable to do, as it generally has no legal authority to collect unpaid taxes from an individual who is resident in a foreign country.

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