A Tax Court of Canada (the “TCC”) decision entitled 3792391 Canada Inc. v. The King (hereafter “391”) creates concern for tenants who do not have clear and sufficient knowledge of their landlords’ residency status. 391 has crystallized the risks of tenants failing to withhold taxes on rental payments made to non-resident landlords under Part XIII of the Income Tax Act, RSC 1985, c 1 (5th Supp) (the “ITA”).
Facts
David Siscoe (“Siscoe”) signed a lease in 1996 of a personal residence (the “Premises”), with the original landlord being a Canadian corporation. In 2006, the Premises was sold by the landlord to Sebastiana Trimarchi (“Trimarchi”). Between 1996 and the relevant period in this TCC decision, Siscoe leased the Premises.
In May of 2010, Siscoe and Trimarchi entered into a three-year lease for the Premises. Trimarchi wrote a Canadian address for her residence on the lease, but the lease indicated that she had signed it in Italy. She also provided phone numbers located in both Quebec and Italy. In 2011, Siscoe started to pay rent for the Premises to Trimarchi through his company, 3792391 Canada Inc. (the “Company”), which was the appellant in this case.
In October of 2018, the Minister of National Revenue (the “Minister”) assessed the Company for failure to withhold taxes under Part XIII of the ITA payable on rental income received by Trimarchi, in addition to interest and penalties, due to Trimarchi being a non-resident of Canada for income tax purposes. Siscoe argued at the TCC that he was never informed that Trimarchi was not a resident of Canada, and that he had seen her in person multiple times. Siscoe confirmed that neither he nor the Company ever withheld any Part XIII tax.
Applicable Law
Section 212(1)(d) of the ITA states that non-residents of Canada must pay income tax of 25% on every amount of gross rent that a resident of Canada pays to them. Adherence to the foregoing section is incumbent on tenants instead of landlords, in the form of the tax being withheld by tenants or their agents to the Receiver General of Canada under Section 215 of the ITA. Critically, Section 215(6) of the ITA requires tenants who fail to withhold and remit these taxes to pay the taxes themselves, in addition to penalties and interest.
Analysis by the TCC
The appellant argued that (i) it had rebutted the Minister’s assertion that Trimarchi was a non-resident of Canada, and that, (ii) should Trimarchi be found to be a non-resident, that Siscoe did not have knowledge of that fact. The respondent relied on a plain reading of the text in claiming that the legislative purpose of Part XIII was clear, and that Siscoe and the Company did not withhold the tax as they were supposed to.
The TCC ultimately found it likely that Trimarchi was a non-resident of Canada, thereby rejecting the first argument of the appellant, based on reasons including, but not limited to:
- the fact that Trimarchi owned no Canadian property except for the Premises, which were leased to Siscoe and the Company);
- Trimarchi not filing any Canadian income tax returns; and
- Trimarchi having an Italian phone number and an Italian email address.
The appellant’s secondary argument concerned the level of knowledge required for tenants to confirm the residency of their landlords. Essentially, the appellant argued that Section 215(6) of the ITA required the tenant to have knowledge of the landlord’s non-residency for the tenant to be liable for not withholding taxes. Furthermore, the appellant argued that the obligation for tenants to investigate and confirm the residency of their landlords is unjust, and places too high a burden on tenants. These arguments were also rejected by the TCC.
The TCC appreciated the difficult situation created by the ITA provisions cited in this trial. The level of responsibility placed on tenants to investigate the residency of landlords can create a difficult burden; however, the TCC held that this is the best solution the law has created thus far to ensure that foreign owners of Canadian real estate pay their fair share of taxes on their rental income. Compliance among taxpayers in Canada is easier to monitor and enforce than among taxpayers living in foreign jurisdictions when it relates to amounts owing in Canada.
Takeaways and Considerations
To prevent incidents such as in the 391 case occurring again, tenants may protect themselves by ensuring that a prospective landlord makes an explicit representation or covenant in the lease contract stating that they are not a non-resident for the purposes of the ITA. While the court in this case made it clear that the onus is on tenants to confirm the residency status of their respective landlords, contractual representations affirming Canadian residency may fulfill this requirement.
Ultimately, due diligence is of the utmost importance for tenants when investigating the residency of landlords. The TCC indicated that while there is a defence of due diligence that exists enabling tenants to discharge the onus of confirming residency, it was not met in this case. By not making the necessary inquiries, the TCC decided that the appellant was unable to shift the onus of proof to another party.
The decision in 391 has not been cited in any substantial way since its release. Whether or not this strict onus on tenants will stand in the future remains to be seen, but currently, identifying and confirming the residency of one’s landlord is critical in order to abide by the provisions in Part XIII of the ITA.
