Principal Issues: [TaxInterpretations translation] In the event that the owner of a property does not reside in Canada, does Part XIII tax apply in respect of the amounts actually paid by the manager to the owner (i.e. 50% of the rental income of the building minus commissions to travel agents) or gross rents collected by the manager on behalf of the owner?
Position: Part XIII tax is applicable in respect of gross rental income received by the manager unless an election under subsection 216(4) is made.
Reasons: The Act.
XXXXXXXXXX 2011-041434 Nancy Turgeon, CGA
January 19, 2012
Dear Madam,
Subject: Interpretation of gross rental income for Part XIII tax purposes
This is in response to your letter received at our offices on July 19 in which you asked us for our opinion on the interpretation of rental revenue for Part XIII tax purposes.
You described a situation where a person resident in Canada (the "Manager") has entered into a rental management agreement with the non-resident owner (the "Owner") of an immovable located in Canada. Under that agreement, the Owner retains the services of the Manager for rental management purposes and grants the Manager the authority to rent the property. Under the agreement, the payments to the Owner are set at 50% of the rental income from the building less commissions paid to travel agencies. Every month, the Manager remits to the Owner the payments established under the agreement and you wish to know if Part XIII tax should apply in relation to the sums actually paid by the Manager to the Owner (i.e., 50% of the rental income of the building minus commissions to travel agencies) or to the gross rents received by the Manager on behalf of the Owner (i.e., 100% of the amounts collected from the lessees).
You specified that the income from the rents of the building is property income of the Owner and not business income.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the “Act").
The situation you described in your letter appears to be an actual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, when it comes to determining whether a completed transaction has received adequate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. We are, however, prepared to provide the following general comments, which may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Our Comments
Pursuant to paragraph 212(1)(d), a non-resident person must pay an income tax of 25% on every amount that a person resident in Canada pays or credits to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, rent. Since subsection 214(1) provides that the tax payable under section 212 is payable on the amounts described therein without any deduction from those amounts whatever, it follows that it is the gross amount of the rent payment that is subject to a 25% tax under paragraph 212(1)(d).
Section 215 of the Act provides that a person who pays, credits or provides an amount on which an income tax is payable under Part XIII must deduct the applicable tax and remit it to the Receiver General on behalf of the non-resident person. Where, as in this case, an amount on which an income tax is payable under Part XIII was paid to an agent for or on behalf of the non-resident person who is entitled to payment without the tax having been deducted or withheld, subsection 215(3) provides that it is then the responsibility of the agent to deduct or withhold the Part XIII tax payable in respect of the amount received on behalf of the non-resident. Since the requirements imposed by subsection 214(1) remain applicable in such a case, it follows that the amount from which the agent is required to withhold 25% is the gross amount of the rents collected by the agent for or on behalf of the non-resident. In such a case, the non-resident person and the agent may, however, make the election under subsection 216(4) so that the Part XIII withholding tax applies only to the amount available out of the rent for remittance to the non-resident (i.e. the gross amount of the rent received by the agent less the related expenses). It follows from the foregoing that in the absence of an election under subsection 216(4), the agent of a non-resident person must withhold Part XIII tax on the gross amount of the rent received by the agent on behalf of the non-resident person.
In this situation, the Manager would therefore be required to withhold and remit to the Receiver General for Part XIII tax 25% of gross rental income (i.e. 100% of the amounts collected from lessees), and not 25% of the sums that are actually paid by the Manager to the Owner. In order for only the amounts actually paid to the Owner to be subject to the 25% withholding, the Manager and the Owner must make an election under subsection 216(4).
For more information, we invite you to read CRA’s Interpretation Bulletin IT-393R2 Election Re: Tax on Rents and Timber Royalties Non-Residents.
Best regards,
Guy Goulet, CA, M. Fisc.
Manager
International Operations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch