A non-resident lessor of Canadian lands receives annual compensation from a Canadian utility company pursuant to a court order that is intended to compensate for the loss of rental income that resulted from the utility’s construction of power lines on the lands. CRA stated:
According to [the surrogatum] principle, the tax consequences of compensation received by a taxpayer are determined according to what the amount is intended to replace. … When an amount is paid to a taxpayer in a year to compensate for the loss of rental income, [CRA] would generally consider the compensation to be rental income for that year. Rental income paid by a Canadian resident to a non-resident would generally be subject to a 25% withholding tax by virtue of paragraph 212(1)(d).
However, both the final taxation of such amounts as well as the withholding required by the payer of the amounts can be modified pursuant to certain elections available under section 216.