Principal Issues: Is a rental agency required to withhold and remit tax on rental income from Canadian real estate received on behalf of a non-resident?
Position: Provided general comments on the tax implications to a non-resident earning rental income from Canadian real estate. Also generally discussed the withholding obligations of a non-resident's agent who receives the rental income on behalf of the non-resident.
Reasons: If the rental income is property income, the non-resident's agent is required to withhold and remit tax on the rental income pursuant to subsection 215(3).
XXXXXXXXXX 2009-031131
November 4, 2009
Dear XXXXXXXXXX :
Re: Withholding tax on rental income
We are writing in response to your email of February 23, 2009 in which you requested our comments on whether a rental agency is required to withhold and remit tax on the rental income received on behalf of you and your wife from real property situated in Canada.
In your email, you indicated that you and your wife are residents of XXXXXXXXXX and are owners of a XXXXXXXXXX . You have hired a rental agency to rent out the XXXXXXXXXX . The rental income is deposited in the business bank account in XXXXXXXXXX and used to pay the mortgage on the property and all the expenses associated with the property.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website. We are, however, prepared to provide the following general comments.
You have referred to the rental of the XXXXXXXXXX as a "business" in your email. Based on the limited information provided, it may be that the rental income from the XXXXXXXXXX constitutes income from property. The characterization of the rental income is important since the Canadian tax implications to a non-resident of Canada who receives rent from real property in Canada depends on whether the non-resident is carrying on business in Canada in respect of the property or is simply receiving passive rental income (income from property). Whether the rent is from property or from a business is a question of fact and depends on the number and kinds of services provided to the tenants. In most cases, a landlord would be earning income from property if the arrangement involves the rental of the space and the provision of basic services only. Basic services include heat, light, parking, and laundry facilities. However, if the landlord provides additional services to tenants, such as cleaning, security and meals, the landlord may be carrying on a business. The more services provided, the greater the chance that the rental operation is a business. Further information on the characterization of rent from real property is contained in our Interpretation Bulletin IT-434R, Rental of Real Property by Individual.
Where the rental operation of a non-resident is a business, the non-resident is subject to tax on the net income from the business under Part I of the Income Tax Act (the "Act") at the same rates imposed on residents of Canada. For information on the type of expenses that may be deducted in computing the net income from a rental business, please refer to the CRA Guide T4002, Business and Professional Income.
Where the rental income is income from property, the non-resident will be subject to Part XIII tax under paragraph 212(1)(d) of the Act on the rents received. Subject to any relevant tax treaty, the rate of withholding tax is 25%. Alternatively, the non-resident may make an election under subsection 216(1) of the Act to file an income tax return for a particular year and pay tax under Part I of the Act on the net rental income for that year (at the income tax rates applicable to Canadian residents) and, to the extent that the amount of the withholding tax exceeds the non-resident's income tax liability, the excess will be refunded. Information regarding the section 216 tax return and the deductions that may be available in computing net income for the purpose of that return can be found in Interpretation Bulletin IT-393R2, Election Re: Tax on Rents and Timber Royalties Non-Residents, and the CRA Guide T4036, Rental Income.
With regard to your question on withholding obligations, in a situation where paragraph 212(1)(d) of the Act applies to the rental income, the guests renting the property must, according to subsection 215(1) of the Act, withhold from the rent the amount of the tax payable by the non-resident owner under paragraph 212(1)(d) of the Act and remit that amount to the Receiver General on behalf of the non-resident owner. If the rent is paid to an agent of the non-resident or to another person acting on behalf of the non-resident without the amount of the tax having been withheld by the guests, the agent must withhold the amount of the tax and remit that amount to the Receiver General according to subsection 215(3) of the Act.
Subsection 215(6) of the Act provides that when a person fails to deduct or withhold any amount as required by section 215 of the Act, from an amount paid to a non-resident person, that person becomes liable to pay as tax under Part XIII on behalf of the non-resident person the whole of the amount that should have been deducted or withheld. Any person liable to pay an amount on behalf of a non-resident person in accordance with subsection 215(6) of the Act is entitled to recover from that person the amount so paid.
We trust that these comments are of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA in respect of any particular situation.
Yours truly,
Jenie Leigh
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch