The foreign landlord doesn't pay tax, the CRA goes after the tenant

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It was a Tax Court of Canada case last year that went off the radar of everyone but the legal community, who were surprised by the ramifications for landlords.

The Montreal tenant was audited and ordered to pay the monthly rent withholding tax to the non-resident landlord as required by law. As a result, he was ordered to pay six years' worth of taxes, plus interest and penalties. The Canada Revenue Agency (CRA) was unable to collect against his overseas landlord, so the Canadian tenant was on the hook.

Last year, a tenant sued the Minister of National Revenue, claiming he did not know the landlord was a non-resident. An Italian-based landlord lost a Tax Court appeal because a tenant who owned a unit in a Montreal building was a Canadian resident paying rent to a non-resident landlord and was therefore required to withhold and remit 25 per resident. Cents of rent to CRA. The judge acknowledged the “serious consequences” in his ruling, but still held the “resident payer” or tenant liable.

The problem with the law is that residential rent is treated the same as royalties or similar payments, said Eric Louw, a Montreal tax lawyer who represented the tenant in the case. In other words, residential tenants meet the “sophisticated business” standard, he said.

Ignorance that the lessor is not a resident is not considered a valid reason.

“It's very important,” Mr. Luu said. “But it's very difficult to go after a non-resident, so they put a burden on the tenant. If you take a step back, leave the way the Income Tax Act was drafted and look at its politics, you have to ask yourself who has the leverage in these situations. The lessee clearly has no leverage.

“The Department of Finance can suggest ways to ensure that non-resident landlords pay taxes without burdening tenants,” said Mr Luu.

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As it turns out, non-resident owners have had to pay taxes on their properties that they sell or rent for a long time. However, few landlords and few in the real estate business know that if those taxes aren't paid, the tenant could be on the hook, said longtime realtor Lorne Goldman. Mr. Goldman sells properties to nonresidents and said realtors — and all landlords and all small mom-and-pop apartment owners — should be formally educated about the risks to tenants.

“I'm in the real estate business, and I don't even know about it,” Mr. Goldman said. “I believe that 99.99 per cent of all renters in Canada are not aware of this and it is the CRA's responsibility to inform the renting public that this tax can be withheld.”

In BC, if one in 10 new condominiums is owned by a non-resident, what are the chances that some of the non-resident renters will not remit the withholding tax? he asked.

Chris Oliver, a non-resident landlord who owns three rental units in Vancouver and lives in Hong Kong, said he was unaware of the levy, but his property manager covered it. Licensed property managers are responsible for collecting taxes, taking the burden off the tenant by assuming they are paid through the property manager.

Mr Oliver said: “It seems unfair to require tenants to follow this accounting rule.” “Can you imagine all the stress they're going through having to pay rent and the cost of living going up and then finding out they have a complicated payment rule to manage?

Ron Asher, a longtime lawyer and general counsel for the Society of Notaries Public and a visiting professor at Simon Fraser University, said he was surprised by the Quebec case when he learned about it last year. How many non-resident apartment owners who do not pay taxes?

“How many tens of thousands of cases are not implemented?” The impact on tenants is huge. … I think this story is strange, strange, and it seems like the law.”

He added that it is “very difficult” to determine whether someone is a resident or a non-resident.

“We are not talking about physical residency, but tax residency. They may be in San Diego, but they're really tax residents, so there's that challenge.”

Lawyer Michael Drouillard is the Vice Chair of Landlord BC and a specialist in rental law. Mr. Drouillard said he was already aware of the potential for tenant liability when he was a property manager, but was still surprised to see a tenant charged.

“I'm surprised they did it in the context of a residential rental,” he said.

“I don't think it's very good for the CRA to go after a tenant who has no clue. You will never be told that there is this long-term responsibility and this high level of care (is maintained).

“What can you expect from a tenant in an apartment?” he asked. “They have enough to figure out. They don't need a potentially massive tax liability they don't know about.”

The government considers a person to be a non-resident if they live in Canada for less than 183 days a year or if they do not “ordinarily” live in Canada. Generally, non-residents are taxed on their Canadian income, including rent. On the Government of Canada's website, it states: “To ensure the correct amount is deducted, it is important to tell Canadian payers (such as renters) that you are non-resident for income tax purposes.”

Mariana Makulkina, a tenant who found her apartment through Facebook Marketplace, says that she only found out that the landlord lives abroad when she did her own research. He has a property manager, but without third-party protection, he wouldn't have known to ask the landlord when he signed the lease. Also, what kind of home owner would you like to ask if they pay taxes in Canada?

“It never came to my attention and I can guarantee that no one knows about it,” Ms Makulkina said.

Donald McKenzie, property manager at Bodewell Rental Property Management, says his company routinely makes remittances to non-resident landlords, who make up 10 to 15 percent of its clients. However, he says that occasionally non-residents do not want to pay taxes.

“And then I say, 'I don't want to work with you.' It's simple. But most owners say “check if we're eligible.”

However, Mr. Drouillard wonders why it's unclear up front for tenants who want to find an affordable apartment and may not know the landlord lives outside of Canada.

To protect themselves, tenants can request statutory declarations from their landlords confirming their tax resident status, Mr Drouillard said. But the landlord can move out of the country and their status changes, and the tenant doesn't know.

BC's residential rental agreement forms do not ask landlords to confirm their residency status. But when a homeowner sells a property, they must show tax residency. This is to protect the buyer from liability in the event of unpaid taxes. Tenants should have the same protections.

“In a housing crisis, should they be forced to look into the residency status of renters as well?” said Mr. Drouillard. “I'm not saying it's not the law, and the tenant should be careful about it. The question is, is this the right thing to do as CRA policy?”

The CRA did not respond to requests for comment.