Tenants need to go into rental agreements with their eyes wide open, particularly in urban centres where there is a high proportion of investor-owned condos for rent, such as Vancouver and Toronto.
Investor-owned homes provide a large share of secondary rental options to the overall rental market. In Vancouver, 42% of condos are investor owned and 13% of the city’s newer condos (built since 2016) are owned by non-residents, according to new analysis by planner and Simon Fraser University associate professor of urban studies, Andy Yan. In Toronto, 39% of condos are owned as investments.
Those statistics mean extra work and due diligence for tenants who may or may not have a non-resident landlord, and who don’t have a property manager or agent representing them. There was the recent case of Montreal tenant David Siscoe, who had lived in his Westmount unit for 24 years before discovering, after a tax audit, that his landlady was a non-resident. Siscoe said he did not know his landlady’s residency status. He found out the hard way that not only was she living in Italy, but when leasing from a non-resident, the law states the tenant must withhold 25% of the gross rent each month and file an NR4 form to the Canada Revenue Agency.
Because he didn’t know, and hadn’t been remitting, he was assessed as owing six years’ worth of withholding taxes, compounded interest, and penalties – tens of thousands of dollars, never mind the massive accounting and legal fees he spent fighting it.
The law is clear about the obligations of all parties involved in a rental owned by someone living outside the country. If the landlord receives rental income from “real or immovable property in Canada,” the payer (the tenant) or the agent (the property manager) must withhold non-resident tax of 25% on the gross rental income paid to the non-resident landlord. Tenants with licensed property managers are generally safe because the property manager is responsible for remitting.
But if it’s the tenant who is on the hook, then they must remit the withholding tax before the 15th day of the month and provide the landlord with two copies of an NR4 slip, a form for statements of amounts paid or credited to non-residents of Canada, which shows the gross amount of rental income paid to the landlord throughout the year, and the amount withheld. The tenant must also send the CRA an NR4 information return and consult with Guide T4061, NR4, which outlines how to withhold, remit and report. Typically, the money is withheld each month and the forms filed.
If the tenant doesn’t withhold and remit the tax, the CRA charges compounded daily interest and could charge penalties.
For Siscoe, it’s added up to around $43,000 in Montreal, and the interest continues to mount until he pays it off.
“One thing that complicates it too, is the question of whether someone's a resident or non-resident for tax purposes,” says lawyer Robert Patterson, who is a legal advocate with the Tenant Resource and Advisory Centre (TRAC), a non-profit organization that helps tenants with residential tenancy matters in Metro Vancouver.
“It is not a simple or straightforward question,” he says. “Even if you know where they live or the address they give you, I mean, the only person who knows for sure is a tax judge if it goes to court.”
Determining one’s tax residency takes some sleuthing because a non-resident can hold a Canadian passport and live in Canada part of the time. They may or may not have a Canadian bank account and social insurance number. They’re deemed a non-resident if they spend 183 days elsewhere, and if the bulk of their dealings are in another country, where they have a permanent address and possibly a foreign phone number.
The biggest concern for Mr. Patterson is the provincial residential tenancy act that allows landlords to evict tenants for non-payment of rent. If a tenant weren’t sure of their landlord’s tax residency and decided to withhold the 25%, the landlord could potentially serve them with an eviction notice.
“They're not allowed to look at the context of why the rent wasn't paid. The question is simply, ‘did the landlord get their money?’ And if the answer is they were they entitled to it and they didn't get it, you're evicted. And in BC, the standard practice at the [Residential Tenancy Branch] and what looks like over 90% of cases, based on what other advocates have researched, is that you get kicked out with two days’ notice. You get two days to move.
“I think that that is like the crux of this – the unfairness in that process super charges the risk when it comes to figuring out what your tax obligations here are as a tenant. Because if you're wrong and you don't pay your landlord, you're tying yourself to the railroad tracks and praying that the train stops.”
There is a provision in the Income Tax Act that gives immunity from litigation if the tenant makes payments to the CRA to comply with the Act, says real estate lawyer Ron Usher, who is general counsel for Societies of Notaries Public of BC.
Patterson believes it could be a good argument if the tenant fights the eviction before the residential tenancy branch at a hearing. However, it’s also possibly a dead end for the tenant.
“There is no guarantee that an Arbitrator would give any of these arguments the time of day – their knowledge and expertise is generally limited to the Residential Tenancy Act, and it is not clear that they have the legal authority to even consider or apply the ITA. Ultimately, we have not seen any of these cases proceed at the RTB, so it is entirely uncertain how an Arbitrator would deal with it given the lack of clear policy direction,” he says.
A better option, says Patterson, is a policy amendment or clarification to the Residential Tenancy Act that remitting tax to the CRA as required by law constitutes payment, “as a bare minimum,” he says.
“Without some actual policy or legislative change, there is no clear way for tenants to get out of this double bind.”
