Update: Draft Legislation on Landlord Tax Liabilities Provides Relief for Residential Tenants

Implications for Corporate and Commercial Tenants Remain

Written By Michelle Yung and Zachary Thacker

Since the publication of our blog, Tenants Beware: The Risks of Landlord Tax Liabilities, draft legislation released by the Department of Finance on August 12, 2024, has proposed a change to the Income Tax Act (Canada) (the Tax Act) that purports to address the issues of tenant withholding tax liability raised in 3792391 Canada Inc. v The King, 2023 TCC 37. Specifically, the draft legislation introduces new subsections 215(1.2) and 215(1.3), which aim to shift the responsibility for withholding tax on rental payments from individual tenants to their non-resident landlords.

The Proposed Changes

The new subsections create an exception for individual tenants who pay rent to non-residents for residential property used as their residence. Under new subsection 215(1.2), these tenants would no longer be required to withhold and remit Part XIII tax. Instead, the responsibility to remit the withholding tax now falls directly on the non-resident landlord (assuming no agent is already doing so on their behalf) as outlined in new subsection 215(1.3).

No Fix for Corporations or Commercial Tenants

While this draft legislation represents a meaningful shift in tax liability for individual residential tenants, it does not purport to alleviate any risks for corporate tenants or those renting commercial properties.

The key points to consider include:

• Inapplicability to Corporations: The exception introduced by subsection 215(1.2) is limited to individual tenants renting residential property. As such, corporations, trusts, or other entities are still required to withhold and remit Part XIII tax when making rental payments to non-resident landlords.
• Commercial Properties Not Covered: The proposed legislative changes are explicitly targeted at residential properties. Rental payments for non-residential properties continue to be subject to withholding tax obligations under Part XIII of the Tax Act, with no shift in responsibility to the landlord.
• Due Diligence Still Required: Performing due diligence remains critical. The proposed amendments do not change the underlying requirement for payors to withhold tax where applicable. Ensuring the correct procedures are followed and that the landlord's residency status is properly verified remains essential to avoid potential significant tax liabilities.

Conclusion

While the draft legislation is a step forward in protecting individual residential tenants from unexpected tax liabilities, it does not offer relief for corporations or those renting commercial properties. Those not affected should continue to navigate the complexities of Part XIII of the Tax Act with care, ensuring they remain compliant with their withholding tax obligations. The draft legislation indicates that new subsections 215(1.2) and (1.3), if implemented as proposed, will be deemed to have come into force on Announcement Date (August 12, 2024).

If you have any questions about how this draft legislation may affect your lease agreements or tax obligations, please do not hesitate to reach out to a member of our Commercial Real Estate or Tax group.

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