canadian Tenants may be Liable to Pay their Landlord’s Income Tax Bills if the landlord lives abroad25/4/2024 4175 Sainte Catherine West in Westmount, Quebec. David lived on the 5th floor. David rents a fifth floor apartment in Westmount, Montreal. He likes it so much he stays there for 20 years. Two years after he leaves, David receives a disconcerting letter from the CRA. It claims he must pay tens of thousands of taxes owed by his landlord. David is incredulous. Clearly a mistake has been made. It shouldn’t take long to fix. But the CRA stands firm. David sues. He loses. David lodges an appeal. That appeal works its way through the legal serpentine and lands in Canada’s Tax Court. The outcome? David loses again, once and for all, and is ordered to pay his landlord’s tax bill of $43,650 + interest + a penalty + court costs. This is a true story. It played out for years and concluded in 2023 in Canada's Tax Court as: David’s landlord Sebastiana lives in Italy. She owns the Montreal apartment as an investment, but is not a Canadian resident. Canada’s Income Tax Act has a provision that imposes a 25% tax on certain income a non-resident receives from a Canadian resident, including rental income. Under this rule, Sebastiana should have paid 25% of her gross rental income to the CRA. But she didn’t. The government knows it’s hard to track down people abroad. To ensure compliance, the Income Tax Act also contains a provision that says this 25% tax can be claimed from the Canadian resident who made the payment, which the CRA did. In plain text, any tenant whose landlord lives abroad could be liable to pay 25% of their gross rent costs to the CRA, even if they have no clue where their landlord actually lives. The burden of knowing the residency background of the landlord is placed on the tenant. The tenant must then ascertain that the landlord will not be paying the 25% withholding tax, and respond by withholding 25% of their monthly rent and remitting this to the CRA. Crazy stuff, but all legally defensible because it’s written in Canada’s tax statutes. The Details of David vs. SebastianaThe apartment was originally owned by Anjar Investments Ltd. Sebastiana was one of three Anjar shareholders, all of whom shared the same last name. It appears this was a family-run holding company. Anjar sold the apartment to Sebastiana in 2006. It appears that Anjar was paying the 25% withholding tax until the 2006 sale, and Sebastiana continued paying it for four years after the transaction (until 2010). Because David began living in the apartment in May 1996, but the CRA only claimed unpaid tax for the years 2011 to 2016. David signed a new three-year lease in May 2010 with Sebastiana as the lessor. Sebastiana countersigned from Italy, but listed a Quebec mailing address on the document. The lease also contained two phone numbers, one in Montreal and the other an international number. Her email address ended in .it (for Italy). David met Sebastiana on three occasions: in 2010 when she delivered the lease, in 2014 or 2015, and once in 2017. David is a small business owner and began paying his rent through his numbered company in 2011, so it’s his company that is officially on the hook for the tax bill. He says he was never told that his landlord lived in Italy. How to win the CaseAs worrying as this case is, David could not win his appeal by claiming it was unfair of the CRA to make him pay his landlord’s debt. Part XIII, section 250 of the Income Tax Act is unequivocal on this. His only chance was proving that Sebastiana was not living in Italy, but actually a Canadian resident.
His evidence was weak, though. All he had was the old Anjar business registration that showed Sebastiana as a shareholder of the family company, a social insurance number, and a TD Bank Trust account where he deposited his rent. The SIN was proof that Sebastiana had at one time lived in Canada, but it did not prove she hadn't left. And so, David lost his appeal. He must pay his landlord’s tax bill. It’s a grossly unfair outcome. How can a tenant be expected to background check their landlord to learn if they are living abroad? And how could they ever know if their foreign-based landlord is paying their Canadian tax bill? You sign a lease, you pay your rent, end of story. But not in Canada.
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