27 March 2013 External T.I. 2012-0450491E5 - Election under s. 216

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: (a) Does a Canadian resident payor of rent (the "tenant") have an obligation under the Act to withhold Part XIII tax on the whole of the amount of rent paid to a non-resident or only on a portion thereof? (b) If a partnership, which has both resident and non-resident partners, holds real property in Canada upon which it receives rent, is it necessary that the tenant withhold Part XIII tax on the entire amount of rent paid or on the proportionate share of the interest held by non-residents? (c) Where the non-residents have filed an election under subsection 216(4), is the tenant relieved of the obligation to withhold Part XIII tax? If so, is there any guidance that can be given as to what evidence the tenant may rely upon in order to be satisfied that elections have been accepted by the CRA?

Position: (a) The tenant must withhold Part XIII tax from the entire amount of rent paid. (b) The tenant must withhold Part XIII tax from the entire amount of rent paid and not only from the non-resident's proportionate share. (c) Technically, the tenant is not relieved of the obligation to withhold Part XIII tax on the rent. However, when a subsection 216(4) election is filed, the tenant would only withhold Part XIII tax from the rent in limited situations.

Reasons: (a) Subsection 215(1) requires that the tenant withhold Part XIII tax on the entire amount of the rent paid. (b) Paragraph 212(13.1)(b) deems a partnership to be non-resident if it has one or more non-resident partners. As such, the tenant should withhold Part XIII on the entire amount, notwithstanding that some of the interests may be held by a Canadian resident. (c) Where a non-resident appoints an agent pursuant to subsection 216(4), the agent is required to withhold Part XIII tax on amounts paid to the non-resident. As such, the CRA would not expect a tenant to withhold Part XIII tax, except in limited situations.

XXXXXXXXXX
2012-045049
Katharine Skulski

March 27, 2013

Dear XXXXXXXXXX:

Re: Withholding tax on rental income when election under subsection 216(1) is made

We are replying to your letter of May 15, 2012 inquiring about the liability of a Canadian resident payor (the "tenant") to withhold tax on rental income for a property located in Canada that is owned by a non-resident partnership. We apologize for the delay in responding.

Unless otherwise stated, all statutory references in this letter are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.) (the "Act"), as amended to the date hereof.

You have asked us whether interpretation 9805755 remains accurate, and in particular:

(a) Does a tenant have an obligation under the Act to withhold Part XIII tax on the whole of the amount of rent paid to a non-resident or only on a portion thereof?

(b) If a partnership, which has both resident and non-resident partners, holds real property in Canada upon which it receives rent, is it necessary that the tenant withhold Part XIII tax on the entire amount paid or on the proportionate share of the interest held by non-residents?

(c) Where the non-residents have filed an election pursuant to subsection 216(4), is the tenant relieved of the obligation to withhold Part XIII tax? If so, is there any guidance that can be given as to what evidence the payor may rely upon in order to be satisfied that elections have been accepted by the Canada Revenue Agency ("CRA")?

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings. As noted in paragraph 7 of IC 70-6R5, the CRA will not provide an advance ruling on a completed transaction. Where a situation involves a specific taxpayer and a completed transaction, the request should be addressed to the relevant tax services office. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature and are not binding on the CRA.

To address your first question, subsection 215(1) requires that where a person pays, credits or provides an amount on which an income tax is payable under Part XIII, or is deemed to have done so, the person shall deduct or withhold the appropriate amount of tax, and remit such withholding to the Receiver General on behalf of the non-resident. Such withholding is based on the gross amount of the rent. The person is also required to submit a statement in prescribed form together with the remittance.

In relation to your second question, paragraph 212(13.1)(b) provides that where a Canadian resident person pays an amount to a partnership that has one or more partners who are not resident in Canada, the partnership will be deemed to be a non-resident person for the purposes of Part XIII of the Act. Paragraph 7 of Interpretation Bulletin IT-81R, Partnerships – Income of Non-Resident Partners confirms that where a partnership is deemed pursuant to paragraph 212(13.1)(b) to be a non-resident person, the withholding applies to the full amount of the payment even though some members of the partnership are residents of Canada. The portion of such tax withheld that is attributable to a resident partner of the partnership may be claimed by the resident partner as a credit against the tax otherwise payable under Part I of the Act. As well, each of the non-resident partners may make an election pursuant to subsection 216(4) by filing Form NR6, Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property or Receiving a Timber Royalty. Upon the Form NR6 being approved, the agent shall collect the gross rent from the tenant and remit the necessary amount from the rent on behalf of the non-resident. The non-resident is required to file a return within six months from the end of the taxation year in which rents were received.

Notwithstanding the appointment of the agent, the Act technically does not release the tenant from the requirement to withhold Part XIII tax. However, in our view, the subsection 216(4) election is not intended to impose double withholding. Therefore, the CRA would not expect a tenant to withhold Part XIII tax except in limited situations (e.g., where the tenant is aware or has concerns that the agent may not withhold and remit the required tax).

Please note, as per Guide T4144, Income Tax Guide for Electing Under Section 216, where an election using Form NR6 is approved, the agent may withhold non-resident tax at the rate of 25% on the net rental income (i.e. the amount of rental income available after rental expenses have been paid).

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch