4 June 2024 STEP Roundtable Q. 13, 2024-1007851C6 - DRT and Section 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 deemed resident trust owns a Canadian rental property. Is such a trust resident for purposes of determining rental income? Is such a trust resident for purposes of non-resident withholding tax on rent paid to the trust?

Position: General comments provided.

Reasons: See below.

2024 STEP CRA Roundtable – June 4, 2024

QUESTION 13. Deemed Resident Trust and Section 216

A non-resident trust deemed to be resident in Canada pursuant to section 94 of the Income Tax Act (footnote 1) (“deemed resident trust”) owns a Canadian rental property. Is such a trust resident in Canada for purposes of determining rental income? Is such a trust resident in Canada for purposes of non-resident withholding tax on rent paid to the trust?

CRA Response

When subsection 94(3) applies to a non-resident trust in a particular taxation year, the trust is deemed to be resident in Canada for the purposes outlined in paragraph 94(3)(a) throughout that year. Of note are subparagraph 94(3)(a)(i) which deems the trust to be resident in Canada for the purposes of section 2, subparagraph 94(3)(a)(ii) which deems the trust to be resident in Canada for the purposes of computing the trust’s income for the particular taxation year, and subparagraph 94(3)(a)(viii) which deems the trust to be resident in Canada for the purposes of determining the liability of the trust for tax under Part I, and under Part XIII on amounts paid or credited to the trust.

As such, a deemed resident trust is generally required to compute its income and losses for the year according to the rules that are applicable to Canadian residents and is liable for Canadian tax under Part I. Therefore, the rental income earned on real or immovable property in Canada would be included in the computation of a deemed resident trust’s income under Part I. Note that subsection 104(7.01) restricts the amount that a deemed resident trust can deduct under subsection 104(6) in computing its income in the event that the trust has Canadian-source income, such as income from real or immovable properties in Canada, and makes distributions to beneficiaries not resident in Canada.

As previously mentioned, a deemed resident trust is not subject to Part XIII tax on amounts paid or credited to it, pursuant to subparagraph 94(3)(a)(viii). However, paragraph 94(4)(c) provides that a deemed resident trust is not considered to be resident in Canada for the purposes of determining the liability of a person (other than the trust) to withhold and remit under section 215.

Accordingly, there will be a requirement pursuant to section 215 to withhold and remit Part XIII tax on the rent paid or credited or deemed to be paid or credited to the deemed resident trust. However, to the extent the amount on which the Part XIII tax is paid is included in the deemed resident trust’s income, paragraph 94(3)(g) deems the withholding amount to have been paid on account of the trust’s tax under Part I for the particular taxation year.

Note that subsection 216(4.1) may provide relief in respect of the withholding tax required to be remitted on rent on real or immovable property or on a timber royalty in respect of a deemed resident trust, wherein the person who is otherwise required by subsection 215(3) to remit the Part XIII tax in the year elects not to remit under that subsection, provided certain conditions are met.

Katie Robinson
2024-100785

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Income Tax Act (Canada).