Section 216

Shortly after immigrating to Canada, a non-resident individual, who had been renting out the three identical units in a Canadian triplex and reporting the net rental income (after CCA deductions) based on a s. 216 election, moved into one of the three units in the triplex for use as his principal residence. CRA treated this as a partial change of use (i.e., the triplex was one property, not three), so that recapture of depreciation and taxable capital gain could be realized on a proportionate (1/3) basis pursuant to ss. 13(7)(d)(ii) and 45(1)(c)(i). Thus, the property’s use by him as a s. 216 filer and then by him as a resident was integrated for purposes of applying those rules.

An s. 216 election must be made by filing a special income tax form T1159 within either 6 months or 24 months of the end of the year (6 months if form NR6 is filed to reduce withholding tax remittances). Does CRA have an administrative approach to allow for late filing (for example a voluntary disclosure process) and what are the conditions?

CRA indicated that it has a policy allowing non-residents a one-time opportunity to late -file their s. 216 returns and have them treated as though they were filed on time. A late-filed s. 216 return will not be accepted under this policy where: CRA has already advised the taxpayer of their responsibilities under Part XIII in respect of rental income or timber royalties earned in Canada; CRA has already initiated action because of the failure to comply with Part XIII; or the taxpayer has submitted, and CRA has approved, Form NR6.

Where a taxpayer is not eligible for relief under this policy, it may be possible to get an extension, in respect of a s. 216 return, where the taxpayer can sufficiently demonstrate that circumstances of an extraordinary manner existed. Further information is at Subsection 216(1) Late-Filing Policy.

A personal trust resident in Canada (the “Trust”) has a stand-alone operation of renting out Canadian residential and commercial buildings owned by it. Its services include taking care of electricity, heating and water, and maintenance services. For the commercial buildings, it also offers cleaning and security services. Is the Trust considered to carry on a business where all the property management services are provided by an external manager dealing at arm’s length with it and its beneficiaries?

Regarding the relevance of the external manager, CRA stated that even though in general the Trust and the Manager deal with each other at arm's length, it seems reasonable to consider that the Manager, in providing its management and services, is acting on behalf of the Trust.”

CRA then referred to IT-434R, including the statements in para. 4 that “the renting of real property by an individual … will be regarded as a business operation only when the landlord supplies or makes available to tenants services of one kind or another to such an extent that the rental operation has gone beyond the mere rental of real property,” and that, accordingly, other factors such as “[t]he size or number of properties being rented” and “the extent to which their management or supervision occupies the owner's time” are not “to be taken into account in determining if the operation is a business.” Furthermore, CRA here noted that the “Bulletin list[s] the basic services (e.g. heating, parking, laundry room, etc.) that are generally considered to be an inherent part of the rental activity,” but also referred “for example, to cleaning and protective services in respect of rented accommodation” as being additional services that may indicate that “it is possible that the landlord is carrying on a business rather than simply renting out real estate.”

Accordingly, based on the brief factual description “it would therefore be possible to consider that the Trust is carrying on a business because of the number and nature of the services offered.” CRA also stated:

[T]he fact that the Trust entrusts an external manager with the responsibility of providing some of the services it offers as a landlord will not in itself have any impact on the nature of its income.

A non-resident individual owning a Canadian rental property had filed T1 returns pursuant to the s. 216 rules. On her death, that property was deemed to be transferred to her non-resident estate (the “Estate”) at FMV, which did not distribute the rental income thereon, and the property was then distributed to her two non-resident children (Y and Z) as equal residuary capital beneficiaries, who became equal co-owners. The non-resident executors wish to designate the Estate as a graduated rate estate (“GRE”).

Can the Estate file a T3 return under s. 216; and after such distribution, can Y and Z each file a s. 216 return on 50% of the property’s rental income?

After making various assumptions, including that s. 94 does not apply to the Estate, that the Estate will not use the optional method of payment provided under s. 216(4), and that the executors would hold legal and beneficial ownership of the estate property until its distribution, and after further noting that "[t]here is no provision in the Act prohibiting an estate filing under section 216 from qualifying as a GRE [graduated rate estate]." CRA stated:

A non-resident estate could file its return of income under Part I pursuant to a section 216 election by the filing due date set out under section 216 and make the GRE designation in the return. While the Estate is a GRE, the Estate will be taxed at the graduated rates in respect of the net rental income. ...

… Provided that the section 216 requirements are satisfied, from the time they acquire beneficial ownership of the property, Y and Z could elect to file under Part I pursuant to section 216 in respect of their share of income derived from the rental property. …

Consistently with the surrogatum principle (or the broad meaning of "in lieu of" per Transocean), CRA found that annual compensation paid pursuant to a court order by a Canadian utility to a non-resident lessor, to compensate the lessor for lost rental income resulting from the utility’s construction of power lines on the rented lands, should be treated for Part XIII purposes as rent (subject to 25% withholding). However, CRA indicted that, by the same token, the compensation amounts also would be eligible for the s. 216 election provided that the usual tests were satisfied.

Is a non-resident person that has accrued rental income at the end of a taxation year able to file an s. 216(1) election in that year for that amount or is it required to wait until the subsequent taxation year? CRA responded:

The election…is only available where an amount has been paid during a taxation year to a non-resident as, on account of, in lieu of payment of or in satisfaction of, rent on real property in Canada. …[A] return under that subsection…can only be filed for the year in which the amount is paid. This result is consistent with the fact that the election provides a non-resident with the option of having the payments of gross rental income received in a taxation year upon which Canadian withholding tax has been withheld under paragraph 212(1)(d)...be subject instead to Part I tax on the net rental income received for that year.

After leaving Canada, an individual filed a Part I return under s. 216(1) reporting only rental income. Assessment of that s. 216 return is now statute-barred. However, the TSO has now determined that the individual in fact was always resident in Canada and proposes to assess him for unreported employment income. Does the fact that the Part I assessment resulting from the section 216 election is statute-barred prevent the assessment of the individual on his employment income for the same taxation year? In finding that the normal reassessment period for assessing the employment income had not yet begun to run, the Agency stated:

Since the Act contemplates a return filed under subsection 216(1)...as being separate and distinct from any other return under Part I..., an assessment in respect of a return filed under subsection 216(1)...should be regarded as an assessment separate and distinct from any other assessment under Part I...in respect of income from sources other than those referred to in paragraph 216(1)(b)… .

Accordingly…the normal reassessment period for an assessment in respect of a return filed under subsection 216(1)...should be separate and distinct from the normal reassessment period for any return in respect of other sources of income taxable under Part I… .

Where a non-resident corporation has elected under s. 216(1), the calculation of its "outstanding debts to specified non-residents" and of its retained earnings, contributed surplus and paid-up capital will be made from the perspective of the corporation as a whole rather than taking into account the portion of the above items that relate only to the Canadian rental property.

"The filing of a return of income pursuant to section 216 cannot have any impact on whether or not an individual meets the 'all or substantially all' test in section 118.94. Consequently, the income which has been reported on a return of income pursuant to section 216 is not included in the non-resident's taxable income earned in Canada."

Brief discussion of application of s. 216 election where there is a non-resident partner in a partnership receiving rents from a MURB property.

Two non-resident individuals (A and B) are each a 50% partner of a non-resident general partnership (AB) which, in turn is a 50% partner in a general partnership (ABC) governed by provincial law and holding a Canadian office building generating income from property. A Canadian resident (C) is the other partner of ABC holding a 50% interest. Revenue Canada stated:

Mr. A and B would be permitted to make an election under subsection 216(1) of the Act with respect to the rental income which is allocated to them through the two-tiered partnership... .

Where a non-resident trust which has made the s. 216(1) election receives a lump sum as payment of the entire three-year rent for Canadian premises, the entire amount must be included in its income in the year of receipt with no deduction as a reserve for prepaid rent.

The thin capitalization rule in s. 18(4) will have application to a non-resident corporation which makes a s. 216(1) election.

A Canadian agent remits rent to a non-resident who owns rental property in Canada. They have filed an NR6. Rental property expenses are paid both by the agent and the non-resident. Is withholding calculated based on: the gross rental income less any expenses paid directly by the agent; or the non-resident's net rental income, taking into account rental expenses that have been paid by either the agent or the non-resident? CRA stated:

[T]he phrase "any amount …available out of the rent or royalty received for remittance to the non-resident person" refers to the amount of rent or royalty collected, less any allowable expenses paid by the agent. Such expenses would include items such as repairs and maintenance, property taxes, property management fees, and interest and service charges relating to the financing of the property in question. However, as noted in Guide T4144…once a Form NR6 has been approved, [CRA] will allow the agent to withhold and remit tax based on the amount that is the non-resident's net rental income. Thus…the agent could take into account allowable expenses paid by the non-resident. …[T]he agent will need to ensure that it has received all the necessary information from the non-resident... .

…[T]he agent would remit the tax by the 15th day of the month following the month an amount is paid or credited to the agent or other person on behalf of the person entitled to the payment.

After an agent of a non-resident was assessed for failing to withhold and remit Part XIII tax on rental collections paid to the non-resident as required by s. 215, the non-resident and agent submitted a s. 216(4) undertaking within six months of the year end. The timely-filed return showed nil taxes. The Part XIII tax was then reassessed to remove the initial amount that was not withheld. How much interest should be removed?

In finding that interest on the withholding amount accrued only up to the time at which the s. 216 elective filing was made (but with interest continuing to accrue on any arrears interest), CRA stated (after discussing Pechet, 2008 TCC 208, aff'd 2009 FCA 341):

For purposes of calculating Part XIII interest, the day upon which the subsection 216(4) filing was made is effectively the "the day of payment of the amount to the Receiver General" as per subsection 227(8.3). Such an interpretation is coherent with the purpose of section 215, as it recognizes the obligation to withhold and remit is not extinguished retroactively and thus the accrued interest on the Part XIII tax remains payable.

Where a Canadian-resident tenant pays rent to a partnership having one or more non-resident partners, those non-residents may elect under s. 216(4), so that "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," i.e., "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)." CRA further stated:

Notwithstanding the appointment of the agent, the Act technically does not release the tenant from the requirement to withhold Part XIII tax. However…CRA would not expect a tenant to withhold Part XIII tax except in limited situations (e.g., where the tenant is aware…that the agent may not withhold and remit the required tax).

A Canadian-resident "Manager" agrees to provide rental management services to the non-resident owner (the "Owner") of an immovable located in Canada. Under the terms of the agreement, the payments to the Owner are set at 50% of the rental income from the building less commissions paid to travel agencies. Is Part XIII tax applicable to such sums actually paid by the Manager to the Owner (which are property income rather than business income to it) or to the gross rents received by the Manager on behalf of the Owner (i.e. 100% of the amounts collected from the lessees)?

Where … an amount on which an income tax is payable under Part XIII was paid to an agent for or on behalf of the non-resident person who is entitled to payment without the tax having been deducted or withheld, subsection 215(3) provides that it is then the responsibility of the agent to deduct or withhold the Part XIII tax payable in respect of the amount received on behalf of the non-resident. Since the requirements imposed by subsection 214(1) remain applicable in such a case, it follows that the amount from which the agent is required to withhold 25% is the gross amount of the rents collected by the agent for or on behalf of the non-resident. In such a case, the non-resident person and the agent may, however, make the election under subsection 216(4) so ​​that the Part XIII withholding tax applies only to the amount available out of the rent for remittance to the non-resident (i.e. the gross amount of the rent received by the agent less the related expenses).

A property manager agreed with the owners of condos, including the non-resident owner in question, to rent out the condo on behalf of the owner, and pay the rents collected by it net of expenses to the owner. CRA indicated that, in light of ss. 215(1) and (3) that, absent an election under s. 216(4), the manager was required to withhold and then remit 25% of the gross amount of the rents collected, rather than only on the net amount paid to the non-resident owner. Regarding such election, the Directorate stated:

In order for only the amounts actually paid to the non-resident person to be subject to the 25% withholding, [the property manager] and the non-resident person would have to make an election under subsection 216(4).

… [W]e have assumed that the rental income is property income to the non-resident person rather than business income (in which case the rental income would not be subject to Part XIII tax but rather to Part I tax). … [T]he services provided by [the property manager] o the lessees do not appear to be sufficiently important to characterize the rents as business income (see … IT-434R and … Walsh … 65 DTC 5293 (Ex. Ct.)).