Subsection 216(1) - Alternatives re rents and timber royalties
Cases
Pechet v. The Queen, 2009 DTC 5189, 2009 FCA 341
The non-resident taxpayer received rents from Canada in 1997 to 2001 without withholding of Part XIII tax, and in 2002 filed returns under s. 216(1) in respect of those years in which she showed no Part I tax owing due to the claiming of expenses. The taxpayer was assessed for her joint liability under s. 227(8.1) for interest that had accrued, up to the date she filed her returns, on the Part XIII tax on the rents that the resident Canadian payor thereof had failed to withhold and remit.
Trudel, J.A. rejected the taxpayer's submission that, in light of the "in lieu of" wording of s. 216(1), the filing of the s. 216(1) returns displaced the withholding and remittance obligations of the resident tenant ab initio.
The Queen v. Merali, 88 DTC 6173, [1988] 1 CTC 320 (FCA)
The taxpayer computed his income from a rental property during the 1978-1980 taxation years, while he was a non-resident of Canada, in accordance with s. 216(1). It was held that s. 216(1)(c) did not prohibit him from carrying forward 1978 and 1979 losses on the property to his 1981 taxation year during which he had become a resident of Canada. Desjardins, J. stated: "The legal nature of the losses, as non-capital losses, was the same, before and after 1981. The non-capital losses incurred by the respondent in 1978 and 1979 were not deductible because of the bar pertaining to his election under subsection 216(1), but they still were in the nature of non-capital losses."
Arnos v. The Queen, 81 DTC 5126 (FCTD)
Before going on to find that a non-resident trust (established by a U.S. REIT) was subject to tax with respect to recapture of depreciation realized on the disposition of a Canadian rental property because the non-resident trust had not made the election under section 216, Jerome A.C.J. noted (at p. 5127) the proposition that recapture of capital cost allowance takes its character from the nature of the business income from which the capital cost allowance was deducted.
MNR v. Bessemer Trust Co., 73 DTC 5045, [1973] CTC 12 (FCA)
Income of a non-resident trust from its interest in real property in Canada, in respect of which it previously had made a s. 216 election, included recapture of depreciation on a subsequent disposition of the property.
See Also
Pechet v. The Queen, 2008 DTC 3381, 2008 TCC 208, aff'd 2009 FCA 341
The taxpayer was assessed for interest on withholding tax that a tenant of a rental property in Edmonton, Alberta owned by a partnership of which the taxpayer had a 50% partnership interest had failed to withhold from rents paid to the partnership, notwithstanding that subsequent to the taxation years in question (1997 to 2001) the taxpayer had filed income tax returns under s. 216(1) for those taxation years which showed that no Part I tax was owed by the taxpayer in respect of those years. Campbell J. stated (at para. 27):
"The legislative intent is that the resident/payor must withhold and remit amounts forthwith without taking into account or referencing in any manner the tax position of the recipient non-resident of those amounts. If the resident/payor does not withhold and remit, the non-resident will clearly be jointly and severally liable for interest in those amounts."
Administrative Policy
23 July 1997 T.I. 963894
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.
8 November 1996 Memorandum 963552
"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."
14 July 1994 Memorandum 940737 (C.T.O. "Non-Resident Partner & 216 Election (7558-3)")
Brief discussion of application of s. 216 election where there is a non-resident partner in a partnership receiving rents from a MURB property.
5 January 1993 T.I. 922570 (November 1993 Access Letter, p. 510, ¶C180-154)
Two non-resident individuals are permitted to make the election with respect to rental income allocated to them by a non-resident partnership which, in turn, has a 50% interest in a Canadian partnership that owns an office building generating income from property.
16 July 1991 T.I. (Tax Window, No. 6, p. 14, ¶1350)
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.
9 February 1990 T.I. (July 1990 Access Letter, ¶1341)
The thin capitalization rule in s. 18(4) will have application to a non-resident corporation which makes a s. 216(1) election.
IT-393R "Election re Tax on Rents and Timber Royalties - Non-Residents"
Subsection 216(4) - Optional method of payment
See Also
Stellwaag v. The Queen, 2013 DTC 1106 [at 573], 2013 TCC 111
The taxpayers filed s. 216(4) undertakings in respect of their 2007 taxation year, but did not file returns until 21 July 2013. D'Auray J found that the taxpayers were late for the six-month deadline period, and that the Minister was entitled to refuse to process their returns (although the Minister did have the discretion under s. 220(3) to extend the deadlines). The wording in s. 216(4) does not allow for a "liberal interpretation" of the deadline.
Curragh Inc. v. The Queen, 94 DTC 1894 (TCC)
In response to a submission that s. 216(4) seems to assume that a Canadian agent of a non-resident will receive rents or royalties on behalf of the non-resident free of withholding tax, Mogan TCJ. stated (p. 1898) that:
"... if the Canadian agent is required to pay certain expenses and, his non-resident principal exercises the option in section 216 to pay Part I tax, there is nothing in section 216 which relieves the initial Canadian payor of his obligation to withhold and remit under subsection 215(1). The possibility that the agent may have a cash shortfall in paying expenses is a problem which must be solved with his principal."
Administrative Policy
22 July 2014 T.I. 2014-0520701E5 - Meaning of "any amount" in subsection 216(4)
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.
7 February 2014 Memorandum 2013-0506151I7 - Section 216 returns and interest
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):
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.
27 March 2013 T.I. 2012-0450491E5 - Election under s. 216
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 an agent for them can collect the gross rents from the tenant and "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).
90 C.R. - Q60
The Canadian agent must undertake to file a return and pay the balance of tax should the non-resident fail to do so, but there is no requirement for the agent to hold back additional monies in excess of the undertaking on the NR6 form.
89 C.M.TC - Q.18
non-cash items such as CCA are not eligible deductions.
The reduction in withholding will only take effect from the date the NR6 is received.
87 C.R. - Q.89
Non-cash expenses, such as CCA, are not eligible deductions, whereas normal non-capitalized expenses relating to repairs, property taxes, management fees and interest and service charges respecting the financing of the property, are deductible.
86 C.R. - Q.83
The required deductions and remittances may not necessarily be based on 1/12 of the net rental, but may depend on the amount available to the non-resident on each payment date.
81 C.R. - Q.48
Where the Canadian lessee signs the form NR6 as agent of the non-resident, thereby agreeing to pay any tax liability should the non-resident not fulfill his undertaking, RC will normally not challenge such an arrangement.
T4144 "Income Tax Guide for Electing Under Section 216"
After we approve your Form NR6, your agent can withhold non-resident tax at the rate of 25% on your net rental income (that is the amount of rental income available after the rental expenses have been paid).
Articles
Jack Bernstein, "Nonresident Investment in Canadian Real Estate", Tax Notes International, Vol. 31, No. 3, 21 July 2003, p. 249.
Subsection 216(5) - Disposition by non-resident
Cases
Deitcher v. The Queen, 79 DTC 5415, [1979] CTC 500 (FCTD)
The recapture of depreciation that is included in income under what is now s. 216(5) includes depreciation that was claimed by the non-resident person in years in which he was a resident.