Rental Returns/Part XIII Taxation

Canadian Real Estate Rental Income (Section 216)

Individuals: An individual will be resident in Canada in a particular year if that individual is “ordinarily resident” in Canada in that year. Disputes with the Canada Revenue Agency most often arise in connection with individuals who attempt to cease residency in Canada for tax purposes

  • A number of statutory rules may dictate that an individual be deemed a Canadian resident for tax purposes even if that individual was not “ordinarily resident” in that year.
  • The most significant statutory rule states that an individual “sojourning” in Canada for 183 days or more will be deemed a resident throughout the taxation year. A “sojourn” is generally interpreted as an intended “visit” or “temporary stay”.
  • The Canada Revenue Agency’s main considerations are outlined in Interpretation Bulletin IT-221R3, which should be consulted in planning for potentially contentious situations.
Trusts: There is little Canadian case law dealing with the residency of trusts for tax purposes.
  • Generally, a trust will be considered to be resident when a majority of its trustees reside.
The Canadian Revenue Agency’s main considerations are summarized in Interpretation Bulletin IT-447.
Corporation: Any corporation incorporated in Canada after April 26, 1965 is considered resident.
  • Any corporation incorporated outside of Canada may still be considered resident if its “mind and management” or “central management and control” and located in Canada, usually where the director’s meetings are held.

A non-resident liable for tax under Part I must file the applicable Canadian tax return.

In the case of income that would otherwise be subject to tax under both Part I and Part XIII (e.g. interest income earned in connection with a business carried on in Canada), the income will only be subject to tax under Part XIII unless such income pertains to a business carried on through a permanent establishment in Canada, in which case it will only be taxable under Part I.In certain cases, income taxable under Part I may be offset by losses incurred in other years.

 

Part XIII Taxation:
Income taxable under Part XIII of the Act is subject to a 25% tax rate unless the rate is reduced under the terms of one of Canada’s tax treaties.
  • The gross amount of such income is taxed at the 25% rate-no deductions are allowed.
  • Such tax should be withheld at source-there is no return for the non-resident to file. If an agent receives such income on behalf of a non-resident without tax being withheld, that agent is responsible for withholding and remitting the Canadian tax.

Among the most common types of income which are subject to tax under Part XIII are the following:

  • Interest from Canadian sources
  • Generally, Part XIII tax will only apply to amounts paid or credited to the non-resident by a Canadian resident. However, in certain cases, a non-resident payer is treated as being a Canadian resident for this purpose, particularly if the payment relates to a business carried on in Canada.
  • Payments by Other Non-Residents.
  • Rents or royalties paid by a non-resident to another non-resident may be treated as being paid by a Canadian resident for this purpose.
  • In cases where two rates are shown, the lower rate will only be available with respect to eligible manufacturing and processing profits.

In addition, non-resident corporations may be subject to Ontario tax if they owned real property, timber resource property, or timber limit in Ontario the income from which arose from the sale or rental thereof or is a or is a royalty. This will be the case even if the activities do not constitute a business carried on through a permanent establishment in Ontario.