ARCHIVED - Election Re: Tax on Rents and Timber Royalties Non-Residents
DATE: February 21, 1994
SUBJECT: INCOME TAX ACT
Election Re: Tax on Rents and Timber Royalties Non-Residents
REFERENCE: Section 216 (also sections 3, 115, 118 to 118.9 and 219, subsections 2(3), 104(7), 107(2), 120(1), 124(1), 126(1) and 215(3), and paragraphs 13(21)(d.1), 111(1)(a), 111(8)(c), 212(1)(d) and 212(1)(e) of the Income Tax Act and section 400 and subsection 2602(1) of the Income Tax Regulations)
This bulletin replaces and cancels Interpretation Bulletin IT-393R dated August 12, 1983.
Certain rent and timber royalty payments from sources in Canada that are made to a non-resident person are subject to non-resident withholding tax at a rate of 25% (unless reduced by a reciprocal tax treaty) of the gross amount of the payments. However, the non-resident may be able to save tax by subsequently electing to file a Canadian income tax return and instead be taxed on the net income derived from these payments in a manner similar to that in which a resident of Canada would be taxed.
This bulletin discusses the types of income that qualify for the election, the required separate return, the unavailability of certain deductions and of the non-refundable tax credits, and certain provincial income tax implications. Also discussed are the provisions for the recapture of capital cost allowance and the non-deductibility of a loss reported under the election against income for the year reported on any other return or against income of other years. The Canadian resident payer or an agent must still withhold and remit the non-resident tax in the first place on the gross rents or royalties, but the tax return subsequently filed by the non-resident can result in some or all of the tax so remitted being refunded. Also, there is an election available which allows an agent receiving the rents or royalties to withhold and remit tax on the net amount available from those rents or royalties.
DISCUSSION AND INTERPRETATION
1. Non-resident corporations and individuals (including estates and trusts) that receive rent from real property situated in Canada, or that receive a timber royalty on a timber resource property or a timber limit in Canada, are generally subject to Part XIII tax under paragraphs 212(1)(d) and (e), respectively, on the gross amount received. Subject to any relevant tax treaty, the rate of withholding tax is 25%. Alternatively, an election may be made under subsection 216(1) to file an income tax return and pay tax under Part I on that income as though the taxpayer were resident in Canada. This alternative is also available to a non-resident member of a partnership which receives such income.
2. Where the renting of real property by a non-resident is a business carried on in Canada by the taxpayer, the provisions of Part XIII and the alternative treatment under section 216 are not applicable. Income from a business carried on in Canada is taxed pursuant to Part I of the Act and is also subject to the relevant income taxes of any province or territory in which such business is carried on. In this situation, the taxpayer is required to file a return reporting the taxable income earned in Canada as determined under section 115. For more details on this subject, see the current version of IT-420, Non Residents - Income Earned in Canada, and of IT-171, Non-resident Individuals - Computation of Taxable Income Earned in Canada and Non-refundable Tax Credits.
3. A person who elects under subsection 216(1) to report Canadian source real property rent or timber royalty income as though resident in Canada must file the appropriate income tax return within two years (within six months, in the situation described in 9 below) from the end of the taxation year in which the income was received. It is not necessary for the person to have been a non-resident throughout the year. Thus, for example, an individual who immigrated to or emigrated from Canada during the year may elect under subsection 216(1) to report such income received during the part of the year in which he or she was a non-resident. A subsection 216(1) return must include all Canadian source real property rent and timber royalty income that would otherwise be taxable under Part XIII for the taxation year (or part of the year in which the person was a non-resident).
Furthermore, the subsection 216(1) return must be filed
(a) as though the non-resident had no income other than the above- mentioned rent and timber royalty income, and
(b) without affecting the liability of the non-resident person for tax otherwise payable under Part I.
As a result, the subsection 216(1) return is separate from any other return required for the year. For example, a non-resident would report section 115 taxable income earned in Canada from a business or employment in Canada on a Part I return separate from the return for subsection 216(1) income. If the non-resident had a loss from sources described in section 115, that loss could not be applied against income reported on the subsection 216(1) return.
4. Except as noted in 5 below, an election under subsection 216(1) permits a non-resident to claim those Part I deductions available to a resident in computing income under section 3. Thus, the non-resident can deduct those expenses (including capital cost allowance) incurred in earning the subsection 216(1) income, as well as any applicable amounts in subdivision e of Division B. For example, although the income reported on a subsection 216(1) return does not qualify as "earned income" for purposes of claiming a registered retirement savings plan premium, the non-resident might nevertheless, in limited circumstances, be able to claim such a premium on a subsection 216(1) return, such as in a situation where the non-resident was a resident in the immediately preceding year and had "earned income" for that year. A "subdivision e" deduction cannot, of course, be claimed twice (e.g., once on a section 115 return and again on a subsection 216(1) return). By virtue of paragraph 216(1)(c), no deductions are allowable in computing taxable income on a non-resident's subsection 216(1) return. Thus, Division C amounts such as non-capital losses are not deductible. Also, by virtue of paragraph 216(1)(d), the non-refundable tax credits described in sections 118 to 118.9 (such as the basic personal credit or the medical expense credit) are not deductible in computing the tax payable on a subsection 216(1) return.
5. Subsection 216(8) provides that, for greater certainty, no deduction is allowed in computing the income or the tax payable of a person who elects under subsection 216(1) if that deduction is not permitted under Part I for a non-resident. For example, a non-resident would be denied a foreign tax credit under subsection 126(1) and a non-resident trust would be denied a deduction by virtue of subsection 104(7) for distributions to a non-resident beneficiary, since those provisions are specifically dependent upon actual or deemed residency in Canada.
6. A non-resident's rent from real property in Canada can be reported under section 216 only if it is not income from carrying on a business in Canada (see 2 above). As a result, rent that can be reported under section 216 does not represent "income earned in the year in a province" by a non-resident individual or "taxable income earned in the year in a province" by a corporation, since these terms as defined in subsection 2602(1) and section 400 of the Income Tax Regulations, respectively, include only the income from a business. Rent reported under section 216 by an individual is therefore subject to the additional tax under subsection 120(1) and is not subject to tax by any province or territory whose individual income taxes are collected by the Government of Canada. Similarly, rent reported under section 216 by a corporation is not eligible for the deduction from tax provided by subsection 124(1) and is not subject to tax by any province or territory whose corporate income taxes are collected by the Government of Canada. Income reported under section 216 by a corporation is also not subject to "branch tax" under section 219 (the branch tax is discussed in the current version of IT-137, Additional Tax on Certain Corporations Carrying on Business in Canada).
7. Where capital cost allowance has been claimed (or deemed by subsection 107(2) to have been claimed) by a taxpayer on a particular property situated in Canada for purposes of calculating the rent or timber royalty income from that property under section 216, any recapture of that capital cost allowance arising on the disposition of the property (or an interest in the property) in a subsequent taxation year will be taxable under subsection 216(5). Similar to a subsection 216(1) return, a subsection 216(5) return is separate from any other return filed for the year such as a return to report section 115 taxable income earned in Canada. In addition to the capital cost allowance recapture (or the non-resident's share of the recapture), the subsection 216(5) return must also include all Canadian source real property rent and timber royalty income that occurs in the year of the recapture (or in such part of the year in which the taxpayer is a non-resident) and that would otherwise be taxable under Part XIII. The other rules that apply for purposes of filing a return under subsection 216(1), as described above, generally also apply for purposes of filing a return under subsection 216(5). However, a subsection 216(5) return is filed because it is required when that provision applies, rather than because the non-resident elects to do so. Also, the two year filing period mentioned in 3 above does not apply, i.e., a subsection 216(5) return must be filed by the deadline that would apply if the non-resident were a resident.
8. In certain cases, it may be that what is reported on a section 216 return is a loss from rents or from timber royalties. In such a case, the taxpayer may not set off such a loss against income for the same taxation year reported on any other return required under Part I, since to do so would conflict with the rule in 3(b) above. Of course, if a taxpayer has a loss for the year from one section 216 property and income for the same year from another section 216 property, the loss would be set off against the income. For example, if the loss from the one property was $5,000 and the income from the other property $2,000, the net income reported on the section 216 return would be nil. However, a section 216 loss may not be deducted in other years under paragraph 111(1)(a) because, by virtue of paragraph 111(8)(c), such a loss does not qualify as a non-capital loss.
9. Even though the non-resident payee may elect to file a section 216 return (which, as indicated in 3 above, can be done within two years from the end of the year in which the income is received), the Canadian resident payer or an agent, as the case may be, is nevertheless required by section 215 to withhold at the appropriate rate (see 1 above) and remit an amount to the Receiver General in payment of Part XIII tax on the gross amount of the non-resident's real property rents or timber royalties. In most cases, the difference between the Part XIII tax so remitted and the Part I tax liability resulting from the section 216 return will result in a subsequent refund to the non- resident. Where certain conditions are met, an election under subsection 216(4) may be made by an agent or other person acting on behalf of the non-resident who would otherwise be required by subsection 215(3) to remit the Part XIII tax on the gross rents or royalties. This election is available where the non-resident (or each non-resident who is a member of a partnership) has filed with the Minister an undertaking in prescribed form (Form NR6) to file a return of income under Part I for a taxation year as permitted by subsection 216(1), but within six months (rather than the two years described in 3 above) from the end of the relevant taxation year. The subsection 216(4) election allows the agent or other person to withhold and remit at the applicable rate on "any amount available" out of the rents or royalties received for remittance to the non-resident. The expression "any amount available" describes the excess of rents or royalties collected over any disbursements deductible in computing income by virtue of the election under subsection 216(1). Such disbursements would include non-capital outlays relating to repairs and maintenance, property taxes, property management fees and interest and service charges relating to the financing of the property in question. Non-cash items, such as capital cost allowance, are not deductible for this purpose. Further particulars on the subsection 216(4) election may be found in the current version of Information Circular 77-16, Non-Resident Income Tax.
If you have any comments regarding the matters discussed in this bulletin, please send them to:
Director, Technical Publications Division
Legislative and Intergovernmental Affairs Branch
Revenue Canada - Customs, Excise and Taxation
875 Heron Road
Explanation of Changes
for Interpretation Bulletin IT-393R2
Election re Tax on Rents and
Timber Royalties - Non-Residents
The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.
OVERVIEW This bulletin discusses the section 216 election that is available to a non-resident to pay Part I tax on Canadian source rents from real property and timber royalties. We have revised the bulletin primarily as a result of changes to the law under Bill C-139 and to expand the bulletin to include a discussion on the subsection 216(4) election available to an agent receiving section 216 rents or royalties.
The comments in the bulletin are not affected by proposed amendments to the Income Tax Act contained in Bill C-9, which received first reading in the House of Commons on February 4, 1994, or in the draft legislation released on August 30, 1993 (a Bill for this legislation will likely be introduced in the House in the current session of Parliament).
LEGISLATIVE AND OTHER CHANGES
CLARIFICATION CHANGES: Throughout the new bulletin, there are some additions and changes to the text which we have made solely to clarify or elaborate on the information given, without changing the substance of what was said in the old bulletin. Also, the order of some paragraphs has been changed.
Old No. 4: This has been discontinued for the reason stated below under "New No. 5".
New No. 4 (replaces old No. 5: The words in parentheses in the first sentence of old No. 5 are discontinued in new No. 4 for the reason stated below under "New No. 5". The example regarding a deduction for an RRSP premium has been modified to reflect the amendments to the RRSP rules which became law in 1988 by the enactment of Bill C-52. The last sentence of new No. 4 indicates that the non-refundable tax credits cannot be claimed by the non-resident (on a return filed under subsection 216(1)). This restriction is contained in paragraph 216(1)(d), which was added to the law under Bill C-139 (as a result of the introduction of the non-refundable tax credits under the same Bill C-139).
New No. 5: This paragraph describes the "for greater certainty" provision, subsection 216(8), which was added under Bill C-139, preventing a non-resident who files a return under section 216 from claiming any deduction that is not permitted to a non-resident under Part I of the Act. Because of this "for greater certainty" provision, old No. 4 and the words in parentheses in the first sentence of old No. 5 are no longer necessary and have been discontinued in the new bulletin.
Old No. 7: This paragraph is not continued in the new bulletin. As the paragraph indicates, the general averaging provisions were repealed for years subsequent to 1981. Forward averaging is being phased out and cannot be used for income reported after 1987 by virtue of amendments to sections 110.4 and 120.1 under Bill C-139.
New No. 7 (replaces old No. 8: New No. is similar to old No. 8, but has been modified to restrict the discussion on CCA recapture to that reported on a subsection 216(5) return in respect of CCA originally claimed on a section 216 return. (The discussion on recapturing CCA claimed on a section 150 return is outside the scope of this bulletin.) The last sentence of old No. 8 is discontinued in new No. 7 because the current tax treaty between Canada and the United States does not contain a relieving provision like Article XIIIA(2) of the old treaty.
New No. 8 (replaces old No. 9: The last sentence in old No. 9 indicates that a loss reported by a non-resident under section 216 cannot be deducted under paragraph 111(1)(a) in the previous or a subsequent year in which the taxpayer was a resident. In Pandju Merali v. The Queen, 88 DTC 6173, (1988) 1 C.T.C. 320, the Federal Court of Appeal found that there was nothing in the Act to prevent such a loss application in the 1981 taxation year. However, the law was then amended to nullify the application of this decision after the 1982 year: the last sentence of new No. 8 discusses paragraph 111(8)(c) the effect of which, as amended under Bill C-2, is that a loss reported under section 216 cannot qualify as a non-capital loss for the 1983 and subsequent taxation years.
New No. 9: We have added this paragraph to the bulletin to provide additional information to non-residents filing under section 216, regarding:
- the requirement that the Canadian resident payer or agent withhold and remit Part XIII tax on the gross rents or timber royalties; and
- the subsection 216(4) election that permits the agent or other person acting on behalf of the non-resident to withhold and remit on the net amount available out of the rents or royalties.
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