2015-0570011E5 Compensation by non-resident-loss of rental income

Principal Issues: What should be the tax treatment of an annual amount paid to a non-resident taxpayer as compensation for the loss of rental income?

Position: The compensation received should generally be given the same treatment as what it is intended to replace.

Reasons: Surrogatum principle

Author: Mathieu, François
Section: 212(1)(d), 216

XXXXXXXXXX                                                                                                             François Mathieu
                                                                                                                                     2015-057001
February 13, 2017

XXXXXXXXXX:

This document is in response to your letter dated January 28, 2015 in which you asked what would be the tax treatment of annual compensation (“Compensation”) received by a non-resident of Canada from a utility company (“Utility”) pursuant to a compensation order (“Order”) granted in respect of land situated in Canada (“Land”) that is currently rented to a Canadian resident. We understand that the Compensation will be paid by the Utility so long as the Order is in effect, and that the Order is intended to compensate for the loss of rental income that resulted from the Utility’s construction of power lines on the Land.

We apologize for the delay in responding to your letter.

Unless otherwise stated, all statutory references are to the provisions of the Income Tax Act (Canada) (the “Act”).

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R7, Advance Income Tax Rulings and Technical Interpretations. 

In general, Canadian courts have relied on the common law surrogatum principle to determine the tax treatment of compensation received by a taxpayer. According to that principle, the tax consequences of compensation received by a taxpayer are determined according to what the amount is intended to replace. The determination of what the compensation is intended to replace is a mixed question of fact and law that requires an assessment of all the relevant circumstances including the form of the compensation received and the terms of the compensation order or settlement. When an amount is paid to a taxpayer in a year to compensate for the loss of rental income, the Canada Revenue Agency would generally consider the compensation to be rental income for that year. Rental income paid by a Canadian resident to a non-resident would generally be subject to a 25% withholding tax by virtue of paragraph 212(1)(d).

However, both the final taxation of such amounts as well as the withholding required by the payer of the amounts can be modified pursuant to certain elections available under section 216. For more information on elections under section 216, consult Guide T4144, Income Tax Guide for Electing Under Section 216 - 2016.

We trust that our comments will be of assistance, and thank you for your enquiry.

Yours truly,

Dave Beaulne, CPA, CA
Section Manager
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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