Non residents receiving rental income

Non-residents owning rental properties in Canada

 

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There are two important tax considerations for non-residents (“NR”) who own rental properties in Canada:

1. NR Receiving Rental Income
2. NR Selling a Real Property in Canada

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1.  NR Receiving Rental Income

Your obligations include:

• The tenant or property manager has an obligation to withhold non-resident tax at a rate of 25% on the gross rental income paid to a non-resident;

• The tax should be sent to the Canada Revenue Agency (CRA) on or before the 15th day of the month following the month the rental income is paid;

• The payer would have to prepare a NR4 slip to provide you the gross amount of the rental income and the amount that was remitted to the CRA, annually.​

Example 1​

Part XIII tax on rental property is 25% of the gross rent. If the total rental income received for the years was $36,000, your Part XIII part withheld and remitted should be $9,000.

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Alternatively, to minimize your tax liability, non-residents can consider to:​

• Elect to file under section 216 of the income Tax Act to pay tax on only your net rental income instead of the gross amount;

• File a form NR6 with the CRA, once approved, your agent in Canada can withhold non-resident tax on your net rental income instead of the gross rent;

• Appoint an agent (a resident of Canada who acts on your behalf regarding your Canadian rental income) to perform steps around form NR6 and other related required steps such as preparing and filing NR4 slips and NR4 Summaries.

Example 2​

If your net rental income in the above example, after deducting all the allowable expenses, is $6,000, when that figure is taxed on 25%, your tax bill is $1,500.​​

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THINGS TO DO​

(i) Elect to file a tax return under section 216

In most cases, it's more beneficiary to elect under section 216 of the Income Tax Act to pay tax only on your net rental income instead of on the gross amount.

As illustrated above in the Example (2), if your net rental income, after deducting all the allowable expenses is $6,000, when that figure is taxed on 25%, your tax bill is $1,500. If the non-resident tax withheld by the payer is more than the amount of tax payable calculated on section 216 return, the CRA will refund the excess to you. 

If section 216 return is not filed by the due date, section 216 election becomes invalid. In such a case if payer did not withhold the correct amount, CRA will issue a non-resident tax assessment.

(ii) Withholding on net rental income (Form NR6 filing)​

Q1.  What do I have to do if I want to have tax withheld on net rental income instead of gross rental income?​

Note that the election to file under section 216 itself does not automatically remove the requirement for the Canadian payers to withhold 25% on the gross rental income.​

If you decide to elect under section 216, you may consider another way of having non-resident tax withheld on your rental income, withholding tax on your net rental income instead of the gross amount. To do this, you and your agent have to complete Form NR6 and send it to the CRA for approval.​

Q2.  Is the process complicated? And what do I have to do?

No, it's not that complicated but you do need a bit of professional assistance and an agent (a resident of Canada who acts on your behalf regarding your Canadian rental income). It's important to note the following steps and deadlines:

a) Form NR6 has to be sent on or before January 1, of each year or before the first rental payment is due. Your agent should keep on withholding non-resident tax on the gross rental income until the CRA approves, in writing, your form NR6.​

b) After the CRA has approved your form NR6, your agent can withhold non-resident tax at the rate of 25% on your net rental income instead of the gross income.​

c) If you sent Form NR6 to the CRA and got approved, you must file a section 216 return for that year, even if you do not owe any tax. And If CRA approves your Form NR6 for a year and you do not file your section 216 return by the due date, you will be subject to non-resident tax on your gross rental income, meaning back to 25% on gross rent amount for the entire year.

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2.  NR Selling a Real Estate in Canada

Even though Canada’s real estate market has recently shown sign of slowing, it’s still one of the most preferred investment country, especially in cities like Toronto and Vancouver. Despite the high number of non-resident owners, many professionals who are involved in the real estate industry, including real estate agents and even lawyers, are unaware of the extensive taxation responsibilities of sellers and buyers when a non-resident of Canada is selling Canadian real estate. To avoid nasty surprises such as steep penalties and interest, you must know what is required under provisions of the Canadian Income Tax Act (“ITA”).

When non-residents selling Canadian real estate, they are subject to tax on gains resulting from the sale of a “Taxable Canadian Property” (“TCP”). The NR seller, and the buyer as well, must make sure to follow the tax reporting rules set by CRA. Not doing so could result in penalties.

THE PROCESS:

1. The ITA requires the NR seller to notify CRA of the sale either before they dispose of the property or within 10 days of disposition, and to remit the taxes payable that may result from the sale (generally 25% of the net capital gain).
2. Once the notification and withholding tax is received by CRA, CRA issues a clearance certificate to the NR seller and his/her solicitor. A copy of the certificate will also be sent to the buyer.
3. In the absence of a clearance certificate, the buyer is required to withhold and remit to the CRA 25%, or potentially 50% of the purchase price within 30 days after the end of the month of closing (for example, if the closing occurs in the middle of March, by April 30).
4. If the NR seller obtains a clearance certificate prior to this date, CRA allows the buyer to remit to CRA only 25% of the amount of the capital gain, instead of the purchase price.

Put simply, the NR seller will not receive the full proceeds of the purchase price until a clearance certificate is obtained.

The amount of withholding tax remitted will be credited to the seller’s account. The NR seller must file a tax return for the year the disposition of the property took place to report the net gain and to claim any refund if an overpayment to CRA has been made.