If you are a non-resident of Canada, you may be subject to Canadian income taxes if you receive rent from Canadian real estate. Payments to a non-resident are subject to a 25% withholding tax (to be withheld and remitted by the tenant) unless an arrangement has been made by an agent (a representative of the non-resident) to comply with the tax requirements.
There are three alternatives when dealing with non-resident investment income in a given year.
Alternative 1:
The gross rental revenue is subject to a withholding tax of 25%. The tenant must withhold this tax and remit it to Canada Revenue Agency (CRA) monthly. If the non-resident takes no further action, this will be the final tax. There is no deduction for expenses. An NR4 form (see below) must be filed by the tenant by March 31 of the following year.
Alternative 2:
The non-resident has a second alternative after the end of the taxation year. He/she may elect to file a Section 216 personal tax return (see below) within 2 years after the end of a taxation year. In calculating the taxable income, related expenses can be claimed and the income tax calculated in this manner will be less than the tax originally withheld. The non-resident will receive a refund for the difference.
Alternative 3:
A third alternative is available if prepared and filed before the commencement of a taxation year. If the non-resident has a Canadian “agent” for income tax purposes (the tenant or management company may become the agent), the non-resident and the agent may elect to file an NR6 form before the beginning of the taxation year to reduce the tax withheld and remitted to CRA. An NR4 will be required by March 31 of the following year and a section 216 return by June 30 of the following year.
This third alternative is beneficial as it reduces the risk of overpaying taxes and increased cash flow by being able to claim expenses. This is the preferred alternative.
NR6 Forms
In this form, the non-resident taxpayer and their agent will estimate net income for the year and are only required to withhold 25% of the estimated net income. The remittance of withholding tax is due monthly on the 15th of the following month. The agent must ensure that the non-resident file a Section 216 personal T1 tax return by June 30 of the year following the taxation year. If the T1 is not filed by June 30, a penalty of 25% of gross rental revenue may be assessed against the agent.
NR4 Forms
A form NR4 must be filed by the Canadian tenant (or agent) for each taxation year by March 31 of the following year to report total rental revenue and the amount of taxes withheld.
Section 216 Return
You have to file the section 216 return:
within two years of the end of the tax year; (subsection 216(1)) or
six months from the end of the tax year if you have submitted -- and CRA approved -- Form NR6. (Subsection 216(4))
In determining the net rental income to be reported in Section 216, the expenses relating to the rental property may include the following:
Advertising
Insurance
Interest on mortgages obtained to finance the acquisition of the rental property
Repairs and maintenance
Management and administrative fees and commissions
Accounting fees
Property taxes
Utilities
In the calculation of taxable income, depreciation (referred to as “Capital Cost Allowance” or “CCA”) may also be taken to reduce taxable income. The CCA rate on buildings is 4%. However, an individual who is contemplating moving into the property in the future should normally not take any CCA during the period that he/she is renting it. This is to avoid deemed disposition rules which result from a change in use.
Due date summary
NR6 – before the beginning of the year, basically December 31 before the taxation year
NR4 - March 31 of the following year
S216 - June 30 of the following year
Withholding taxes - monthly on the 15th of the following
Annually, information requests to file Section 216 personal tax return for the year
Rental income statement prepared by the property manager, tenant or agent
Details of interest expense and loan balance (e.g. Bank mortgage statement)
List and details of any additions during the year (e.g. major renovations, new furniture, appliances, etc.)
List and details of expenses paid directly by the owner and not by the property manager, tenant, or agent (e.g. property taxes, accounting fees, etc.)
Property tax notice
The original NR4
If applicable, a copy of the form NR6
Sale of the Property
Clearance certificate
Prior to closing, the non-resident vendor must obtain a clearance certificate for CRA. In issuing the certificate, CRA would want a remittance of 25% of any gain (difference between the original cost and proceeds) on the disposition. To prepare the application you will need to provide the purchase agreements including the lawyer's closing documents as well as the sales agreements. Depending on what part of Canada, CRA is taking three to six months to issue the certificate. To facilitate closing some lawyers are willing to hold the withholding tax in their trust accounts until the certificate is received while others will remit to CRA.
If you do not or cannot obtain the certificate, the lawyer is required to withhold 25% of the gross proceeds and remit to CRA.
CRA may want a 50% withholding if the property is a “depreciable” property, which is a strong argument for NOT claiming CCA on the property.
Section 115 tax return
You would have to file a section 115 tax return to access the refund of any overpayment.
This return must be filed (separately from the 216 return) in order to claim selling costs and other outlays on a disposition of Canadian investment properties. This return is also due by June 30 of the following year.
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