If you are a non-resident with a Canadian rental property here is a guide of your tax filing obligations, important due dates and other issues you should be aware of.
Tax Filing Obligations
- 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.
You could then elect under Section 216 of the Income Tax Act to pay tax on only your net rental income instead of the gross amount. Please note that you only have a two year period to make this election.
Instead of electing under Section 216 you could, prior to the first rental payment for the year, elect to file Form NR6 “Undertaking to File an Income Tax Return by a Non-resident Receiving Rent from Real or Immovable Property”. This form allows your agent to withhold 25% on your net rental income. If you have a property that has little or no net rental income then you will definitely want to consider filing Form NR6 annually. If your NR6 is approved by the CRA then you are required to file a Section 216 income tax return (no longer optional). The non-resident individual has until June 30 of the following year to file the Section 216 income tax return.
Important Due Dates
|Item||Obligation and due date|
|NR6||Submit form prior to first payment of rent for the year|
|NR4||Withhold and remit 25% non-resident tax before the 15th of the following month and file the NR4 by March 31|
|Section 216 Return||Two years to file to pay tax on the net rental basis|
|Section 216 Return if NR6 filled||June 30 of the following year|
Disposition of Canadian Rental Property by a Non-Resident
If you are a non-resident reading this, why should you care? You are currently receiving all of the rental income tax free and most likely not reporting it in Canada or the country that you currently reside in. You should care because if you have been renting out a property as a non-resident for a number of years without completing the above obligations, there could be significant tax consequences when you eventually sell the property.
The purchaser of a property from a non-resident is required to withhold 25% of the purchase price. The withholding amount is 50% if the property was used for rental purposes. These withholdings technically should be remitted to the CRA within 30 days of the sale. Practically speaking this is not possible and normally the funds are held in trust with a lawyer or notary.
To reduce the withholding tax requirement the vendor has an option to file election’s T2062 and T2062A “Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property” to reduce the withholding tax to an amount based on the estimated gain. These two elections must be filed within 10 days of the closing of the sale or penalties can apply.
|John emigrated from Canada in 2000 and became a resident of Hong Kong. He did not sell his house when he left Canada and decided to rent it out. He did not realize that he had any obligation to file a Canadian Tax Return since he became a non-resident of Canada.|
|John had the following income and expenses from the property:|
Gross rental income
Minus allowable expenses
Minus capital cost allowance
Equals net rental income
|With the extremely hot Vancouver real estate market, John would now like to sell his property. John has agreed on a sale price with the purchaser.
Here is the surprise: his lawyer has just told him that he is going to have to withhold 50% of the proceeds until they receive a clearance certificate from the CRA.
John instructs his lawyer to simply send in the request for the clearance certificate with the withholdings. However, as part of the request for clearance John must declare if the property was rented and when the last NR4 was filed. This is where it starts to unravel for John since he has not remitted or filed anything with the Canada Revenue Agency.
At this point his tax obligation is 25% of the gross rents from 2000 onward. This amounts to $9,000 over a 15 year period for a total of $135,000 plus potentially significant penalties and interest!
If John filed everything correctly he would have only paid $56,250. It is potentially a very expensive mistake.
The non-resident would then file a non-resident return prior to April 30 of the following year to determine the actual taxes owing. On this return additional costs can be deducted including real estate commissions and legal fees. Usually the withholding taxes are higher than the actual taxes eventually owed so that the non-resident will typically receive a refund of some of the withholdings.
Please contact us if you find yourself in a situation similar to this one, as there are a number of ways to mitigate the taxes and penalties owing.
The information contained in this article is general information and is not intended to replace professional advice.