Owning a rental property in Canada as a non-resident comes with specific tax obligations. Understanding these requirements is crucial to ensure compliance and avoid late filing penalties, interest charges on outstanding balances and or being subject to a fixed tax on your gross rents. This blog will guide you through the key aspects of managing taxes on Canadian rental income for non-residents of Canada.

Registration and Appointment of an Agent in Canada

Generally, as a non-resident of Canada, owing a rental property in Canada, you must register for a non-resident tax account with the Canada Revenue Agency (“CRA”) and appoint an agent in Canada to withhold and remit taxes based on 25% of the gross rental income received monthly.  The due date for remitting these taxes is the 15th day of the month following the month in which the rent was received. The details related to the agent, the owner of the property, the gross rents received, and the taxes withheld are reported on a Statement of Amounts Paid or Credited to Non-Residents of Canada, Form NR4.  Failure to remit the taxes withheld on time can result in penalties and interest charges. If you choose, this initial withholding tax can be your final tax obligation on the rents received.

Filing a Section 216 Canadian Tax Return

If you wish to report rental income and claim deductions for expenses incurred, you may elect under Section 216 (“S216”) of the Canadian Income Tax Act (“CDN ITA”) to file a Canadian tax return and report the rental income, claim a deduction for related expenses, and a credit for taxes withheld and remitted. Any excess taxes withheld and remitted will be refunded when the return is processed and assessed. You do not need to file an Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property, Form NR6, to file an Income Tax Return under S216 of the CDN ITA. The due date for a S216 return for which no NR6 has been filed is within 2 years from the end of the year that the rental income was received. Failure to file a S216 tax return by the due date will result in your rental income being taxed at 25% of gross rents and CRA will issue a non-resident tax assessment to your agent accordingly.                         

Filing Form NR6

To have withholding taxes remitted based on net rental income rather than gross receipts, a non-resident can file Form NR6 with CRA, once approved your agent may begin remitting withholding taxes on a net of expenses basis. Form NR6 must be filed before the start of the calendar year or before the first rental payment of the year. If Form NR6 is not filed on time, the withholding taxes will be based on gross rent, potentially leading to higher upfront tax payments.

Filing a Section 216 Return After Filing Form NR6

If you have filed Form NR6, you are required to file a Section 216 return to report rental income and expenses. The due date for a S216 return for which an NR6 has been filed is June 30th of the year following the year that the rental income was received. Failure to file a S216 tax return by the due date will result in your rental income being taxed at 25% of gross rents and CRA will issue a non-resident tax assessment to your agent accordingly.

Conclusion

Non-residents owning Canadian rental properties must navigate complex tax regulations such as appointing an agent, understanding withholding requirements, and filing the appropriate returns on time. Understanding these obligations can help mitigate penalties, interest charges, taxes, and ensure compliance. Consulting with a tax professional experienced in cross-border tax issues is highly recommended to optimize your tax strategy.

Contact Me, Jay P. Trudell, CPA, CPA (Illinois) for Guidance

For tailored advice and support, reach out to me via email at jptrudell@jptcpa.ca Let me guide you through the intricacies of Canadian non-resident rental property tax compliance, ensuring peace of mind and financial confidence.