The tax treatment of rental income generated by a non-resident is subject to specific rules that differ from those applicable to Canadian residents. To better understand rental income tax for non-residents, here is a detailed overview of the obligations and forms that must be completed.
What is a non-resident?
A non-resident is a physical or legal person who does not have a tax domicile in Canada. This means that the non-resident does not permanently reside in Canada and their primary economic interests are not located in Canadian territory.
Taxation of rental income in Canada
Rental income from real estate located in Canada earned by a non-resident is taxable in Canada. Rental income may come from the leasing of residential or commercial properties. The taxation applies similarly to both types of properties.
Here are the two options for the tax treatment and rental income tax for a non-resident:
1. 25% withholding tax
By default, rental income earned by a non-resident is subject to a 25% withholding tax on the gross rent received. Here are the main characteristics of this option:
- Withholding at source: the tenant or the real estate agent (property manager) must withhold 25% of each rent payment and remit it to the Canada Revenue Agency (CRA), once a month.
- NR4 form: at the end of the year, an NR4 form must be completed and submitted to the CRA to report the gross rental income and the withholding tax.
2. Section 216 election
Non-residents can choose to file a tax return under Section 216 of the Income Tax Act. This option allows non-residents to report net rental income (after deducting eligible expenses) and be taxed on this net income at progressive tax rates. Here are the steps for this option:
- Filing the election: to opt for this method, you must file a non-resident tax return (see below) before June 30 of the following year.
- Deductible expenses: eligible expenses may include mortgage interest, property taxes, management fees, insurance, repairs, and maintenance, etc.
- Tax calculation : the rental income tax for non-residents is calculated on the net income, and progressive tax rates apply. This can often result in a lower tax obligation than the 25% withholding on gross income.
- Refund: if the tax withheld at source exceeds the tax owed on the net income, you may be eligible for a refund.
Filing and administrative obligations
To comply with rental income tax laws, non-residents must fulfill certain administrative obligations:
- NR6 form: before the beginning of the fiscal year, or as soon as the rental begins, an NR6 form may be filed to allow a reduced withholding tax based on the anticipated net rental income. This form must be approved by the CRA.
- T1159 form: as mentioned, the non-resident tax return must be filed before June 30 of the year following the fiscal year in question.
- NR4 form: at the end of the fiscal year, this form must be completed to report the gross rent payments and the withholding tax.
Also note that if you sell your property, you will need to file a non-resident clearance certificate.
What are the consequences of not complying with tax obligations?
Failure to comply with tax obligations in Canada may result in penalties, interest, and additional sanctions. It is essential for non-residents to comply with Canadian tax rules and those of their country of residence.
Get expert advice on reporting your rental income in Canada
Rental income tax for non-residents of Canada requires a good understanding of the available options and reporting obligations. By choosing the most advantageous method, you can minimize your tax burden. To assist you with these steps, professionals specializing in international taxation will provide valuable advice.
To discuss your situation and explore your options, contact one of our tax accountants! We will be able to analyze your situation and propose the best strategies based on your circumstances.
