Non-Resident Withholding Tax on Canadian Rental Income
The Canadian tax system primarily operates to tax Canadian “residents.” The term “resident” has its own legal meaning in the Income Tax Act (the “Act”) under section 250. However, the Act still has mechanisms to tax individuals who are not residents under the Act. For the purposes of the Act, these are “non-residents.” Whether an individual is considered a non-resident for tax purposes is something that is very often litigated about. Generally, an individual is considered a non-resident in various circumstances, including:
- Being a tax resident in another country (ie. routinely, customarily or normally living there);
- Not having significant residential ties in Canada and any of the following apply:
- Living outside of Canada in the tax year; or
- Staying in Canada for less than 183 days in the tax year.
Tax residency rules are complex so please consult with one of our lawyers if you are unsure about your tax residency.
Suppose you own a rental property earning rental income and you are not a Canadian resident for tax purposes. You still have tax obligations to adhere to. What are these obligations and what do they entail? This article focuses on rental income earned by non-resident taxpayers.
Non-Resident Obligations for Reporting Rental Income
Any rental income earned by a non-resident taxpayer must be partially withheld to the government. This amount is paid as a pre-payment of your tax obligation – specifically, 25% of the gross amount. This would be done monthly by the payer (ex. the tenant) or agent (ex. the property manager) and paid on the 15th day of the month following the month the rental income was earned. Practically speaking, it is normally the landlord who sends the 25% to the government for withholding tax. Amounts not withheld and sent to the CRA have interest assessed, and penalties may also be charged. This obligation is to ensure that non-residents are paying taxes on income earned and derived from Canadian sources.
However, non-resident taxpayers can have this tax reduced to 25% of the net amount by making an election under section 216 of the Act. Section 216 of the Act outlines the responsibilities a non-resident taxpayer bears in making the election, and the Canada Revenue Agency (“CRA”) has a plain-language guide in completing those duties.
In order to elect under section 216, a specific tax return must be filed prior to June 30. Your return will then be assessed, and you will receive a refund which is the difference between 25% of the gross amount, and 25% of the net amount.
There is even a way to withhold 25% of the net, rather than 25% of the gross. This is done by completing a Form NR6 (Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property or Receiving a Timber Royalty). The Form NR6 requires CRA approval, and it must be filed prior to December for the next year to take effect. Once CRA approves the form, you may start withholding 25% of the net.
In preparing the NR6 Form, you must have an agent, and that agent must be a resident of Canada who acts on your behalf for your Canadian-source rental income. The agent must agree to file the section 216 tax return on time. If the deadline is missed, the tax goes back to 25% of the gross, and the CRA will go after the agent for that money.
Additionally, the agent must fill out an NR4 slip (Statement of Amounts Paid or Credited to Non-Residents of Canada) and provide you with two copies of it for the previous tax year. A guide to filling the NR4 slips are found here.
It is important to be aware of tax obligations for income being earned in Canada. This is especially important if you are a non-resident for tax purposes. If you are a non-resident earning rental income and have questions regarding a section 216 election, or any other questions, please give us a call today. We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.