by Matthew Pollock

by Elias Zafiridis

CRA ArticlesJanuary 16, 20252 comments

Non-Tax Resident of Canada: Understanding Your Tax Obligations

A non-tax resident of Canada is someone who earns income in Canada but does not meet the residency criteria for tax purposes. Understanding your tax obligations as a non-resident is crucial to avoid unexpected tax liabilities, penalties, or compliance issues. Whether you are a Canadian living abroad, a foreign investor, or someone earning Canadian-sourced income, knowing how Canada’s tax laws apply to non-residents will help you manage your financial affairs efficiently.

Who is Considered a Non-Tax Resident of Canada?

The Canada Revenue Agency (CRA) considers an individual to be a non-tax resident if they do not maintain significant residential ties in Canada. Residency for tax purposes is determined based on several factors, including:

• Primary residential ties: Such as owning or renting a home in Canada, having a spouse or dependents living in Canada.
• Secondary residential ties: Such as holding Canadian bank accounts, a driver’s license, health insurance, or membership in Canadian organizations.

If you do not have significant residential ties and spend less than 183 days in Canada in a calendar year, the CRA will typically classify you as a non-tax resident or a deemed non-resident.

Tax Obligations for Non-Tax Residents of Canada

Non-residents are taxed only on their Canadian-sourced income. Unlike tax residents, who must report their worldwide income, non-residents are subject to Canadian taxes only on specific types of earnings.

1. Income Subject to Canadian Tax

If you are a non-tax resident, you must pay taxes on the following types of income earned in Canada:

• Employment income earned in Canada.
• Business income generated from Canadian sources.
• Rental income from properties in Canada.
• Capital gains from the sale of Canadian real estate.
• Pension and retirement income, including the Canada Pension Plan (CPP) and Old Age Security (OAS) payments.
• Dividends and investment income from Canadian corporations.

2. Tax Withholding for Non-Residents

Non-tax residents of Canada are subject to withholding tax, which is deducted at source from certain types of income. The standard withholding tax rate is 25%, but this may be reduced if Canada has a tax treaty with your country of residence.

• Rental income: If you earn rental income from Canadian property, a 25% withholding tax applies unless you file an NR6 form to pay tax on net rental income instead of gross income.
• Pension income: OAS and CPP payments are also subject to withholding tax, which may be reduced under a tax treaty.
• Dividends and interest: Canadian corporations deduct 25% withholding tax on dividends paid to non-residents.

3. Tax Filing Requirements for Non-Residents

Non-residents may need to file a Canadian non-resident tax return if they earn taxable Canadian income. While withholding taxes often fulfill tax obligations, filing a tax return may be necessary to claim refunds, deductions, or treaty benefits.

You may need to file a Section 216 return for rental income or a Section 217 return to be taxed at regular Canadian tax rates instead of the flat 25% withholding tax.

Tax Treaties and Their Impact on Non-Residents

Canada has tax treaties with over 90 countries, reducing the tax burden on non-residents by preventing double taxation. A tax treaty can:

• Lower the withholding tax rate on certain income types (e.g., dividends, pensions).
• Determine which country has taxing rights over specific income.
• Allow tax credits to offset taxes paid in Canada against taxes owed in your home country.

If you are a non-resident, reviewing the tax treaty between Canada and your country of residence is essential to determine your eligibility for reduced tax rates.

Common Tax Mistakes Non-Residents Make

Failing to understand tax obligations can lead to costly mistakes. Some of the most common errors non-tax residents make include:

• Failing to declare Canadian-sourced income: Non-residents must report income from Canadian sources, even if they reside elsewhere.
• Not filing required tax returns: Withholding tax may not fully satisfy your tax obligations, and filing a return may result in refunds or deductions.
• Ignoring tax treaty benefits: Many non-residents pay excessive withholding tax because they are unaware of tax treaty reductions.
• Overlooking tax residency status: Some individuals assume they are non-residents but may still meet the CRA’s tax residency criteria, leading to compliance issues.

Strategies to Minimize Taxes as a Non-Resident

To optimize your tax situation as a non-tax resident of Canada, consider the following strategies:

• Apply for Tax Treaty Benefits: File the appropriate forms to reduce withholding taxes under tax treaties.
• File a Section 216 Return: If you earn rental income, filing a Section 216 return allows taxation on net income rather than gross income.
• Claim Tax Credits: Certain credits, such as the foreign tax credit, can reduce the total tax you owe.
• Consider Structuring Investments: Holding Canadian investments through tax-efficient structures can minimize tax exposure.

How a Tax Lawyer Can Help Non-Tax Residents

Navigating Canada’s tax system as a non-resident can be complex, especially when dealing with withholding taxes, tax treaties, and filing requirements. A tax lawyer can assist with:

• Determining tax residency status and ensuring compliance with CRA regulations.
• Reducing withholding tax obligations through tax treaty applications.
• Filing non-resident tax returns to claim deductions or refunds.
• Advising on real estate sales and capital gains tax for non-residents.
• Defending against CRA audits or reassessments related to non-resident taxation.

Understanding your tax obligations as a non-tax resident of Canada can help you avoid unnecessary taxes and legal issues. If you need assistance with tax compliance, withholding tax reductions, or filing a non-resident tax return, schedule your free consultation with Rosen & Associates Tax Law. Our experienced team can help you navigate Canadian tax laws and ensure you meet all regulatory requirements.

***Disclaimer: 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.