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If you leave Canada and own a rental property, or you are a non-resident and you buy a rental property, there are tax considerations that apply.
Canadian residents are taxable on their worldwide income. Non-residents do not generally file a Canadian tax return, but there are exceptions. A notable one is when a non-resident owns a Canadian rental property.
Rental income paid to non-residents is subject to 25% withholding tax. This tax is most commonly remitted by either a property manager or the tenant to the Canada Revenue Agency (CRA) by the 15th of the month after the rental income is paid.
The CRA uses the term “agent” to describe a property manager or any other person who acts on your behalf for Canadian-source rental income. The agent must be a resident of Canada but does not have to be a professional property manager; it can be a family member, friend, or someone else.
If a non-resident does not arrange for this withholding tax, they are generally subject to arrears interest payable to the CRA and possibly a penalty.
A non-resident landlord has the option to file a Form NR6, Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property or Receiving a Timber Royalty.
This form can be used to estimate the rental income and expenses for the property for the next calendar year. If approved, the CRA may allow a lower withholding tax equal to 25% of the projected net rental income (gross rental income minus expenses).
Approval can take several months, and since the January withholding tax remittance is due February 15, it is advisable to file many months beforehand to be safe.
Your agent should also produce a slip called an NR4, Statement of Amounts Paid or Credited to Non-Residents of Canada. Like other official Canadian tax slips, it reports income and tax. In this case, it is meant for gross rental income and tax withheld and remitted to the CRA.
Deadlines, tax tips and more
An NR4 slip should be filed with an NR4 Summary to the CRA by March 31 each year. You report the NR4 slip on your Canadian income tax return. The income and some or all expenses may also need to be reported on your foreign tax return, depending on whether your country of residence taxes foreign income.
The Canadian tax payable, which can differ from the withholding tax based on your Canadian tax filing, is often eligible to claim as a foreign tax credit on a foreign tax return to avoid double taxation.
Most non-residents who own a rental property will file a Canadian tax return called a section 216 return. When you do so, you are electing under section 216 of the Income Tax Act to pay tax on your net rental income instead of simply conceding the 25% withholding tax.
Because you can deduct rental expenses against your rental income, your net rental income will generally be lower than your gross rental income. There is no provincial income tax on rental income earned by a non-resident, either. As a result, and because of Canada’s marginal tax rates charging lower tax on lower levels of income, most non-residents pay well under 25% tax on their net rental income, let alone their gross rental income.
Filing a section 216 return can therefore result in a tax refund. The deadline is generally June 30 but you have to file by April 30 if you sold a rental property upon which you previously claimed capital cost allowance (CCA), also known as depreciation.
If you owe tax, regardless of the due date, the balance owing is due by April 30.
When you sell a rental property as a non-resident, or any real estate for that matter, the default withholding tax rate is 25%.
The seller can file form T2062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property to claim a reduced withholding tax. A form T2062A may be required if you claimed capital cost allowance on the property in the past.
The CRA generally aims to approve these forms within 30 days, but you cannot file until you have a purchase and sale agreement and an official sale—so you cannot file before selling. If approved, the CRA will allow a 25% withholding tax rate on the capital gain (or 50% on the recaptured CCA). The approved T2062 or T2062A needs to be provided by the seller to their lawyer to have a larger share of the property proceeds released.
The seller must then file a non-resident tax return to report their capital gain and generally receives a refund of some of the withholding tax. If they had rental income and sold a property in the same year, the seller will file two tax returns with the CRA.
Owning a rental property as a non-resident is more complex than as a resident in many ways. The tax considerations can be onerous, and it is important to understand them before leaving Canada or before buying a rental property as a non-resident.
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