Taxation of non-resident rental income
Over the last number of years, Canada’s housing market has been the subject of much attention both at home and abroad. The market was red hot while housing in many other nations, including the United States, was still feeling the effects of collapse. Historically low interest rates were a mechanism that allowed many to leverage and keep the housing market in Canada a hot commodity. Even after the Ministry of Finance attempted to slow down the market by decreasing maximum amortization to 25 years, housing has for the most part remained stable, especially around the Greater Toronto Area. One of the many catalysts is the role of the international investor. Many non-residents of Canada own property throughout the country due to their income-generating abilities. This article explores the taxation of non-resident rental income, and offers a method of reducing the non-resident’s Canadian tax bill.
For those non-residents having earned rental income from real or immovable property, their tenants must withhold a non-resident tax of 25% on the gross rental income received. Consider a scenario where Mr. Johnny Slick, a resident of the United States, owns a rental property in Toronto. He charges his tenant $1,000 monthly for rental income of $12,000 annually. However, due to his non-residency, his tenant must withhold 25%, or $250, each month as withholding tax. This tax must be remitted to the Canada Revenue Agency (CRA) either on or before the 15th day of the month that follows the month when the rental income is paid to Mr. Slick. If the non-resident tax is not paid, the CRA will charge compound daily interest on the unpaid balance, and may even charge additional penalties.
The tenant must also provide two copies of Form NR4, which shows the gross amount of rental income paid, and the amount of non-resident tax withheld. The CRA must also receive a copy of Form NR4 from the tenant.
How to pay less withholding tax
Virtually every non-resident investor would benefit by paying less withholding tax. One way would be to pay the 25% tax on a smaller balance, such as on the net rental income (after expenses) instead of on gross rental income (before expenses). Thanks to Section 216 of the Income Tax Act, this is possible. Section 216 allows the non-resident to pay the tax on the net amount rather than the gross amount of rental income, resulting in a lower tax bill. The Section 216 return must be filed within two years from the end of the calendar year when the rental income was earned, with any filings not submitted by this timeframe being ruled as invalid. As an example, recall the above scenario with Johnny Slick’s rental property. If he earned his rental income in 2010, he would have until the end of 2012 to file his Section 216 return. Any accepted returns would result in a refund for the difference between the tax paid on the gross amount and the adjusted tax payable on the net amount. If Johnny Slick’s rental expenses are $500 per month, his net rental income drops from $1,000 to $500 monthly, and his tax bill drops from $250 per month (25% of the $1000 gross income) to $125 per month (25% of the $500 net income).
Alternative to filing a Section 216
As an alternative to filing a Section 216 return to obtain a tax refund from the CRA, the tax can be withheld directly on the net income earned every period. Doing so would spare the non-resident from seeking a tax refund at the end of the year, with any surplus tax savings having the potential to compound and earn interest faster. For the tax to be applied to the net income each payment period, the following process must be followed:
- Form NR6 must be completed and approved by the CRA. It must be sent either on or before January of each year, or before the first rental payment is due.
- Until it is approved in writing by the CRA, the tenant must continue to withhold the non-resident tax on the full gross amount of rental income.
- Once approved, tax withheld on the net income amount may begin.
- The non-resident tax must continue to be paid on or before the 15th day in the month that follows the month when the rental income is earned.
- The tenant must still provide two copies of form NR4 to the non-resident along with one copy to the CRA.
- Even if Form NR6 is accepted by the CRA, a Section 216 must still be returned by the due date.
- The due date for 2013 returns is on or before June 30, 2014. Any unpaid balances for 2013 must be remitted either on or before April 30, 2014. Late payments will be charged interest on that balance effective May 1, 2014.
- If a Section 216 return is not filed by the June 30, 2014 due date, and the non-resident’s Form NR6 was approved, the non-resident is then liable to pay back the tax on the gross rental income.
Section 216 and it's relevance to your situation
Section 216 is a powerful tool that can help a non-resident reduce their tax bill and increase after-tax income. The tax accountants and financial advisors at Tax Doctors Canada will discuss Section 216 with you, explain its relevance to your situation, and help you file your Section 216 return.
Tax Doctors Canada offers a stress free Initial No Obligation Phone Consultation with one of our professionally certified tax accountants. We Welcome Your Business!
Tax Doctors Canada, a division of GTA Wealth Management Inc, has 3 office locations (by appointment only) in Toronto, Markham and Mississauga to serve you. You can also have one of our certified tax accountants assist you with your personal tax return requirements remotely from the comfort of your home utilizing Tax Doctors Canada's secure document transfer portal. We accept clients from Canada and worldwide.
