Rental property can be a great investment. If you are able to purchase a property and rent it out you could potentially have someone else pay your mortgage on the property. Maybe you want to buy a ski lodge in Whistler; maybe a cabin on the lake is more your speed. Either way, if you are not a resident of Canada and are looking into a vacation property or rental property within Canada you need to be fully aware of the tax implications. It is important for non-resident property owners in Canada to be informed of the tax rules and regulations that will affect them, and ensure that they are in compliance with them in order to avoid penalties, interest, and criminal punishment.
In this article, AG Tax analysts have summarized a few of the tax rulings that a non-resident property owner needs to comply with in Canada. We have also provided links to other similar articles which may be useful for existing non-resident Canadian property owners, and for those looking forward to investing in Canadian property with the possibility of earning rental income.
Taxpayers should be informed that the contents of this article are only a summary and are subject to changes made by the relevant tax authorities. It should not replace professional advice which is based on the taxpayer’s personal tax situation.
Rental Income, Applicable Income Tax Rates, and GST/HST
As per the Canada Revenue Agency (CRA), rental income is income earned from renting property either owned by an individual or having a usage right. The property can be owned fully by an individual or in partnership, and the income can be from renting houses, apartments, rooms, space in an office building, or other real or movable property.
A non-resident taxpayer can choose to pay either 25% tax on the gross rents received, or elect to file a Canadian income tax return and be subject to tax on the net rental income (gross rental income less qualifying deductible expenses). However, be informed that a late or missed filing could lead to the rental income being taxed at 25% of the gross rental income plus interest and penalties. Also, since this tax is not refundable, it is recommended that one seek professional counsel before proceeding with filing the income tax return.
In the case of an election, tax rates may range from 23% to 43% for an individual, and from 29.5% to 35.5% for a corporation (excluding GST/HST, but including local provincial/territorial property tax), depending upon whether any tax treaty exists between Canada and the taxpayer’s home country.
Goods and Service Tax/ Harmonized Service Tax (GST/HST) is not levied on residential rental income. It is, however, levied on the sale and purchase of newly built homes (previously unoccupied) and on commercial rents. Commercial rents would occur if your rental property fell under commercial zoning, such as: shops, hotels, etc. If this were the case, GST could be levied at a rate of 5% to 15% (based on province) on the gross rental income if it is above $30,000 per year and if the taxpayer holds a GST/HST number.
Tax Withholding & Possible Reduction
As a rule, it is mandatory for the tenant or property manager of a Canadian property owned by a non-resident individual/corporate to withhold 25% of the gross rental income and remit it to the CRA by the 15th of the following month, and also provide the owner with an NR4 slip showing the gross rents and the taxes which have been withheld and remitted to the CRA for the year.
However, as mentioned above, the taxpayer has the option to make an election under Income Tax Act (ITA) §216 of the Income Tax Act by filing Form NR6 to file a Canadian income tax return and be subject to taxes on the net rental income. In this case the withholding amount is calculated as 25% of the net rental income (ie. Rents less eligible expenses), and any excess amount of the withholding (i.e. 25% withheld tax less actual tax rate) would be refunded to the taxpayer, unless the taxpayer files his return late, or does not file.
A waiver from withholding may also be obtained by filing an 805 Waiver annually for commercial renting activities.
Required Tax Forms & Slips
Being informed about the necessary forms and slips will help you keep track of the forms that you will need to file as a non-resident owner of Canadian rental property.
- 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 non-resident rental property owner, through their Canadian resident property manager, needs to file this form to elect for filing the year-end annual income tax return under §216, and be subject to ordinary income tax rates. It also provides an estimate of the revenue and associated expenses attributable to the rental property during the year. Form NR6 should be filed at the beginning of each tax year (1st of January), or when the rental payment is due.
- Regulation 805, Waiver Application Form: Under Regulation 805, the 25% withholding tax may not be required if the rental income qualifies as ‘business income’ carried out through a permanent establishment in Canada; often applicable for §115 business/hotel properties. It acts as a “comfort letter” for the property manager, affirming that they are not required to withhold the 25% nor will they be held responsible in case of any change in situation. If eligible the non-resident taxpayer may apply for this waiver by 15th of June each year.
- NR4 Slip, Statement of Amounts Paid or Credited to Non-Residents of Canada: The gross rental income and the 25% withholding tax is noted on this slip by the property manager, and remitted to the CRA along with the withheld tax amount. Copies of the slip are also provided to the non-resident owner, who should maintain it as it will be necessary while filing year-end return if an election has been made, and to claim any refund of the withheld taxes. In the event that the property owner is acting as their own property manager and remitting the withheld amount to the CRA themselves a letter must be sent to the CRA in order to receive an NR4 slip – this can take 90 days.
- T1159, Income Tax Return for Electing Under §216: If CRA approves the filed Form NR6 for a tax year, the non-resident property owner needs to file this return to report the rental income from §216 properties (residential rentals). If there is no election in place the property owner can still file a T1159 return in order to recover some of the taxes withheld during the year.
- 115 Property Income Tax Return: Commercial properties generally fall under §115, and the rental income qualifies as ‘business income’. Therefore, the non-resident taxpayer would need to file a Section 115 Return whether or not waiver has been obtained under Reg.805.
Having said that, one needs to pay strict attention to certain additional clauses for claiming a waiver or reduction in withholding. Additionally, the deadlines need to be kept in mind for all the forms to avoid any tax penalty situation. With a bit of planning, a non-resident taxpayer can easily reduce the tax burden and avoid any tax compliance issue that could arise due to lack of proper tax planning.
AG Tax LLP Can Help
If you wish to discuss further on the above issue, or have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
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