Generally, Canadian tax residents pay tax on worldwide sources of income. By contrast, non-residents of Canada are only liable to pay tax on income or gains from Canadian sources. For example, non-residents pay taxes on Canadian employment income and income from businesses operating in Canada. In addition, a non-resident's income from property such as dividends from securities, interest income, rental property income, and proceeds from a disposition of property in Canada is subject to withholding tax under Part XIII of the Income Tax Act (the "Canadian Tax Act").
The withholding tax under Part XIII of the Act is set at flat rate of 25% of the payment made to a non-resident unless the payment is eligible for a reduced withholding rate pursuant to a tax treaty. If all of the income for a non-resident from Canadian sources is subject to withholding tax, the non-resident is not required to file a tax return.
This article will provide discuss the situations where a non-resident is required to file Non-Resident Canadian Tax Return. In addition, this article will also briefly discuss the situations in which a resident may elect to file a tax return.
When do I have to file a Non-Resident Tax Return?
The general income tax filing rule for taxpayers is found in section 150 of the Act; however, there are exceptions to this general rule under subsection 150(1.1). For example, individuals do not have to file a Canadian tax return unless tax is payable under Part I of the Act for the year or the individual is non-resident throughout the year and the individual has a taxable capital gain or disposes of a taxable Canadian property.
For reference Part I tax includes:
- income from employment in Canada or from a business carried on in Canada;
- employment income from a Canadian resident for employment in another country, if the terms of a tax treaty between Canada and the country of residence make the income exempt from tax in the country of residence;
- certain income from employment outside Canada earned by a resident of Canada when the duties were performed;
- the taxable part of Canadian scholarships, fellowships, bursaries, and research grants;
- taxable capital gains from selling or disposing of taxable Canadian property; and
- income from providing services in Canada other than in the course of regular and continuous employment.
When can I elect to file a Non-Resident Tax Return?
In addition to the scenarios when you are required to file a non-resident tax return, there are also situations in which you can elect to file a T1-NR tax return. Elective returns can be filed under sections 216, 216.1, 217, and 218.3 of the Act. Brief descriptions of the various elections available are included below:
- Section 216: with respect to rental income from real or immovable property or timber royalties on a timber resource property or timber limit in Canada. A section 216 return allows a non-resident to pay tax on net Canadian rental/timber royalty income. Note that "timber resource property" is a technical term defined by the Canadian Income Tax Act. A right to cut and remove timber from a property that does not meet the requirements of a timber resource property is typically a timber limit for the purposes of Canadian Income Tax Law;
- Section 216.1: with respect to non-resident actors (film and video acting services rendered in Canada). Please notes that this election does not apply to persons employed in the entertainment industry;
- Section 217: with respect to various types of Canadian sourced property income; and
- Section 218.3: with respect to losses on your disposition of Canadian mutual fund investments.
What is Taxable Canadian Property?
While a non-resident taxpayer can elect to file tax return under the various elections listed above, a return must be filed if a non-resident disposes of taxable Canadian property. Taxable Canadian property is defined in subsection 248(1) of the Act and the most common example of "Taxable Canadian Property" for non-residents is real or immovable property.
As a result, a non-resident tax return needs to be filed whenever a non-resident disposes of a Canadian real property.
Tax Tips - Non-Resident Tax Returns
Whether or not to file a non-resident tax return can be a complicated determination. There are situations in which a non-resident must file a tax return and there are situations when a non-resident can elect to file a tax return. If you need advice as to whether filing a Canadian tax return may be beneficial to you as a non-resident, contact our top Toronto Tax Lawyers today.