When a non-resident of Canada earns income from a rental property or disposes of a real property in Canada, the tenant or purchaser may be required to withhold certain amount of tax which is usually 25% and remit that to the Canada Revenue Agency (CRA). This article will focus on the special taxation rules with respect to rental income and disposition of a real estate property for non-residents.
Taxation of Rental Income
Section 216 Election
When non-residents of Canada receive rental income from a rental or immovable property in Canada, the tenant or property agent must withhold tax which is 25% of the gross rental income paid to the non-resident and remit them to the CRA. A non-resident can then file a s.216 election under the Income Tax Act (the "ITA") to recalculate the withholding tax based on the net rental income (gross rental income minus expenses and cost). The CRA will refund the excess if the amount of tax withheld is more than the recalculated amount of tax payable when the non-resident files s.216 tax return. The deadline for a non-resident to file is within 2 years from the end of the year in which the rental income was paid or credited. To better illustrate the mechanism, let's take a look at the following example:
Jim left Canada and became a resident of New Zealand in 2019. He didn't dispose of his house in Toronto and decided to rent it out. In 2020, his tenant paid a total rent of $10,000 and withheld $2,500 of tax (25% of the gross rental income – 10,000). Jim's total rental expenses and cost for the year of 2020 is $5000:
- Gross rental income 10,000
- Allowable expenses and cost 5,000
- Net rental income 5,000
- Non-resident tax withheld 2,500
- Recalculated tax 1,250
Therefore, Jim has until December 31, 2021 to file his section 216 election and he only needs to pay $1,250 of tax based on his net rental income (25% of $5,000). The CRA will refund Jim $1,250 when he files his s.216 return.
Form NR6 – withhold tax based on net income
Fortunately, there is a better way for non-residents to elect under section 216 so that the a tenant or agent only needs to withhold tax based on the net rental income instead of the gross income. In order to do so, a non-resident and his agent must complete 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.
A non-resident must send Form NR6 on or before either January 1 of each year or the due date for the first rental payment. One thing to keep in mind is that the tenant or agent must continue to withhold tax based on the gross rental income until Form NR6 is approved. Once it's approved, the agent can then withhold non-resident tax of 25% on the net rental income and must remit that on or before the 15th day of the following month regarding each rental payment. The non-resident then must file the s.216 election within 6 months from the end of the year (no later than June 30 of the following year), otherwise the tax withheld will still be based on gross rental income as opposed to net rental income.
Late filing policy
A non-resident may still be able to file a section 216 election if he fails to do so before the deadline. The CRA may grant a one-time retroactive s.216 application which acts as the taxpayer already filed each year's return on time and it can make a huge difference on the overall amount of tax. Although the CRA will not apply penalties, it may still charge arrears interest regarding the net income. However, the CRA will not accept a late-filed s.216 election if:
- It has already advised the non-resident of his responsibility under Part XIII of the Act with respect to rental income or timber royalties earned in Canada, or
- It has already initiated action because of the non-resident's failure to comply with Part XIII, or
- The non-resident has submitted Form NR6 undertaking which was already approved by the CRA.
Taxation on Disposition of Real Property
Non-residents of Canada who sell taxable Canadian real properties must notify the CRA about the proposed or actual disposition before they dispose of the property or within 10 days after the disposition pursuant to section 116 of the ITA. Failure to do so may lead to a penalty of up to $2,500. Notification is generally given by non-residents using Form T2062 – Request by a Non-Resident of Canada for Certificate of Compliance Related to the Disposition of Taxable Canadian Property. The CRA will require a payment of tax that is 25% of the estimated capital gain which is calculated on Form T2062.
The certificate of compliance (the "Certificate") will only be issued if the non-resident vendor already sent the CRA a notice of disposition and made a payment on account of tax or security acceptable to the CRA. The Certificate essentially confirms that sufficient withholding tax has been remitted to the CRA and any remaining amount is eligible to be transferred out of Canada. However, if the Certificate is not issued, the purchaser is required to withhold tax which is 25% of the purchase price and remit that to the CRA on behalf of the non-resident vendor within 30 days from the end of the month in which the property was acquired. Any purchaser who fails to remit the tax payment may be assessed a penalty that is up to 10% of the withholding amount.
Once the CRA finishes processing form T2062 and confirms the amount of tax payable, the appropriate portion of the withholding tax will be applied towards obtaining the certificate and any excessive tax withheld will be refunded to the non-resident vendor.
Although CRA may grant late-filing to certain taxpayers, non-residents are usually in a more favourable position if they file their s.216 election or Form T2062 before the deadline since less withholding tax is required. Missing the deadline would not only result in unnecessary interest or penalties, it may potentially disqualify taxpayers from making the election as well.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.