Non-residents of Canada Owning Canadian Real Property
This article summarizes the compliance requirements and beneficial forms to be filed for non-residents of Canada who own Canadian real property. The Canada Revenue Agency (CRA) requires non-residents of Canada who own Canadian real property to comply with a number of additional regulations than that of a Canadian resident. The reporting requirements for a non-resident of Canada can be very onerous and we are here to assist you through the process from start to finish. Please see the requirements below at each major milestone of owning Canadian real property as a non-resident of Canada.
Purchase of Canadian Real Property
Beginning on April 21, 2017, the Ontario government implemented the Non-Resident Speculation Tax (NRST) which is a 15% tax on the purchase price of real property located in the Greater Golden Horseshoe Region of Ontario by individuals who are neither citizens nor permanent residents of Canada. The list of geographical areas which are subject to the NRST can be found at the following website. Your purchase of Canadian real property may be subject to NRST if certain criteria are met.
Your purchase of Canadian real property may be subject to Goods and Services Tax or Harmonized Sales Tax (GST/HST) if certain conditions apply. GST/HST is a sales tax (13% in Ontario) that may apply to the sale price of Canadian real property if you are purchasing real property from an entity who is in the business of building or restoring real property such as a residential home builder. The GST/HST is most commonly applied to real property that has never been occupied (i.e. new building construction).
The Canadian income tax on rental income is calculated as 25% of the gross rental revenue and is required to be withheld by a Canadian Agent of the non-resident. However, the CRA will allow the non-resident to pay tax on the net rental income if they file a tax return within the prescribed time. As we find most clients benefit from claiming deductions, the rest of this article will outline their approach and procedures.
As noted above, there is a 25% withholding tax that is required to be submitted to CRA when receiving rental revenue as a non-resident of Canada. A Canadian Agent must be designated by the non-resident and the Canadian Agent’s responsibility is to administer the remittance of the appropriate withholding tax to CRA. The Canadian Agent is often a Canadian friend or family member of the non-resident, a long-term tenant of the non-resident or someone who is considered to work in a professional capacity such as a lawyer or accountant.
Form NR6 – Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property is available to be filed prior to receiving your first rental payment for a particular tax year. The completion of this form will allow your Canadian Agent to remit a reduced amount of withholding tax to CRA which is calculated as 25% of your expected net rental income (expected revenue minus expected expenses) as opposed to the standard requirement of 25% of the actual gross rental revenue (actual rent payments received). As noted below, the filing of this form for a particular taxation year tightens the filing deadline for the Canadian personal income tax return to six months after the end of the year as opposed to the standard two year filing deadline.
Before March 31 of the following year, form NR4 – Amounts paid to Non-Residents must be filed with CRA by the Canadian Agent. This form reports the amount of gross rental revenue received by the non-resident and the amount of taxes that were withheld (and subsequently sent to CRA) from the non-resident for the preceding tax year. The non-resident, along with their accountant, will then use this form to assist them with completing their Canadian personal income tax return for that year.
To be taxed on the net rental income, you will be responsible for filing a Canadian personal income tax return for each year in which you receive rental revenue from the Canadian real property. This tax return is due no later than two years after the end of the year in which you receive the rental revenue. If form NR6 (discussed above) is filed for a particular tax year, then the deadline to file is only six months after the end of the year in which you receive the rental revenue. Form T1261 – Application for a CRA Individual Tax Number (ITN) for Non-Residents may be applicable to you if you do not have a valid Social Insurance Number on file with CRA. Form T1261 is required to be completed along with your first Canadian personal income tax return. You will be assigned a Canadian ITN upon CRA’s assessment of this form that will be used to identify you with CRA going forward.
This return, filed under Section 216 of the Income Tax Act, will not report any other income sources, as it is limited to the reporting of the rental property operations such as rental revenue received, rental expenses incurred, (examples include, but are not limited to, insurance, utilities, property taxes, repairs, maintenance, mortgage interest, and property management fees) and tax withheld on rental revenue. There may be a refund or balance owing from this tax return depending on the calculated amount of tax and the withholding tax already remitted to CRA.
You may also be required to register for a GST/HST account if your total gross rental revenue over four consecutive calendar quarters totals more than $30,000 and this revenue was derived from rental periods of less than one month each (i.e. short-term rentals). You must then charge GST/HST (13% in Ontario) on your rental revenue once you are registered for GST/HST. You are also permitted to claim Input Tax Credits (ITCs) for GST/HST that you pay on your expenses that you incur in the course of your rental operations. These ITCs will lower the GST/HST payable to CRA upon the filing of your GST/HST return. You are required to file a GST/HST return at least once annually depending on your annual revenues and desired filing frequency.
Sale of Canadian Real Property
As a non-resident of Canada, the sale of your Canadian real property will be subject to non-resident withholding tax of 25% of the sale price. These funds will be held by the purchaser’s lawyer in trust for CRA until the lawyer receives further instruction from CRA. Form T2062 – Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property should be filed which allows a reduction of the non-resident withholding tax upon the eventual sale of the real property. This form can be completed as early as the date in which the Agreement of Purchase and Sale is signed by both the buyer and seller but must be filed with CRA no later than ten days after the date of closing to avoid penalties. The completion of this form allows CRA to accept non-resident withholding tax in the amount of 25% of the capital gain (sale proceeds less original purchase price of the property and capital outlays incurred during ownership) as opposed to the standard withholding calculation of 25% of the sale proceeds. CRA will notify the lawyer holding the funds in trust once form T2062 has been approved by CRA. At this point, the lawyer would remit the required withholding tax to CRA and any remaining funds will be returned to the non-resident once all other required expenditures are distributed (such as legal fees). CRA will then issue a final Certificate of Compliance to the non-resident which they, along with their accountant, will use to assist them in filing an additional Canadian personal income tax return which will report the disposition of the Canadian real property. Typically, a further refund of non-resident withholding tax will result from the filing of this additional tax return as selling costs (i.e. legal fees and commissions) can be considered to reduce the capital gain.
As shown above, the compliance requirements and administrative burden for non-residents of Canada who own Canadian real property are extensive, however, following the procedures for net rental taxation can be beneficial for non-resident landlords. We are happy to assist you through this process to help avoid any potential interest and penalties assessed by CRA for any non-compliance.