Non-resident Earning Rental Income on Canadian Real Estate
If you are a non-resident who owns and rents out real estate in Canada, there are certain Canadian tax rules that you need to know. Non-residents have an obligation to pay tax on their monthly rental income. The amount of tax you pay depends on your situation.
A non-resident needs to appoint a withholding agent. Withholding agents are responsible for sending 25 percent of the rent paid to the Canada Revenue Agency (CRA) by the 15th of every month following the month of collection. For example, if you have a property management company taking care of your property and acting as your withholding agent, the property manager remits 25 percent tax to the CRA each month and sends you the rest of your payment.
If your agent remits the tax as noted above there are no further tax filing requirements to Canada. However, non-residents could elect to file a Canadian tax return that reports only their Canadian rental income. They would file form T1159 (Income Tax Return for Electing Under Section 216). This may result in you paying less tax because you will pay tax based on net rental income.
Electing to file under Section 216 gives non-residents the opportunity to deduct expenses and capital cost allowance (depreciation) from their rental income, which lowers their tax cost. For example, if a non-resident owns a property where the rent is $2,000 per month, he earns $24,000 in gross rent per year. Based on that figure, he pays $6,000 (25 percent) in taxes and pockets $18,000. However, if the non-resident spends money throughout the year on his property, those expenses can be used to offset his income. For example, if you earn $24,000 in rental income but you spend $6,000 on property management fees, interest, landscaping, or other relevant expenses, you may deduct the $6,000 in expenses from the $24,000 income. That leaves a remainder of $18,000 in net rental income. If that net rental income is taxed at 25 percent, your tax liability is $4,500, a savings of $1,500.
In order to take advantage of a lower withholding tax a taxpayer can file Form NR6. This form must be filed on or before the first day of the tax year or the day in which the first rental payment is due. By filing a NR6 a non-resident is undertaking to file a T1159 income tax return at the end of the year. Once the CRA receives this form, it allows your withholding agent to submit monthly taxes based on your net rent payments, rather than the gross. For example, if expenses takes up $800 of the $2,000 monthly rent payment, the withholding agent applies the 25 percent tax to the net rent of $1,200. At the end of the year the rental income and all the expenses are itemized on the T1159 and the tax liability is calculated. The monthly tax payments are then applied to determine if there is a tax refund or additional taxes owing.
What if as a non-resident, I am planning to sell my rental property? If that is the case there are a number of tax filings that you will need to consider before and after the sale. I will discuss that topic in my next article.