The world we live in has become more diverse and interconnected. It is common for both humans and capital to travel across borders for a wide variety of reasons. As a result, you may be a non-resident of Canada and own a rental property located in Canada. It is important to understand your tax obligations with respect to this property.
We must first consider how you came into possession of this Canadian property. The rules discussed below are comprehensive if you purchased this property while a non-resident of Canada with the intent to remain a non-resident and earn rental income from the property during the entire period of ownership. However, there are many additional issues to consider in other situations. For example, the property may have previously been a personal-use property, you may have recently emigrated from Canada, or you inherited the property from another person. While outside the scope of this letter, I would be happy to provide additional detailed information on topics such as the determination of residency, what to do when emigrating from Canada, the principal residence exemption, change in use rules and inherited property.
Canadian source rental income paid to non-residents of Canada is subject to withholding tax at a rate of 25% of the gross rental income. This tax should be withheld by the payer, such as the tenant or property manager, and remitted to the Receiver General by the 15th of the month after the income is paid or credited. At the end of the year, the payer will issue a NR4 slip to you which reports the gross rental income and withholding taxes paid. Canada Revenue Agency considers these withholding tax payments to be your final tax obligation and you are not required to file an annual income tax return.
Often the payer does not properly withhold and remit these taxes. You will be liable for interest and penalties on underpayments as a result. You should make the remittances on your own behalf in this situation. After the year-end, you can submit a letter to CRA requesting a NR4 slip to be issued to you. As the withholding tax is based on gross rental income, it is often advisable to elect to file an annual income tax return under section 216 of the Income Tax Act. If you elect under section 216, you will be required to file an annual tax return within two years of the year the rental income was paid or credited. On this return, you can claim rental expenses with respect to the property such as mortgage interest, property taxes, insurance, utilities, repairs and maintenance, advertising, etc. Capital Cost Allowance (CCA), otherwise known as depreciation or amortization, may be claimed as well and is discussed further below. The net rental income will be taxed at marginal tax rates and the withholding taxes previously paid can be applied against taxes owing. You will typically receive a refund of some or all of the withholding taxes paid once the rental expenses are claimed. If you do not already have a Social Insurance Number, you will need to apply for one at the time of your first filing.
The requirement to remit based on gross monthly income is not ideal from a cash flow perspective if you expect a significant portion of the withholding taxes to be refunded at the end of the year. You can elect to have tax withheld on your net rental income if you have a Canadian resident agent working on your behalf. You and your agent must complete Form NR6 and send to CRA for approval. This form should be submitted one or two months prior to January 1st each year to ensure it is processed prior to the first rental payment. If CRA approves the request, you will be required to file an annual tax return within six months of the end of the year that the rental income was paid or credited.
As mentioned above, you can claim CCA as a rental expense. CCA can be claimed at a rate of 4% per year on the undepreciated cost of the building. This can be beneficial during the period of ownership to maximize your cash flow. However, any amounts claimed throughout the period of ownership will be included as taxable income on your section 216 return in the year of sale and subject to tax based on the marginal rates. Accordingly, it may not be advisable to deduct these amounts each year depending on your plans for the property, such as how long you intend to own it, and your estimated marginal tax rate in the year of sale. We should discuss this potential claim on an annual basis to determine the best course of action for you.
CRA has an administrative position to accept late-filed section 216 income tax returns if you have not been compliant with the above rules as you were not aware of your requirements. Interest and penalties may be waived or reduced if your submission is accepted under this policy.
There are additional reporting requirements in the year you dispose of your rental property and withholding taxes will need to be paid. The sale generally must be reported to CRA within ten days of the disposition.
Cross-border income tax issues are rarely simple. We are here to help you remain in compliance with all your obligations.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA