Section 216 Election – Canadian Non-Resident Real Estate Taxation – Toronto Tax Lawyer Analysis
Canada’s Withholding Tax Regime – Non-Resident Taxation
Non tax residents of Canada are taxable in Canada to a tax on income from certain “passive” sources of income, including dividends, royalties, and most importantly rent under Part XIII of the Canadian Income Tax Act. This tax is commonly referred to as withholding tax. The general rate for this tax is 25% of the gross amount of the payments received from the Canadian source. The Canadian resident who pays the rent or other amounts to the non-resident is required to withhold the tax from the payment and remit it to the Canada Revenue Agency. No deductions or credits are permitted and the non-resident is not required to file an income tax return.. If there is an international tax treaty in place between Canada and the country of tax residence of the non-resident, then the rate of withholding tax may be reduced or eliminated on certain categories of sources. Our expert Toronto tax lawyers can help you determine how withholding taxes impact your international tax situation.
Election under Section 216 – Non-Resident Real Estate Taxation
For rental income from real estate and timber properties, non-residents of Canada can elect to be taxed on the net rent they receive instead of the gross amount of the rent they receive. Since there are usually costs associated with earning rental income, this can significantly reduce the amount of tax withheld from the non-resident. Non-residents who choose to make this election are required to file special tax returns annually in order to qualify (form T1-NR). To have the Canadian payor withhold less tax prior to the return being filed, they must also have filed an undertaking to file the return. If the payor withholding the tax from your rents withholds too much tax, the Canada Revenue Agency will refund you the difference when they receive your returns. If you are considering making the election, please consider speaking to one of our top Toronto tax lawyers.
Non-residents who elect under section 216 of the Canadian Income Tax Act are still are not able to claim deductions (other then rental expenses) and credits against their net rents. This prevents the use of loss carry overs if you are losing money on your property in some years.
Late Filings of Section 216 Returns – Non-Resident Real Estate Taxation
Non-residents who wish to elect under section 216 must file their income tax returns by June 30th of the following year. If the non-resident fails to file their return within 2 years of the deadline, they normally lose their opportunity to be taxed on their net rent. However, if the Canada Revenue Agency has not advised the non-resident of their responsibilities under Part XIII of the Canadian Income Tax Act or initiated any action against the non-resident due to their failure to comply with those responsibilities, the non-resident may be able to successfully file late returns and take advantage of the election. Filing late returns is also impossible if the non-resident previously filed an undertaking stating that they would file the returns and then failed to follow through. Our experienced Toronto Tax Lawyers can assist you in determining whether you are able to file late returns to take advantage of the election.
Ordinarily, taxpayers identify a tax compliance problem and have not yet been contacted by the Canada Revenue Agency; they should come forward through the voluntary disclosure program or VDP. When a taxpayer’s voluntary disclosure is accepted by the Canada Revenue Agency, they will receive full penalty relief and partial interest relief and will not be prosecuted for tax evasion. However, the voluntary disclosure program does not deal with late filed section 216 returns. Instead, there is an equivalent tax amnesty through the International Tax Service Office. If you require assistance making submissions to the International Tax Service Office, please consider contacting one of our knowledgeable Toronto tax lawyers.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."