Introduction – Rentals and Dispositions of Real Estate and Canadian taxation
In the previous article found here, we discussed the various tax considerations that apply to non-residents of Canada when acquiring Canadian real estate. This article will focus on taxation with regards to non-residents of Canada renting and selling Canadian real estate. While non-residents who earn Canadian income are typically subject to withholding taxes, special rules apply when it comes to rental income. Additionally, some provinces such as British Columbia have further implemented a vacancy tax in order to encourage property owners to rent out vacant homes.
Taxation of Rental Properties
The primary taxation concern when a non-resident rents out a Canadian property is the withholding tax. The withholding tax for rental income is calculated as 25% of the gross rental income, even if a rental loss is incurred, and is required to be withheld from each payment and would be the taxpayer’s final tax obligation, meaning the taxpayer is not obligated to file a Canadian tax return. For example, if a property is being rented for $1000 per month, $250 would need to be withheld and remitted to the CRA on a monthly basis (specifically, before the 15th day of the month after the rental income was paid) – this withholding does not take into account any expenses or costs and makes this a very unattractive situation. The good news is that non-residents can elect under s.216 of the Income Tax Act to file a Canadian tax return which recalculates the withholding to only 25% on the net rental income, allowing for normal expenses to be deducted. Note that 25% of the gross rental income would still need to be remitted, but the taxpayer would receive a refund upon filing the s.216 tax return. However, a s.216 tax return must be filed within 2 years of the end of the year in which the rental income was paid or credited to you. For example, that means that if you earned rental income in 2021, you have until December 31st 2023 to file a s.216 tax return. That said, it can be possible to make a s.216 election after the normal deadline if:
- The CRA has not already advised you of your responsibilities under Part XIII of the Income Tax Act;
- The CRA has not already initiated action because of your failure to comply with Part XIII ; and
- You have not submitted, and had approved, Form NR6.
Alternatively, a Form NR6 – Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property can be filed. This form must be filed prior to the first rental payment of a particular tax year and will allow the taxpayer to withhold and remit 25% of the expected net rental income. If a Form NR6 is filed, the taxpayer must then file a Canadian tax return within 6 months of the year end and any differences in tax owing between the expected net rental income and actual net rental income must be accounted for at that point. Note that the NR6 is only effective for one year and must be refiled each year.
Non-residents who rent out Canadian real property must also file Form NR4 – Amounts paid to Non-Residents by March 31st of the year following the end of the year in which the rental income was received. I.e. if rental income was earned in 2021, Form NR4 would need to be filed by March 31st, 2022. This form simply reports the gross rental income earned by a non-resident taxpayer and the amount of taxes that were withheld.
If the non-resident taxpayer has $30,000 or more in gross revenue in any four consecutive quarters, the taxpayer will need to register for a GST/HST account and begin collecting and remitting HST to the CRA. However, this does not apply to residential rentals where GST/HST is not applicable. This applies only to commercial rentals or short-term rentals (rental periods of less than one month each). Speak to one of our experienced Toronto tax lawyers and learn more about non-resident taxation in Canada.
Taxation on Disposition of Canadian Real Property
As with rental income, when a non-resident disposes of Canadian real property, the taxpayer must pay a withholding tax of 25% of the sale price of that property. Also like the rental situation, the withholding can be reduced from 25% of the total sale price to 25% of the capital gain realized by the non-resident. However, in order to recoup the difference between these two amounts, the non-resident must file Form T2062 – Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property. Form T2062 must be filed within 10 days of the date of closing of the real estate sale and can be filed as early as the date that the agreement of purchase and sale is signed by the vender and purchaser of the property. While Form T2062 is being processed, the initially withheld funds (25% of the sale price) will be held in trust by the non-resident’s real estate lawyer and once Form T2062 is processed, the real estate lawyer will remit the required tax amount to the CRA and return the remaining amounts to the non-resident taxpayer.
Pro Tax Tip – Pay Attention to Filing Deadlines
While non-residents are not required to file Canadian tax returns and can simply remit the required withholding tax, that typically results in a worse tax result. As there are often significant expenses and costs involved in operating a rental property (agent fees, maintenance and repairs, property tax, mortgage interest, etc.), paying 25% of the gross income can mean that very little, if any, profit is made from a rental property. Similarly, paying 25% of the sale price on the disposition of real property can result in similar unprofitability. As discussed above, the Income Tax Act allows non-resident taxpayers to reduce the withholding taxes on both of these to the net income rather than gross income. However, each of these have their own filing deadlines and missing the deadline can mean that the preferable tax treatment becomes unavailable or can result in penalties. Call our top Toronto tax lawyers and ensure that you are not missing any opportunities to minimize your taxes.
"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."