An offer to work on assignment in the U.S. may be good reason to be filled with excitement. Benefits often include a pay raise, new work challenges, exposures and even housing and school benefits for your kids. But as you consider these perks and the U.S. tax implications, do not lose sight of your home rented in Canada and your tax responsibilities there.
Withholding Tax Requirements for Non-Residents of Canada
When non-residents of Canada rent Canadian real estate to a Canadian resident, there is a withholding requirement. The Canadian tenant is generally required to withhold and remit 25% of the gross rental income to the Canada Revenue Agency (CRA). Even if the net rental income is low, or there is a rental loss, the default requirement remains the same. While a refund may be possible after filing an income tax return, there may still be a need to pony up some cash.
How to Reduce Your Withholding Tax Requirement
However, if it isn’t ideal for you to have your withholding based on the gross rental income, you may apply to the CRA to reduce it. To do this, you would submit an NR6 to the CRA for approval, requesting that your withholding be computed based on the net rental income, rather than the gross amount. This may be beneficial for those with significant expenses on the rental property and insufficient cash to withhold based on the gross earnings.
Things to Keep in Mind
If you make this election, there are still obligations you should consider. This includes paperwork, penalties and even potential problems for even the Canadian agent, if the taxpayer does not comply.
Filing Requirements
To reduce your withholding, you will need to keep on top of some paperwork including your need to file, or report the following:
- a Form NR6, to make the Section 216 election to withhold based on the net, rather than gross rental amounts;
- a Section 216 Return on Form T1159, to report the net rental income for the year, if a non-resident elects to be taxed based on net rental income, rather than the gross amount; and
- NR4 returns and slips.
Due Dates
| ITEM | WHEN DUE |
| NR6 | Annually before the start of the year, or the date on which the first rental payment is due |
| Withholding from rental income | Within 15 days after the month the rent is due |
| Section 216 return | Within two years of the tax year end to which the rental income relates
If Form NR6 is filed to reduce your withholding, the Section 216 return must be filed within six months of the end of the taxation year |
| NR4 returns and slips | Prior to March 31 of the year following the year the rental income is received |
Withholding Requirement
Your withholding should continue to be based on 25% of the gross rental amount withheld, until the CRA approves it.
Need for a Canadian Agent
If the Form NR6 is filed, the non-resident must appoint a Canadian agent that steps in on their behalf to collect and remit amounts to the CRA.
Potential Consequences for Failure to Comply
It is important to comply with the CRA requirements. A late Section 216 return may mean the Section 216 election is not permitted and the non-resident withholding rates continue to apply. Further, the NR6 may be disregarded and late penalties and interest applied if the 25% of the gross rental income is not properly withheld.
So, before you sail into the sunset, consider your obligations and what may work best for you.
Got US tax and Canadian tax compliance issues? Contact Cross-Border Financial Professional Corporation – When Perspectives Matter!
Karlene J. Mulraine, EA, CPA, CA, CPA (NH) is the President of Cross-Border Financial Professional Corporation. Follow us on Linkedin and Twitter, or hang out on Facebook.
The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.