As a non-resident of Canada, understanding the taxation rules for rental income is essential. By default, non-residents are subject to a flat tax on their gross rental income and this amount should be withheld from the tenant or agent and submitted to the CRA. However, it is possible to request a reduction in this withholding by filing form NR6 with the CRA.
The Basics: 25% Tax on Gross Rental income
When leaving Canada, individuals often lease out their properties. However, there are specific taxation rules for rental income earned in Canada by non-residents. By default, non-residents are subject to a 25% tax rate on their gross rental income, although possible reductions may apply. The tenant or agent should withhold the tax at the source and submit it to the CRA.
NR6 Form: A Potential Reduction in Tax Withholding
If the NR6 is filed, individuals must file a Canadian income tax return reporting only the net rental income (referred to as a “Section 216” return) within six months of the end of the year, or by June 30. If an NR6 is not filed, individuals can still elect to file a Section 216 return until December 31 of the second year following the end of the current year.
Departure Year Tax Returns
During a departure year, taxpayers may have to file two tax returns: a part-year tax return and a Section 216 return for the non-resident portion of the year. The Section 216 return only includes net rental income and does not include any other types of income, even if earned from other Canadian sources. Capital gains from the sale of real estate are also excluded from this return. Tax is applied to net rental income at regular graduated rates, which range from approximately 22% to 49%. Personal credits cannot be claimed.
Making the Decision: Gross vs Net Basis
When deciding whether to pay tax on a gross or net basis, individuals should compare the net income tax liability based on this return with the 25% gross rate that would otherwise apply. It is important to note that the decision to file a tax return is made annually and can be changed.
The Section 216 Return: Reporting Net Rental Income
Overall, non-residents of Canada who earn rental income must understand the taxation rules that apply to them. To reduce withholding taxes on their gross rental income, individuals can file form NR6 with the CRA and then submit a Section 216 return within six months or by December 31st of the second year following the end of the current year. Furthermore, when deciding whether to pay tax on a gross or net basis, it is important for individuals to compare both rates before making any decisions. Ultimately, understanding these taxation rules will help ensure you are in compliance with Canadian law and avoid penalties for underpayment or late filing fees.
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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.