Many foreign investors are renting their Canadian investment properties.  The rental marketplace is also increasing due to a number of Canadians leaving Canada on a temporary or permanent basis and either holding their properties for personal reasons or as a hedge against rising housing prices.  Many non-residents are unaware of some common considerations, including the basic withholding requirements and the annual filings with respect to Canadian rental property.

A non-resident of Canada who owns and rents out their Canadian property is subject to a 25% withholding tax on the gross rental income.  The tax withholding must be remitted to Canada Custom & Revenue Agency (CCRA) by the 15th of the month following the month the rental income is paid or credited to the owner of the property.  This can be considered the final tax liability and no further action would be required.

However, it is generally more beneficial for the individual to elect to pay income tax on the net rental income subject to the graduated tax rates by filing the relevant income tax return.  This return reports the actual income and expenses of the property and is therefore more beneficial than paying the withholding tax on the gross rental income, as described above.

Where tax withholding has been applied on the gross income, a return can be filed within two years of the end of the relevant tax year in which the rental income arises, to claim a refund of all or part of the withholding tax that was collected on the gross income.

It is possible to reduce or eliminate the withholding tax if the individual files the appropriate form (NR6) before the first rental payment is due.  The form is then filed on an annual basis before January 1st  (or before the first rental period) for each year the property is rented.  By completing the NR6 form, the individual is requesting to have the tax withheld on estimated net rental income rather than the gross income.

The estimated net rental income is determined by deducting eligible expense, such as mortgage interest, property taxes, insurance premiums, condo fees, utilities (if the tenant isn’t paying them), management fees, and miscellaneous repairs and maintenance, from the gross rental income.  In the event the expenses exceed the income, it may be possible for the withholding tax to be reduced to nil.   The NR6 form needs to be signed by a Canadian resident or typically the property manager and submitted to CCRA.  CCRA will then confirm with the signer the figures on the NR6 form or otherwise stipulate the correct level of withholding.

Annual Filing Requirements

When the NR6 form has been used, there is a requirement to report the actual income and expenses on the appropriate income tax return (Section 216), which must be filed with CCRA by June 30th following the end of the relevant tax year.

The net rental income is reported on this return by the non-resident individual and is taxed at regular marginal tax rates.  If the taxes calculated on this return are less than the amounts withheld and remitted during the year, the excess will be refunded to the individual.  In contrast, if the taxes calculated are greater than the withholdings, the balance payable is due by April 30th even though the return is not due until June 30th. 

Where a return is filed after June 30th, CCRA will assess a 25% flat tax rate on the gross income, rather than allow the tax to be calculated on the basis of the net income subject to the graduated tax rates.  Failure to meet the deadline can also result in CCRA refusing to the tax withholding to be based on the net income in future years.

If further advice or assistance is required, Landlord can refer the interested party to an accountant specializing in non-resident tax and the filing of the annual tax return (Section 216).   Note the accountants will assess a fee for doing the returns.

For your review please find the following forms you can download.  You will need Adobe Acrobat to view.

NR6
NR6 Expense Sheet
Determine if a Non-Resident Questionnaire

Should there be any question if you are a non-resident or not, please complete the above questionnaire and fax it directly to CCRA for their assessment.