Non-resident rental income: What are the tax obligations?

If you are a non-resident who earns rental income, you must meet certain tax obligations with the Canada Revenue Agency (CRA). The income you earn from rental properties is subject to tax under Part XIII of the Income Tax Act (Canada).

Rents earned by Non-residents are subject to tax under Part XIII at a rate of 25% of the gross rents earned if no elections are filed.

The non-resident will require a Canadian agent, usually a family member or friend, to assist with the withholding and remittance of the tax as the rents are earned. The upfront tax withholding obligations and the ultimate tax liability could be different depending on the elections that are filed.

This article outlines three filing options for non-residents earning rental income in Canada.

Option one: No elections filed

This is the default method of taxation on rental income earned by a non-resident in Canada. Under this method, when rental income is earned, the Canadian agent for the property must withhold and remit taxes of 25 percent of the gross rents each month to the CRA.

The only Canadian tax reporting required under this method is the NR4.

The NR4 is a tax slip that summarizes the gross rents and taxes withheld for the non-resident in the calendar year. This form is filed by the Canadian agent for the non-resident.

The non-resident will not have to file any Canadian tax returns, and the 25 per cent gross withholdings will be the final Canadian tax liability/obligation for the non-resident. The rental expenses incurred are not considered in this option.

Option two: Filing a 216 return

A second option for the non-resident is to elect under section 216 of Income Tax Act and file a Canadian tax return. This is commonly known as a 216 return. The Canadian agent will still be required to withhold taxes on 25 per cent of gross rental income similar to option 1.

When a 216 return is filed, the non-resident is taxed on the net rental income at graduated tax rates. After deducting the expenses and any applicable capital cost allowance, the resulting tax liability can oftentimes be less than the 25 per cent tax withheld and remitted on the gross rents earned by the non-resident during the year. This will result in a refund of excess withholdings remitted by the non-resident during the year.

In this option, the Canadian agent is still required to file an NR4 for the non-resident reporting the gross rents and total tax withholdings. The non-resident will use the NR4 as a starting point to prepare their 216 return.

Option three: Filing a 216 return with an NR6

The third and final option that is available to the non-resident taxpayer is filing the NR6 and the 216 return.

The non-resident and the Canadian agent will prepare a schedule of the estimated net cash flow forecast for the upcoming year. This schedule is submitted along with the NR6 to the CRA. When the NR6 is approved by the CRA, the Canadian agent will be permitted to withhold taxes on 25 per cent of the estimated net rental cash flow for the year instead of 25 per cent of the gross rents.

The non-resident taxpayer will still need to file a 216 return. In this option, the reduced withholdings are meant to be closely aligned with the final Canadian tax liability of the non-resident. The final tax liability under this option will be the same as option two, but it provides cash flow relief to the non-resident throughout the year that the rents are earned.

Similarly, the Canadian agent is still required to file an NR4 for the non-resident reporting the gross rental income earned and corresponding reduced withholdings remitted.

Example

Let’s assume that the non-resident earns rental income from a Canadian real property as follows:

• $2,000 rent per month for 12 months in 2023
• At the beginning of 2023, the non-resident forecasts that the total cash outflow expenses are $12,000
• The final expense including capital cost allowance is $15,000
• The average Canadian tax rate on the 216 return is 25 per cent

Paying attention to deadlines and penalties

Deadlines

Any withholdings must be remitted on or before the 15th day of the following month after rents were paid (e.g., remittance for January 2023 rents is due on or before February 15, 2023).

The NR4 is due on or before the last day of March of the following calendar year.

The NR6 should be sent to the CRA on or before the start of the tax year or before the first rental payment is due.

The 216 return must be filed within two years from the year-end for which the rental income was earned. However, if an NR6 was filed, the section 216 return must be filed within six months of the end of the fiscal year. Finally, regardless of whether an NR6 was filed or not, the 216 return would be due on April 30^th of the following year if you had disposed of the rental property and are claiming a recapture of the previously claimed capital cost allowance on the 216 return.

The balance due date for the final tax liability for any 216 return is April 30^th of the following year, regardless of when the return is due.

Penalties

Penalties can arise if the Canadian agent does not withhold and remit the correct amounts of tax on time. If the tax remittance is late, the agent will be liable for a penalty of 10 per cent on the amounts that were required to be withheld.

For the 216 return, if it is not filed by the due date, the 216 election will be invalid. This means that you will be liable to pay taxes on the gross rental income rather than the net rental income. This becomes extremely significant when an NR6 is filed but a 216 return is not filed on time. In this scenario, the non-resident taxpayer will be required to pay tax on the gross rental income earned, despite the agent withholding taxes on net rental income due to the filing of the NR6. This would likely result in the non-resident being assessed a balance due by the CRA. The CRA would charge the agent the difference (plus interest) between 25 per cent of the gross withholdings and the amount that was withheld on your net income based on the NR6.

In conclusion

Filing the NR6 and 216 returns are very beneficial to non-residents earning rental income in Canada. They allow Canadian agents to reduce withholdings required to remit and non-residents to reduce their taxes due at year end.

However, there are a variety of deadlines to be met and penalties that could be faced if missed, therefore it is important to pay close attention to the withholding and filing requirements.

If you have any questions or need further information, please feel free to contact any one of our Canadian tax professionals.

About the authors

David Liang CPA, CA, MAcc is a Manager in our Tax group. He can be reached at dliang@fullerllp.com or 647-417-0372.

Allison Kolbe was a Junior Tax Specialist in our Tax group during her 2023 Winter Co-op season.