Withholding tax on rental income
When the rental income is received, the agent (i.e. property manager, Canadian family, or friend) must withhold non-resident tax at the rate of 25% on the gross rental income paid.
The agent is obligated to remit this tax to the Canada Revenue Agency (“CRA”) on or before the 15th day of the month following the month of rental income is paid .
The agent give the non-resident owner two copies of an NR4, Statement of Amounts Paid or Credited to Non-Residents of Canada slip showing the gross amount of rental income paid and the amount of non-resident tax withheld.
Election Under Section 216
The non-resident withholding tax is considered the non-resident owner’s final tax obligation to Canada on the rental income. But the withholding tax can be reduced under certain conditions by filing Form NR6, Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent From Real or Immovable Property or Receiving Timber Royalty. After the CRA approves the Form NR6, the Canadian agent or payer can withhold 25% on the net rental income (after rental expenses), which would provide more cash flows on a monthly basis.
If Form NR6 is not filed or approved, the non-resident owner may choose to file a T1159 return and the final tax will be calculated on the net rental income. By filing the T1159 return, the non-resident owner may receive a refund of some or all of the tax withheld on the rental income.
When non-residents of Canada dispose of real property situated in Canada (referred to as “Taxable Canadian Property”), there are a few income tax implications that you need to know about.
The Income Tax Act requires non-resident owners to notify the CRA within 10 days of disposing of real property situated in Canada . The Notification can be made by sending a request for a certificate of compliance to the CRA wherein the capital gain and/or recapture on the sale of the property and the corresponding withholding tax are calculated. The request is generally made on the following forms:
Form T2062 “Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property”.
Form T2062A “Request by a Non-resident of Canada for a Certificate of Compliance Related to the Disposition of Canadian Resource or Timber Resource Property, Canadian Real Property (Other Than Capital Property), or Depreciable Taxable Canadian Property”.
An Individual Tax Number (ITN) is required when making the Notification. A non-resident owner may obtain an ITN by filing Form T1261 “Application for a Canada Revenue Agency Individual Tax Number (ITN) for Non-Residents”.
Non-resident owners who fail to notify the CRA within the 10-day period may be subject to a penalty of up to $2,500 ($25 per day for each day the notification is late). The penalty is applicable regardless of whether any withholding tax is payable with respect to the disposition.
The purchaser can avoid making withholding tax payment to the CRA within 30 days after the end of the month when the sale occurred if a comfort letter is obtained. A comfort letter can be requested by the seller at the time of submitting the Request to the CRA. In practice, if a comfort letter is issued, the buyer’s lawyer can continue to hold the funds withheld from the purchase price (25% or 50% of the gross proceeds) in escrow beyond the remittance deadline without incurring any penalties or interest. When the certificate of compliance is obtained, any excess withholding taxes above the amount calculated in the certificate of compliance can be released to the non-resident seller.
For a certificate of compliance to be issued, the required withholding tax payment calculated in the Request must be provided to the Receiver General when a “Notice to Pay” is received.
Generally, non-resident owners are required to file a tax return if you have disposed a taxable Canadian property. However, you are not required to file a tax return for the year if all of the following apply:
you are a non-resident of Canada.
no tax is payable for the year in which you have disposed of the property.
you are not liable to pay any amount to the CRA for any previous tax year.
the disposition for which a certificate of compliance under section 116 has been issued.
If a Certificate of Compliance (Form T2064 or Form T2068) is not issued and the property is not excluded property, the purchaser may become liable to pay a specified amount of tax that arises from the disposition on behalf of the vendor. In this case, the purchaser is entitled to withhold 25% (50% on certain types of property) of the proceeds minus the amount of the certificate limit, if any, from the proceeds.
The information provided on this page is intended to provide general information. Please contact us with any questions.