Many Canadians live abroad but own rental properties in major Canadian cities like Vancouver – mostly because Canadian real estate has become a choice asset to own. The same principles apply to many non-Canadians who are also invested in rental properties here in Canada. Both classes of taxpayers are considered non-residents for Canadian taxation purposes and both are required to report any rental income earned in Canada.
Non-residents with rental income earned in Canada have tax obligations. Although net rental income is relatively simple to calculate, the tax rules for non-residents are far more complex.
Key factors for non-residents to consider when dealing with rental income:
- A non-resident earning rental income is subject to Part XIII tax under the Canadian Income Tax Act on 25% on gross rent collected.
- Alternatively, a non-resident can make an election to file under the Part I Rule in the Canadian Income Tax Act. Under the Part I Rule, allowable rental expenses can be deducted against rental income. Also under a Part I Rule filing, a non-resident would benefit from the progressive tax rate implicit within the Canadian tax system.
- Regardless, if an election is made to file under Part I, a non-resident is still required to remit 25% of gross rent collected and then when a Part I tax return is filed by a non-resident, the excess remittance would then be refunded.
- A non-resident can also file Form NR6 “Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property or Receiving a Timber Royalty” with the Canada Revenue Agency (CRA). With this undertaking, a non-resident is required to remit 25% of the estimated net rental income before the deduction of Capital Cost Allowance (CCA) to the CRA.
- There are still filing deadlines if a non-resident chooses to file under Part I. Failure to meet those deadlines results in non-resident taxes being applied against the gross rent collected.
- There are filing deadlines as well if a non-resident disposes of the rental property during the year. If these deadlines are not met, it will result in late-filing penalties and interest being charged against the amount outstanding.
As you’ve probably gathered, the rules covered regarding non-residents and Canadian rental income can get complicated and confusing rather quickly. To clarify confusion and adhere to the relevant tax laws, a non-resident typically hires an agent in Canada to handle the collection of rent and tax remittances to the CRA. The hired tax advisor normally only deal with the tax filings.
Professional accountants and tax advisors
As professional accountants and tax advisors, Mew and Company advises on the elections available to non-residents and provides insight into how to minimize penalties in cases where a non-resident has missed filing deadlines or the required remittances. It is important to remember that all non-residents are subject to these rules regardless of whether or not they seek professional assistance in dealing with these types of tax matters. The penalties and interests involved in not adhering to the provisions of the Income Tax Act can accumulate and get costly very quickly.
“An ounce of prevention is worth a pound of cure” as they say; seeking out highly professional tax advisory services at the onset is that ounce of prevention. Without it, the pound of cure ($$) you will be required to provide to the CRA can escalate into several pounds very quickly and without any warning.
- Related info: Moving Abroad & Cutting Ties to Canada for Taxes