As your property managers, we are obligated under CRA to ensure that you are compliant and that tax laws are followed in relation to your real estate investments. Once we are made aware that you are a non-resident of Canada, we are liable for your action, or inaction. However, if you choose to self-manage, please follow these guidelines:
Ontario Rental Income Tax Guide For Non-Residents
First determine residency
Should you believe you are a resident despite the fact you reside outside of Canada, you can complete an NR73 and send it in to CRA for their determination. It can take up to two months to hear back, so it’s best to submit the questionnaire as soon as possible. The moment your property manager starts collecting your rents, they are duty bound to CRA to remit 25% of the gross rents until a determination letter from CRA is received confirming your residency status.
It’s important to note that CRA is the only authority that can determine a client’s residency status. A letter from an accountant such as KPMG stating your residency will not suffice during a CRA audit. To be compliant, only their letter confirming residency will avoid the property manager from being at risk of a penalty equal to 25% of the gross rents collected on your behalf. In addition, should you be audited, and you have failed to comply with any of the above options, you will also be at risk of a penalty.
Remit 25% of Gross and Collect NR4 slips to and from tenants
The payer of the rent, such as a tenant or a property manager (if the property manager is first collecting the rent and then submitting to the owner), must withhold non-resident tax at the rate of 25% on the gross rental income paid or credited to you. At the end of the calendar year, the payer must give you two copies of an NR4 slip showing the gross amount of rental income paid or credited to you during the year and the amount of non- resident tax withheld and remitted to CRA.
Generally, the non-resident tax withheld is considered your final tax obligation to Canada on the rental income. However, you are given two years from the end of the year, in which to file your Section 216 return and be reimbursed for any overpayment of tax.
Assign “Canadian Agent”, ideally your Property Manager and Submit NR6
Remitting 25% of the gross rent in most circumstances can be financially challenging. We recommend assigning someone that lives in Canada to be your “Canadian Agent” for non-resident tax withholding purposes. This can be anyone providing they live in Canada, ideally your property manager.
To have non-resident tax withheld on your net rental income (revenue minus expenses), you and your agent must complete form NR6, Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property and send it to CRA for approval. For the calculation of expenses, you can use mortgage interest, property taxes, insurance, condominium fees, property management fees, utilities (assuming the tenant isn’t paying them), and general repairs and maintenance.
The NR6 form must be filed for every calendar year or before the first rent payment is due. For example, if you have a tenant moving in for the first time on March 1st, the NR6 must be filed before March 1st for the period of March 1 to December 31. Then going forward an NR6 must be filed before January 1st of each year for the period of January 1 to December 31.
When completing the expense portion on the NR6, you are basing your calculations on what you anticipate your expenses to be in the coming year. This is usually a best guess scenario. It’s only once the year is over, and you’ve paid all the expenses that you truly know how close you were when estimating the expense portion of the NR6. If you discover you haven’t paid enough tax, then you have until April 30th the following year to pay CRA without incurring interest. However, keep in mind you still have until June 30th of the following year to file your Section 216 without incurring any penalties. Should you owe money to CRA, you will incur interest starting from May 1st. For example, if you are filing your taxes for 2015, you have until April 30th, 2016 to pay anything owing without incurring interest and June 30th, 2016 to file your 2015 Section 216 without incurring a penalty and interest for filing.