As a property owner living overseas, complying with Canada’s tax legislation is crucial. Let LandLord provide you with easy, expert guidance and support for filing your non-resident rental income tax.
I – What You Need to Know
Non-Resident Taxes: Why is This Important
The Canada Revenue Agency (CRA) is concerned that if you reside outside of Canada, you may not file your tax returns on time, or not pay taxes at all.
Define Your Residency Status
You need to establish your residency status. For most cases, non-residents for tax purposes are defined as those who either live outside Canada for the entire tax year or stay in Canada for less than 183 days in the tax year.
II – Ready to File Your Income Taxes?
Non-resident owners of rental property have the following options while filing their income tax for the year.
Should you believe you are a resident despite the fact you reside outside of Canada, you can complete an NR73 Questionnaire to Determine Residency and send it in to CRA for their determination. It can take a couple of 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 your residency status. A letter from an accountant such as KPMG stating your residency will not suffice during a CRA audit. To be compliant, CRA’s 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.
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 an NR4 slip showing the gross amount of rental income collected and the amount of non- resident tax withheld and remitted to CRA.
Generally, the non-resident 25% 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 (the name of the return) 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, commonly it’s your property manager.
To have non-resident tax withheld on your net rental income (revenue minus expenses), you and your Canadian 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 same 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 2023, you have until April 30th, 2024 to pay anything owing without incurring interest and June 30th, 2024 to file your 2023 Section 216 without incurring a penalty and interest for filing.
It’s important to note that when your property manager signs the NR6 with the Non-Resident, the property manager is in effect guaranteeing to CRA that you will file your Section 216 on time. Failure to do so will result in penalties being assigned to your property manager.
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