Non-Canadian residents who own Canadian real estate and collecting rental income have two ways to deal with the Canadian tax liability.
The first method is remit to the CRA, 25% tax on the gross rent collected. This 25% is due to the CRA on the 15th of the following month the rental income was credited to the non-Canadian resident. This tax is considered the final tax liability on the rental income and the non-Canadian resident has no further obligation. However, the non-resident has the option of filing a Section 216 tax return. By filing this return, the non-resident can deduct rental expenses such as mortgage interest, property taxes, insurance, and strata fees against the gross rent and hence be subject to Canadian tax on the net rental income. Very likely a tax refund will be forthcoming by filing a Section 216 return as the 25% withholding already paid is applied as an installment balance against the Section 216 filing taxes due. Under this method, the Section 216 return is due two years from the end of the year in which the rental income was paid or credited. A completed NR4 is due by March 31 of the following year however.
The second method to deal with Canadian tax liability on rental income is to remit 25% of the expected net rental income at the onset. This 25% is due to the CRA on the 15th of the following month the rental income was received just as in the first method. Just as in above, a Section 216 return must be filed and taxes calculated will offset against the installments made through the withholdings. Under this method, the Section 216 return is due by June 30 of the following year (or April 30 if the property was sold and CCA claimed in prior years).
Why would the non-Canadian resident choose the first method when the second method results in much lower initial withholdings? The second method requires the filing of an NR6 form on or before January 1 of each year or before the first rental payment is due. CRA must receive this form on time and approve the form before the withholdings can based on net rental income. In addition, method two comes with it, an undertaking to file the Section 216 return and on time whereas method one allows two years to file the Section 216 return if choose to do so. The bottom line is the second method has more conditions and deadlines attached to it. Failure to meet the Section 216 filing deadline under method two will result in the non-resident having to pay 25% on the gross rent as non-resident tax with no recourse.
Even if a non-resident has mortgage interest to deduct, it may be wiser to choose method one and file the Section 216 return at a later date to deal with Canadian taxes. The extra time provided to file is worth the initial higher withholdings.
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Mew & Company Chartered Professional Accountants in Vancouver BC are experts in Canadian taxes.
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