Renting out Your Property as a Non-Resident of Canada

Predicting the housing market is already challenging due to interest rate fluctuations and other factors. Throw non-residency into the mix, and for someone departing Canada, it becomes a complicated decision whether to maintain one’s principal residence or to rent it out as a non-resident owner.

If you decide to maintain your property when you leave Canada, and then rent it out as a non-resident, you may be interested to learn about the tax compliance involved for non-resident owners, and what tax planning options are available.

Tax Compliance for Non-Resident Owners of Canadian Rental Property

After becoming a non-resident of Canada, any Canadian rental income you receive thereafter may be subject to 25% non-resident withholding tax on the gross rental income earned. The withholding tax is due on the 15^th day of the following month after the rental income is received. 

Because of this mandatory 25% withholding on the gross rental income, you may wonder how you can claim all the mortgage interest and other rental expenses you will have incurred so as to pay tax to CRA on a net basis after expenses.

To accomplish this, in the following year, you may file form T1159 “Income Tax Return for Electing under Section 216,” (commonly known as “filing a Section 216 return”) to report the expenses and claim some of the excess withholding tax back so as to pay tax to CRA on the rental income on a net basis.

Generally, you are required to send CRA your Section 216 return within 2 years following the end of the year in which you received the rental income. Before you can file the Section 216 return, you are also required to submit an NR4 Pro Forma to CRA to request that they issue an NR4 slip. It’s important to be aware that CRA online payment options might not be available to you if you do not have either a Visa or Mastercard branded Canadian debit card.

Withholding on a Net Basis instead of Gross

With current mortgage rates as high as they are, you may ask if there is an option for you to remit your 25% withholding tax upfront to CRA on a net basis after expenses rather than on a gross income basis. The answer is yes. You have the option to file Form NR6, “Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property” with CRA which permits the election to withhold tax to CRA on a net basis.

Before you prepare the NR6, you are required to have an agent in place who must be a resident of Canada and act on your behalf to remit your Canadian source rental income. Your agent must sign the form, which must be filed on or before the first day of the tax year that you expect to receive the rental income.  Usually, it takes around 3-4 months for CRA to approve the election.

Once CRA approves the NR6 application, you can then pay the non-resident withholding tax based on net rental income instead of gross. Please be aware that until the NR6 is approved, you must still pay the withholding tax based on the gross income. Moreover, once you file the NR6 form, your agent or accountant must submit an NR4 informational slip to CRA by March 31 following the tax year, and the Section 216 return must be filed by June 30.

What should you do if you realize that you are delinquent in reporting your non-resident Canadian rental income to CRA? In that case, you should get in touch with a tax advisor and see if the voluntary disclosure program is available to you.  

If you are a U.S. resident and are therefore required to report your Canadian rental income on your U.S. tax return, it is important to inform your U.S. accountant of the final tax liability you paid on your Canadian tax return. To avoid double taxation, the tax paid on the Canadian tax return may be used as a foreign tax credit on the U.S. tax return to reduce U.S. tax otherwise owing on the rental income.

To discuss your current or future situation as a non-resident owner of Canadian rental property, please schedule a consultation with a cross-border tax and financial planning advisor.