In the last few months, we have received calls and emails from Saudi Arabia, Kenya and Australia, to name a few, from investors who hold Canadian real estate, and need help ensuring they stay onside with Canada Revenue Agency.
This article, part 1, covers what non-residents (NR) need to know about holding Canadian real estate.
If someone who is non-resident (NR) holds Canadian rental real estate, there is generally a 25% Canadian withholding tax on the gross rents. The person paying the rents to the NR must remit this tax to the Canada Revenue Agency (CRA) on or before the 15th day of the month following the month the rental income is paid or credited to the NR. (The NR would normally have an agent in Canada to collect the rents and remit the withholding tax. )
Annual filings for CRA
Annually, the non-resident can file what is known as a “Section 216 Return. ” This is basically the general personal income tax return, but used here to report only the net rental income relating to the Canadian rental properties. The net rental income is subject to tax at the graduated rates applicable to Canadian resident individuals. However, the tax owing is reduced by the previously remitted 25% withholding tax on the gross rents. Excess withholding tax is refunded through this return. Filing such a return is optional and usually is done only when the non-resident is getting a refund.
Gross rents vs. net rents
The person responsible for remitting the withholding tax must file annually a NR4 Return. This return identifies the amounts withheld from the gross rents and remitted to the CRA.
Alternatively, the NR can elect to have tax withheld on the net rental amount instead of on the gross rent. This can be done by the NR and its Canadian agent filing a NR6 Form. Generally speaking, the NR would prepare an estimate of the expected gross rental income, expenses and net income for each rental property. This estimate would be included with the NR6 Form and filed with the CRA. If the CRA approves the NR6 Form, the Canadian agent collecting the rents on behalf of the NR can then withhold tax on the net rental income of each property identified in the calculation instead of on the gross income. Until the form is filed and accepted by the CRA, the agent will be required to withhold tax on the gross rents. Under this alternative the NR must file a Section 216 Return within six months of the calendar year end (i. e. by June 30).
Next, we’ll discuss what non-residents need to do if they sell a Canadian rental property.
Forms to Know
NR4 – Statement of Amounts Paid or Credited to Non-Residents of Canada
NR6 – Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent From Real Property or Receiving a Timber Royalty
Please contact George Dube at email@example.com if you have questions on this article.Tags: foreign reporting, non-residents, tax, withholding tax
What if the NR is a JV partner of a Canadian resident. How would the taxation work in this case?
Sorry we missed this comment earlier. But, George has written an article in the REIN Report magazine that covers this very topic. As a snippet: “In a joint venture, each co-venturer separately reports his or her share of the gross income and expenses from the property. Each co-venturer claims capital cost allowance on his or her cost share of the depreciable assets without regard to what other co-venturers are claiming. Where the joint venture includes non-resident co-venturers, the rules for non-residents apply, but only for the non-resident’s share of the joint venture.” You can find more details here: http://blog.reincanada.com/holding-canadian-real-estate-as-a-non-resident-you-need-to-read-this