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Updated on February 19, 2024
Canadian non-residents are taxed on rental income from their properties in the country. What about their tax obligations?
A non-resident (for tax purposes) who earns rental income must meet certain obligations with the Canada Revenue Agency (CRA). These tax obligations are the same whether the non-resident owns a single home for rent or several rental properties in the country. However, they only apply for federal purposes: there is no tax to pay or return to file for this income for provincial purposes.
There are ways to reduce this tax burden, as discussed later on, but here is the basic rule: a 25% deduction at source of the gross monthly rental income must be remitted to the CRA each month, no later than the 15th day following the payment of rent. Failure to withhold or late remittance of the deduction would result in a penalty of up to 10% of the amount of tax that should have been withheld.
Non-residents have two years after the end of the year to file a tax return to deduct rental income expenses. They will then be taxed on the net rental income (income minus expenses), based on the tax rates applicable to individuals.
The 25% monthly withholding tax will be considered an instalment on the tax liability. The CRA will then refund any overpayment.
Please note: if the tax return is not filed, the non-resident will not be able to deduct expenses and the 25% withholding on gross income will be considered a final tax.
A more advantageous solution
Another option, which is usually more advantageous for cash management, is for the non-resident to pay withholding tax based on 25% of estimated net rental income, rather than gross income.
Again, the withholding will be treated as an instalment, but will generally be much lower because it will be based on net income (i.e., income minus expenses).
To take advantage of this solution, the following conditions must be met:
- The tax obligations should be delegated to a paying agent in Canada, who is a trusted Canadian resident and who pays the tax on behalf of the non-resident;
- NR6 form and an estimate of the next year’s rental income and expenses to must be sent to the CRA before the first rent payment date. The withholding tax payment must be attached;
- Undertake to file a Canadian federal income tax return (T1159) by June 30th of the following year.
What you need to know
Regardless of the option selected, NR4 and NR4 Summary statements must be filed by March 31st of the year following the end of the taxation year or penalties may apply. These statements show the gross rental income and the tax paid to the government.
In addition, non-residents who own several rental properties in the country must include all of their rental income and expenses in the required documents.
Please note that in some countries, such as the United States, non-residents can deduct the actual tax paid in Canada from their tax return.
Finally, for individuals who have failed, in good faith, to declare their rental income earned in Canada, there is always a way to get their affairs in order while avoiding late penalties if they meet certain conditions.
Do you have any questions? Our team of international tax experts can help you meet your tax obligations and choose the most advantageous solutions. Contact us to speak with one of our specialists.