The Taxation of Non-Resident Rental Income

Part XIII of the Income Tax Act says that individuals who are non-residents of Canada but rent out property such as real estate investments must follow certain tax rules.

The Canada Revenue Agency (CRA) applies non-resident withholding taxes as Part XIII tax at a rate of 25% of the gross rental income to be withheld and remitted every month. You have to remit this withholding tax to the CRA by the 15th of the month after the month you got the rent. The withholding is usually done by a Canadian person, like a property manager, who works for the non-resident and does the job.

At the end of the year, this person is also in charge of applying for a NR4 slip that shows how much rent was collected and how much Part XIII withholding tax was remitted to the CRA. Ideally, it should add up to 25% of the gross rent reported. The 25% non-resident withholding tax is your final Canadian tax obligation.

However, many non-residents logically still choose to file the Section 216 rental tax return to report rental income and claim costs. This lowers the total liability of tax they have to pay since you can deduct rental expenses.

Options for Managing Tax Obligations

As a non-resident renting out property in Canada, you are not limited to the default 25% tax on gross rent. The Canadian tax system gives you a few options to help manage your rental income more efficiently. These options can reduce how much tax you pay or how much is withheld each month.

Understanding your choices can help you stay compliant while keeping more of your rental income.

1.   Default Withholding Without Elections

For non-resident owners renting out real estate in Canada, the standard rule is straightforward. Under Part XIII withholding tax, 25% of the gross rents must be withheld and sent to the CRA every month. This applies whether you make a profit or not.

A Canadian agent, such as a property manager, usually handles this on your behalf. Each year, the agent prepares and files an NR4 slip to report the total rent received and the non-resident tax withheld.

If you don’t file a tax return under any special election, this withheld amount is considered your full tax obligation in Canada. No additional filing is needed. This method is simple but often results in higher tax than necessary, especially when expenses are involved.

2.   Electing Under Section 216(1) and filing tax return

Non-residents have the option to reduce their tax burden by filing under Section 216 of the Income Tax Act. This lets you report your non-resident rental income on a Canadian tax return and deduct eligible expenses, like maintenance, mortgage interest, or property taxes.

The CRA then calculates your tax based on your net rental income, not gross. This can often lower the amount you owe and lead to a refund if too much tax was previously withheld.

To do this, non-resident individuals must file a Section 216 rental tax return, also known as Form T1159. The return must be submitted within two years after the end of the rental year. Filing under this section is optional, but it can be financially beneficial for many non-resident rental property owners.

3.   Filing an NR6 Form to reduce monthly withholding taxes

If you use a property manager or another Canadian agent, you may qualify to reduce the monthly withholding by submitting an NR6 form. This form allows tax to be withheld on estimated net rental income instead of gross. To use this option, both the non-resident and the agent must complete and file Form NR6 with the CRA before the first rent is paid for the year.

If the CRA approves it, the agent will only need to withhold 25% of the expected net rental income each month. However, this method comes with a condition: you must file a non-resident rental income tax return under Section 216 to report actual income and expenses.

This option can improve cash flow during the year while still staying compliant with Canadian tax rules.

Important Due Dates and Penalties

Let’s take a look at the key deadlines you need to meet and the penalties you could face if you miss them:

• Payments Due Every Month: Withholding taxes must be paid by the 15th of the month after the rental income payment.
• NR4 Slip: It’s due by March 31 of the year after the renting income year.
• Section 216 non-resident tax return (Form T1159): This non-resident tax return needs to be filled out and sent in within two years of the year of rental income if you did not apply for a NR6 election. If an NR6 was sent in, the return is due by June 30 of the next year.
• Fines: If you don’t pay your taxes or file the necessary tax returns on time, you may have to pay fines and interest.

Takeaway

As a non-resident of Canada, managing rental income means knowing and meeting certain tax requirements.

Non-resident owners may be able to lower their tax bill and improve their cash flow by making a choice under Section 216 and, if necessary, filling an NR6 form. To avoid penalties, it’s important to meet all filing dates and make sure that your reports are correct.

If you need personalized help with your non-resident rental income tax responsibilities, you might want to talk to a Canadian tax expert who has experience in this area.