Last Updated on September 2, 2024 by Rashad Bolbol

Tax Obligations for Non-Residents Owning Canadian Rental Property: A Complete Guide

Owning rental property in Canada as a non-resident comes with specific tax obligations that you must understand to comply with Canadian tax laws. Whether you’re renting out a condo in Toronto or a vacation home in Vancouver, it’s crucial to be aware of the tax implications. This guide provides all the information you need to manage your tax responsibilities effectively as a non-resident property owner in Canada.

Understanding Non-Resident Status for Tax Purposes

Before diving into the tax obligations, it’s important to clarify what it means to be a non-resident for Canadian tax purposes. A non-resident is someone who does not have significant residential ties to Canada and usually lives outside the country. This status impacts how you are taxed on Canadian-sourced income, including income from rental properties.

Tax on Rental Income: Withholding Tax

As a non-resident earning rental income from Canadian property, your primary tax obligation is a withholding tax. The Canadian government requires that 25% of the gross rental income be withheld and remitted to the Canada Revenue Agency (CRA) every month.

A) Who Can Withhold the Tax?

• Tenant or Agent: The tenant or the property manager (acting as an agent) is typically responsible for withholding and remitting this tax on your behalf. The agent handling this must be a Canadian resident.
• Property Owner: Alternatively, as the property owner, you can choose to withhold and remit the tax yourself. If you take on this responsibility, you must still comply with all CRA regulations, including the timely remittance of taxes.

B) NR4 Form

At the end of the year, the party responsible for withholding the tax—whether it’s the tenant, agent, or yourself as the property owner—must file an NR4 form with the CRA. This form reports the total amount of gross rental income paid to you and the total amount of tax withheld.

• Self-Reporting: If you are handling the withholding yourself, you can request the NR4 form from the CRA to ensure proper reporting.

C) Filing Form NR6 to Reduce Withholding Tax

As a non-resident property owner, you have the option to file Form NR6 (Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property). Filing this form allows you to reduce or eliminate the 25% withholding tax on your gross rental income.

• How It Works: By filing Form NR6, you undertake to report your net rental income (gross income minus allowable expenses) on a Canadian tax return under Section 216 of the Income Tax Act. The CRA may then permit you to have tax withheld only on your net rental income rather than the gross amount.
• Filing Requirements: Form NR6 must be submitted to the CRA before the first rental payment of the year. Both you and your agent or tenant (if they handle the withholding) must sign the form.
• Approval: Once the CRA approves your NR6 filing, the reduced withholding tax will apply. You must then file a Section 216 return by June 30th of the following year to report your actual net rental income.

Electing Under Section 216: Net Rental Income

While the standard withholding tax applies to the gross rental income, you may opt to file a Canadian tax return under Section 216 of the Income Tax Act. This election allows you to be taxed on your net rental income (gross rental income minus allowable expenses) instead of the gross amount.

A) Benefits of Filing Under Section 216

• Lower Tax Liability: By deducting expenses such as property management fees, repairs, maintenance, mortgage interest, and property taxes, your taxable income could be significantly reduced, resulting in a lower overall tax liability.
• Tax Refund: If the tax withheld exceeds your tax liability based on your net income, you may be eligible for a tax refund.

B) Filing Requirements

To make this election, you must file a Section 216 return by June 30th of the year following the rental income year. This return will calculate your net rental income and any potential refund.

Expenses You Can Deduct

When you elect to be taxed on your net rental income, you can deduct various expenses related to the rental property. These may include:

• Mortgage Interest: Only the interest portion of your mortgage payments is deductible, not the principal.
• Property Taxes: The annual property taxes paid to your local municipality.
• Repairs and Maintenance: Costs for repairs and upkeep of the property, including cleaning, painting, and landscaping.
• Property Management Fees: Fees paid to a property management company or agent.
• Utilities: If you, as the landlord, pay for utilities such as electricity, water, or gas.
• Insurance Premiums: The cost of insurance coverage for the rental property.
• Depreciation (Capital Cost Allowance): You may also be able to claim a depreciation deduction for the wear and tear on your property, known as Capital Cost Allowance (CCA).

Avoiding Double Taxation

As a non-resident, you might also be liable for taxes in your home country on the income earned from Canadian property. To avoid double taxation, Canada has tax treaties with many countries that may allow you to claim a foreign tax credit for the Canadian taxes paid.

• Check Tax Treaties: Review the tax treaty between Canada and your home country to understand the provisions related to rental income, capital gains, and tax credits.
• Foreign Tax Credit: If eligible, the foreign tax credit allows you to reduce your tax liability in your home country by the amount of tax paid in Canada.

Consulting a Tax Professional

Navigating the tax obligations for non-residents owning Canadian rental property can be complex. It is highly recommended to consult with a tax professional who specializes in cross-border taxation to ensure compliance and optimize your tax situation.

Conclusion: Managing Your Canadian Rental Property Taxes as a Non-Resident

Owning rental property in Canada as a non-resident can be a lucrative investment, but it comes with specific tax obligations. Understanding the withholding tax requirements, the benefits of electing under Section 216, and the implications of selling the property are essential to managing your investment effectively. Whether you choose to handle the withholding tax yourself or work with an agent, staying informed and seeking professional advice will help you ensure compliance with Canadian tax laws while maximizing the financial benefits of your rental property. If you need assistance with non-resident taxes, explore our Non-Resident tax services for comprehensive guidance.

Rashad Bolbol

Enrolled Agent, US/Canada Tax advisor.
Expert in US and Canada’s cross-border taxation. I assist individuals and businesses that earn income on either side of the border to plan ahead and save on their tax bills.