For non-residents, investing in real estate within Canada is a highly profitable venture. But the major setback is that they earn rental income in Canada, which comes with huge tax obligations that must be carefully managed to avoid penalties and maximize returns. Weat Tax Return Filers Ltd. help non-resident property owners effectively navigate Canadian tax laws. Here we share with your key tax strategies that will help you save money, stay compliant, and optimize your rental income.
1. Know Your Tax Obligations as a Non-Resident:
If you’re a non-resident earning rental income from Canadian property, then CRA requires you to remit a withholding tax of 25% on the gross rental income. This tax must be paid by the 15th day of the month following the month the rent was received. For example, if you collect rent in January, then this tax must be remitted by February 15. If you don’t comply, you might face penalties and interest charges. You need to get the non-resident account number (NR), which can be obtained by logging onto your CRA account and clicking on the “get a non-resident account” tab and following the instructions. At the end of the year, the NR4 proforma may be required to request that CRA send NR4 slips. These slips will be enclosed with the section 216 return to claim the refund.
2. File a Section 216 Return to Claim a Refund
Paying 25% of your gross rental income can be expensive, more so when you have deductible expenses. But here is the good news. You can file a Section 216 Return after the calendar year to:
- Report the actual rental income and expenses (instead of gross income),
- Be taxed on net rental income (after deductions), and
- Receive a refund for any overpaid taxes. File a Section 216 Return to obtain deductions for mortgage interest, property taxes, repairs, and other permissible expenses. This will significantly lower your tax liability. Keep Detailed Records of All Your Expenses: To be able to cross over deductions on all expenses for your rental property, save receipts, and keep records in relation to the following:
- mortgage interest (not principal payments);
- property taxes and insurance;
- Repairs and maintenance;
- Property management fees;
- utilities (paid by the landlord);
- advertising and legal costs etc.
Pro Tip: Claim as many expenses as you can which you have incurred to earn the rental income; the lower your taxable rental income, and larger your refund when filing a Section 216 Return.
3. Claim Depreciation (Capital Cost Allowance – CCA) for Extra Savings:
You can claim the depreciation (CCA) to reduce rental taxable income on the building portion of your rental property (Usually Land 30% (no-CCA) and Building 70%). The CCA will lower your rental taxable income in the current year and increase the cash flow.
Drawbacks:
When you sell the property, the depreciation claimed in previous years will be recaptured in form T776 and taxed at a higher rate than the capital gain tax rate. It will be treated as your rental income. Use CCA strategically, especially if you don’t plan to sell soon as explained, it will be taxed at a higher rate.
4. File an NR6 Form to Reduce Monthly Withholding Tax:
If you think that the cash flow from the property is not enough to cover the operating expenses, then instead of paying 25% on gross rent each month, you can file an NR6 Form to request to pay the withholding tax on net rental income.
How It Works:
- You must have a Canadian tax resident who will act as an agent on your behalf to file the NR6. This can be anyone, e.g., your friend, family member.
- Submit the NR6by October or November of the previous tax year (CRA may take up to 3-5 months to process the NR6 request).
- Once CRA approves, you will pay 25% on projected net rental income(after expenses) instead of gross rent.
Example:
| NR6 Approval | No NR6 Approval | |
| Gross Rent | $25,000 | $25,000 |
| Projected Expenses | $15,000 | $15,000 |
| Net Rental Income | $10,000 | $10,000 |
| Withholding Tax (25%) | $2,500 | $6,250 |
Important: If you have approved NR6, then you must still file a Section 216 Return at year-end by June 30th of the following year. If you fail to file the Section 216 return, CRA will cancel the NR6 and ask for 25% on gross rent.
Need Help?
Being a non-resident, managing Canadian tax obligations can be complex, but Tax Return Filers Ltd. is here to help! We will help you in every step of this process and will make it hassle-free. Contact us for the following:
- Section 216 Returns
- NR6 Filings
- Tax Optimization Strategies
- CRA Compliance & Audit Support