Basic withholding tax
A non-resident individual who earns rental income from real estate in Canada is subject to non-resident withholding tax at the rate of 25% of the gross rental income. The resident payer of the rent must withhold the 25% tax from the rental payments and submit the amount withheld to the CRA on behalf of the non-resident tax liability. Unlike the withholding tax on other forms of passive investment income (e.g. dividends), the 25% rate is not reduced under Canada’s income tax treaties.
Unless the non-resident chooses the alternative method of reporting the rental income (discussed below), that is basically the end of the matter. The non-resident does not file a Canadian tax return, and the 25% tax withheld is generally the final tax liability for the relevant year.
As an alternative, the non-resident can elect to file a regular T1 tax return under Part I of the Act within 2 years after the end of the year (rental year) in which the rental income was received. In such case, the net rental income for the rental year will be subject to the same graduated rates of tax as applied to resident individuals. That may save the non-resident tax compared to the 25% flat rate on the gross income.
Note that if the non-resident has more than one Canadian rental property, the election will cover all net rental income from all of those properties. In other words, one can’t make the election for one property and not for another.
Any previously withheld non-resident tax in excess of the actual Part I tax payable for the rental year will be refunded to the non-resident.
Reduction in withholding tax under alternative method
A non-resident who uses the alternative method and wishes to reduce the 25% withholding tax otherwise applicable to the rent can file Form NR6 with the CRA. Once the form is approved by the CRA, the agent who collects your rent will be required to withhold only 25% of the net rental income paid to the non-resident rather than 25% of the gross rental income from the property. (The agent must be resident in Canada.) The CRA requires the form to be filed by January 1 of the relevant year.
In such case, the non-resident must file the T1 return for the year by June 30 of the following year.
If the non-resident files the return late, a rather harsh provision in the Income Tax Act provides that the non-resident will be subject to the withholding tax on his or her gross rental income. The CRA provides the following example:
Emily, a resident of Australia, rents out a property she owns in Canada. Before January 1, 2015, Emily and her agent completed Form NR6 and sent it to the CRA, and the CRA approved it.
For 2015, she received rental income and had rental expenses as follows:
- Gross rental income of $20,000
- Minus allowable expenses of $15,000
- Equals net rental income of $5,000
Because the CRA approved Form NR6, the agent was able to withhold and remit non-resident tax for 2015 on the net rental income (25% of $5,000 = $1,250) rather than on the gross rental income (25% of $20,000).
Emily must file for 2015 a Canadian return on or before June 30, 2016.
If she does not send the return by the due date, her agent will have to pay an additional $3,750, plus interest, on Emily’s account. This $3,750 is the difference between the amount withheld on her net rental income (25% of $5,000 = $1,250) and the amount Emily would have to pay on her gross rental income (25% of $20,000 = $5,000) if she had not filed Form NR6.