Rental income is one of the most common types of Canadian income. Non-residents should handle the taxation of rental income carefully and follow CRA guidelines to avoid unnecessary trouble and penalties. Below are three key areas we explain for everyone.
First, tax on non-resident rental income is collected at 25% of gross rental income. This is different from how Canadian residents are taxed on rental business income. Generally, the CRA taxes Canadian residents on net income and allows various expenses incurred in business or rental services to be deducted from gross income first. For non-resident rental income, the above rules do not apply; the CRA does not allow non-residents to deduct interest, property tax, insurance, and other expenses from rental income. Below we will explain how you can apply to deduct rental expenses so you do not need to remit 25% of total rent to the CRA.
Second, the CRA has strict requirements on how non-resident rental tax is paid, requiring the tenant or a local company or individual to withhold as the withholding agent. Before a non-resident property is rented out, the agent (company or individual) or the tenant must first open a withholding tax account with the CRA. Each time rent is paid, the tenant or agent company/individual must withhold the tax payable and remit it to the CRA, and only the remaining rent can be paid to the non-resident landlord. The tenant or agent effectively becomes the guarantor of the non-resident landlord and shares legal responsibility with the landlord for tax remittance to the CRA. Since 2003, Heyday Accounting has provided withholding and remittance services for over 500 non-resident landlords across multiple provinces.
Now back to our topic: if you want the CRA to allow all rental property expenses so that the prepayment withholding is only 25% of net rent (after deducting expenses) rather than 25% of total rent, how should we handle this?
If the non-resident rental business lasts more than 8 months and you wish to be taxed based on net income, our firm can submit an application to the CRA for the non-resident landlord. Only after CRA approval can you file and pay tax based on net income. The application is submitted by filing Form NR6 (NR6 Undertaking to File an Income Tax Return by Non-Resident Receiving Rent From Real Property or Receiving a Timber Royalty). After approval, the non-resident landlord may deduct rental expenses such as interest, property tax, insurance, management fees, etc., but cannot deduct depreciation on the property.
Based on our past experience, the NR6 approval process takes 4-6 weeks. After approval, the landlord can remit 25% of rent after deducting all applicable expenses to the CRA each month. Currently, about 70% of our clients choose to prepay the full year's withholding tax after NR6 is approved.
Before January 30 of the following year, clients who engage our firm will receive the NR4 form prepared according to CRA requirements (Non-Resident Tax Withholding, Remitting, and Reporting). This form summarizes the actual total rent for the year and the actual total withholding tax remitted.
Before June 30 of the following year, we must report the rental income using the T1159 return. The corresponding interpretation in the Income Tax Act is Section 216.
Generally speaking, it is more cost-effective for non-resident landlords to apply for NR6 and prepay tax based on net rental income. The tax rates applicable to non-residents when filing are the same as for residents. The difference is that some deductions and tax credits available to residents do not apply to non-residents. If a non-resident chooses to file a return, the final tax payable is generally much lower than withholding 25% of gross rent. Therefore, after filing the T1159 return by June 30, there is usually a refund. We often encounter situations where, after deducting annual rental expenses and maintenance costs, the landlord has an overall loss for the year; in such cases, the prepaid tax will be refunded in full. If you are a non-resident landlord and have any questions about the above process, please contact our firm and we can explain in more detail.
(The above text is independently provided by heyday taxbook Solutions Inc. Unauthorized reproduction in any form is prohibited.)