Rental income is the income from renting a real or movable property in Canada that you own or have use of. Rental Income can be income from renting an apartment, house, office, or other shared spaces in a building.
Canada taxes its residents on their worldwide income. If you are not a resident of Canada, you will pay taxes on your Canadian-sourced income. Rental income from property in Canada is a Canadian Sourced Income.
Rental Income Taxation for Residents of Canada
If you are a resident of Canada, you report your Rental income on your personal income tax return by completing form T776, Statement of Real Estate Rentals. You are entitled to deduct all the allowed expenses from your rental income. Net rental income is taxed at marginal tax rates as applicable in Canada.
Deductions allowed for rental income include; advertisement, Insurance, Salaries and wages, benefits on salaries and wages, management fees, administration fees, property taxes, repairs and maintenance expenses (differentiate it from Capital expenditures), interest and bank charges, travel expenses, utilities, motor vehicle expenses, and other rental expenses. You can view the details of these deductible expenses by clicking here.
Rental Income Taxation for Non-Residents of Canada
As mentioned before rental income from real property in Canada is a Canadian-sourced income. Any non-resident of Canada must pay taxes on such income.
Non-residents of Canada must inform the payers of rental income about their non-residence status. This is even more important for those who are leaving Canada (Emigrants). Often the leavers from Canada do not inform payers about their new non-residence status. Uniformed payers keep on making rental payments to their bank accounts. While doing so, they often ignore the fact that such an action may keep their residential ties with Canada. Unknowingly they may become factual residents of Canada, which has other tax implications for them.
The payer of rental payments in Canada, an agent or tenant, must withhold 25% tax on these payments. These withheld amounts are remitted to CRA no later than the 15th day of the following month. There are penalties and interest applicable for not remitting such amounts.
Rental Income for non-residents – 25% tax on Gross Rental Income
The receiver of Rental income does not have to file a return and the tax withheld by the payer (25% on gross rental income) is considered to be the final tax liability of the non-resident. There are no deductions allowed in this case.
Section 216Tax Returns for non-residents of Canada
A Non-Resident of Canada can file an election 216 with Canada Revenue Agency. This way all the deductions are allowed against the gross rental income to arrive at net rental income. Net rental income is then taxed at Canadian marginal tax rates. Section 216 income tax return allows a nonresident to get a refund for the difference between the withholding tax remitted and tax on the net rental income.
In order to lower the withholding tax rate, form NR6 needs to be filed with CRA. This will enable the payer to deduct a 25% withholding tax on net rental income instead of gross rental income.
Underused Housing Tax (UHT)
(Updated January 2023)
Effective January 01, 2022, ‘affected owners’ need to file and pay Underused Housing tax (UHT) for each calendar year no later than April 30th of the following year. UHT is 1% of the value of the residential properties owned by affected owners.
Non-resident taxation issues are often complicated and complex and advice from a tax professional is always recommended. If you own a property in Canada or planning to buy or sell one, you can contact Maroof HS CPA Professional Corporation. We provide tax services for non-residents and residents of Canada including tax preparation services & tax planning.