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 can be income from renting an apartment, house, office, or other shared spaces in a building.
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.
For example, you are a U.S. tax resident and own a condo in Toronto. As this apartment, a real property, is located in Canada, it is a Canadian-sourced income. If your tenant is paying you $3,000 a rent every month, they must remit $750 as a part XIII tax to the CRA, and the remaining $2,250 to you. At the end of the year, the payor, your tenant or property manager, will issue NR4 slip to you. The tax withheld on NR4 is your final tax liability, you do not have to file a tax return in Canada. You can use this NR4 to claim foreign tax credits in the U.S.
Section 216 Tax Returns for non-residents of Canada
Part XIII tax, 25$ of Gross rent is the final tax liability of a non-resident taxpayer in Canada.
Sounds simple but expensive!
In reality, many real properties in Canada have significant expenses attached to them. For example, condo maintenance fees, insurance, property tax, mortgage interest or repairs etc. Sometimes these expenses even exceed the gross rents creating losses.
Non-residents of Canada who intend to claim the deductions against rental income can file an election 216 with the Canada Revenue Agency. Filing a tax return electing under Sec 216 (T1159) all the deductions are allowed against the gross rental income to arrive at net rental income.
Using Section 216 allows non-residents of Canada to pay taxes on their net rental income. While filing a tax return under Section 216, the taxpayer reports the rental income only. Further, the rental losses on Section 216 tax return may offset the income of one property against the loss of another property but cannot offset any other source of income in Canada. For example, a rental loss of a non-resident cannot offset employment income from Canada. Rental losses in this situation do not carry forward or carry back.
If there is a positive net income, T1159 calculates the income taxes for that year. It also allows a nonresident to get a refund for the difference between the withholding tax reported on NR4 and the tax on the T1159.
There is no escape from withholding income taxes even if you elect under Section 216 unless you file NR6 on time. The payor must withhold and remit 25% of Gross Rent. The taxpayer must file this tax return to seek a refund of the excess amount remitted to the CRA.
Reduced withholding with Form NR6
As mentioned before in all cases payor must remit 25% of the Gross rent to the CRA!
25% of Gross rent on a loss-generating rental property can cause cash flow issues for many non-resident owners. Luckily, there is a mechanism available, however, you must follow the procedure in timely manner!
In order to lower the withholding tax rate, form NR6 needs to be filed with the CRA. This will enable the payer to deduct a 25% withholding tax on net rental income instead of gross rental income. This form must be approved by the Canada Revenue Agency before the payor starts deducting reduced withholding.
Important to know regarding Form NR6:
File NR6 on time:
You must file Form NR6 before the start of the year. If someone starts paying you rent in the middle of the year, you must file NR6 before you receive the first rental payment. If you missed the deadline, you cannot file NR6 for that year.
Further, you must file NR6 every year.
The payor must keep on withholding 25% of Gross rents until NR6 is approved.
A Co-signor who can sign the undertaking is needed
You will need a co-signor who can sign the undertaking that you will file a section 216 tax return before the June 30th deadline.
This is the most difficult part unless you have some friends or family who can sign this form for you. When a non-resident does not file the tax return by June 30th, 25% of Gross Rent is payable as tax with no deduction allowed. The person who signed the undertaking is liable now for this amount. This is the reason why your family or friend will dread signing the form for you, especially, if you do not have a good track record of compliance.
You cannot sign your own NR6, it must be a Canadian tax resident.
The filer must file a Sec 216 tax return
If you have an approved NR6, you must file a Section 216 tax return by June 30th. If a Non-Resident taxpayer does not file a Sec 216 tax return after NR6 was approved, CRA assesses the withholding agent for the difference of withholding tax on Gross versus the Net rent.
Section 216 is an election!
Section 216 tax return is an election and like all the elections, it has time limitations.
- June 30th – If approved NR6.
- June 30th – If no NR6, however, the taxpayer can elect within 24 months after the end of the tax year
Late Section 216 tax returns
Can a Non-Resident file late Section 216 tax returns?
The answer is yes but there are certain caveats attached to it.
You cannot make section 216 election:
- If there is an approved NR6, there is no extension or option to file beyond June 30th. If you do not file by June 30th, 25% of Gross rent is payable.
- Sometimes CRA sends a notification to remind NR taxpayers of their reporting requirements. If you received such a letter from the CRA and you did not comply afterwards, you do not have the election available to you.
Section 216 Tax Returns and Certificate of Compliance
You must keep copies of Section 216 tax returns. You will need them when you sell the property. Sec 116 requires notification requirement and the need for a certificate of compliance when a non-resident of Canada disposes of a Canadian real property.
What if you did not know about all this?
The administrative policy of the CRA allows a one-time relief in certain cases. If you have not filed past Section 216 tax returns or are not compliant with your Canadian income tax filings, get in touch with us.
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.
More information about UHT is available here.
Quick Reference for Non-Residents of Canada with Rental Properties Compliance
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.
6 thoughts on “Income taxes for non-residents on Rental Income from Canada”
Hi, I am migrating to Toronto in 2 months time from Singapore and I am looking to lease/rent a place for long term and I wanted to check if it is usual for a real estate person to ask me for my banking statement in Singapore to check for my credit score in Toronto even though I have not moved there yet?
I appreciate your help in this matter and I look forward to your reply. Thank you.
Kind Regards,
Sunita Kaur
hi Sunita, that’s something you have to check with your agent. We are more into income taxes and cannot comment on your broker/agent’s credit checks.
Hi Maroof, I’m planning on leaving Canada and I have a condo that I rent out. Does it mean that if I file an election 216 with Canada Revenue Agency, the tenant no longer has to withhold 25% and that I will myself pay the withholding tax on net income directly to the CRA?
HI, the payor of the rent must withhold taxes from the rental payments to Non-residents at the rates reduced by the treaty. Electing under 216 means you will be able to claim deductions against the rental income. If you want your tennanet to withhold at lower rates you need to send NR6 to CRA. Your Tennant must withhold at Gross rate until NR6 is approved.
Hi Maroof,
I’m a realtor and I have a client asking a question. If they are not living in Canada and want to buy a rental property, and several years later, they may want to give the property to their son when he’s married. (He’s living in Canada.) What is the tax amount?
Hello Aparna
When your client is going to dispose of the property in Canada, she is going to be subject to the same rules as any non-resident disposing of Canadian real estate. The only difference is proceeds of disposition at that time will be determined based on the Fair market value on that day. Why does your client want to buy property in her/his name when later on it has to be gifted? Why not gift the cash right now and let him buy under his name? Unless, of course, there are some other non-tax goals. Receiving gifts in Canada is not taxed. Receiving property by a Canadian tax resident is not taxed in the hands of that taxpayer at the time of receipt of the same. In case of real property situated in Canada, a non-resident or even resident who gifts it records disposition at fair market value on that day.