Many non-residents hold interests in income-producing properties in Canada. In many cases, when they acquire them, they do not obtain proper advice regarding the Canadian tax implications and requirements.
This can be quite costly-in the absence of following certain procedures, a non-resident earning rents from Canadian real estate can be subject to a 25% Canadian tax on GROSS rents (that is, no deduction for related expenses). This can apply even if no profit is being earned from renting the property.
As a general rule, a non-resident who earns rents for the use of Canadian real estate is subject to 25% tax on the gross rents under Part XIII of the Income Tax Act (“the Act”). This is not usually a good result, particularly where there are significant amounts of expenses that pertain to earning that income.
However, it is possible for the non-resident to elect, pursuant to subsection 216 of the Act, to pay Canadian tax on the net rental income, after deducting allowable expenses such as mortgage interest, property taxes, repairs, management fees, etc. If there is any net income remaining, the tax will be payable at graduated rates, similar to those that apply to Canadian residents.
As a general rule, in order for the non-resident to use this method for any year, a special Canadian tax return (form T1159) must be filed within 2 years after the end of that year.
Nevertheless, even if that return will be filed, the tenant paying the non-resident (or, failing that, the non-resident or the collection agent for that non-resident) will still be required to remit 25% of the gross rents to the non-resident. If that amount remitted is more than the actual tax computed on the section 216 return, it will be refunded to the non-resident after the return is assessed by the Canada Revenue Agency (“CRA”).
However, in cases where there is an agent collecting the rents for the non-resident, and an undertaking to file a Canadian tax return (form NR6) is jointly filed with the CRA, the amount remitted to the CRA can be based on 25% of the estimated net cash flow. If the NR6 is filed, the return must be filed within 6 months after the end of the year.
In cases where a non-resident has been collecting rents on Canadian real estate and not remitting any Canadian taxes or filing any returns, they will be subject to 25% Canadian tax on gross rents, plus interest and penalties, if the CRA gets wind of the situation, for any year that ended more than 2 years ago. Such failure to comply will often be unearthed when the non-resident attempts to obtain a tax clearance under section 116 of the Act when the property is sold.
There is no provision in the Act for late filing a section 216 return. However, fortunately, the CRA has an administrative policy of accepting late-filed section 216 returns in cases where the non-resident has never received any communication from it regarding filing tax returns.