Rental Income Reporting for Nonresident
As a nonresident, you may own property in Canada and earn rental income from Canada. If yes, you need to know your tax obligation and filing obligations and deadline to avoid penalty and interest charged by CRA.
Nonresidents are taxed on their Canadian-source income, of which rental payments and timber royalties are this one type. When Nonresidents Receiving Rent, they need to pay part XIII tax, which is nonresident tax. The tax rate is 25%. There are separate rules for rental income compared with other Canadian source income such as dividends and pensions as it was expensive. To avoid tax problems, all tenants who pay rent to nonresidents must remit 25% of the gross amount to the Canada Revenue Agency each month. Though most people who pay rent to nonresidents are not aware that their landlord is not a tax resident of Canada, a landlord must withhold tax on the income on their own account and remit it to CRA each month or entrust an agent to do it.
Reduce Your Tax Obligations with an NR6
For example, Mike has a rental property in Canada. Each month the rent is $1000. If Mike doesn’t apply for NR6, then Mike or his property manager needs to withhold 250 from him each month and send it to CRA before the 15th of the next month. This is nonresident withholding tax. However, Mike needs to pay rental expenses such as management fee, property tax, mortgage interest and insurance. It seems unreasonable for Mike to pay twenty-five percent (25%) of gross rental income for tax. It’s possible for Mike to pay tax on net rental income, correct? There is a process in place to help Mike pay 25% tax on net rental income. File NR6 for each owner and tell the CRA that the nonresidents will file section 216 tax return before June 30 of the following year. The NR6 must be filed to CRA before the first rental occurred each year, NR6 must be filed for each nonresident owner. The Canada Revenue Agency will respond to the nonresident’s application with a letter and approve them to pay tax on net rental income instead of gross rental income. If you do not file NR6 form, you need to withhold 25% of gross rental.
Make monthly remittance in time each month
Please remit 25% of net rental income before the 15th of the month after your NR6 application was approved. If the amount is not big, you can pay you the whole year’s fee in advance. The remittance was calculated based on an estimation only. For example
Grosse rental ——–
Property Taxes ——–
management fees ——–
net rental/per ——–
tax remittance each month ——–
If you expected a rental loss for the coming year, you do not need to make an remittance to CRA.
What about big appliance purchases, and renovations before renting
Yes, the renovation costs and big appliance purchases do not decrease your taxable income for current year.. These increases the tax-adjusted cost base of the property. This is important when you sell the property, and it could help reduce your taxes upon sale.
File NR4 slips and NR4 summary at the year end
At calendar year end, the withholding agent must file NR4 for each owner and NR4 summary must be filed for each NR account. NR4 slips and NR4 summary are similar to T4 and T4 summary, which tell the CRA how much gross rental you are collected for each owner and how much remittance has been made, and the owners’ share of the rental income. NR4 and NR4 summary also inform the CRA contact information of the person who files the form and remitted tax. The deadline to file NR4 and NR4 summary is March 31, of the following year. If you have up to 5 NR4 slips, the late filing penalty per year is 100 CAD.
Income tax return for election under section 216 return
section 216 is the elective return. The deadline to file section 216 return is June 30 of the flowing. the penalty of not filing section 216 return is the taxpayer lost the opportunity to pay tax based on the net rental income. Taxpayers who don’t file a section 216 return by June 30 of the following year will have to pay a 25% tax on their gross rents. If the nonresident fails to file their tax return within 2 years of the deadline, they normally lose their opportunity to be taxed on their net rent. However, if the CRA has not advised you or initiated any action against you because you failed to comply with your tax liability under Part XIII of the Canadian Income Tax Act, you may be able to file a late tax return and take advantage of the election. When you file NR6 at the beginning of the tax year, you are promising CRA that you will file your section 216 return by June 30 of the following year. If section 216 are not filed before deadline, CRA will request 25% of gross rents has been paid before issuing the certification of compliance.