When non-residents receive rental income from rental or immovable property in Canada, the tenant or agent must withhold non-resident tax which is 25% on the gross rental income paid to the non-resident. However, a non-resident of Canada also has the option to pay tax on his/her net Canadian rental income instead of gross income by electing under section 216 of the Income Tax Act. The CRA will refund the excess if the amount of tax withheld is more than the amount of tax payable on the section 216 return. A non-resident needs to report all Canadian rental income and expenses from all properties together on one section 216 return.
Generally, a non-resident should send his section 216 return within 2 years from the end of the year in which the rental income was paid or credited and the CRA will issue a non-resident tax assessment if it is filed on time. To help you better understand the mechanism, let’s review the following example:
John emigrated from Canada and became a resident of Australia in 2019. He still owned a house in Toronto after he left Canada and decided to rent it out. In 2020, his agent of the property withheld and remitted non-resident tax of $2,500 (25% of the gross rental income of $10,000). John’s income and expenses regarding the rental property are listed below:
- Gross rental income $10,000
- Allowable expenses $5000
- Net rental income $5000
Therefore, John has till December 31, 2022 to file his section 216 election and he will pay tax only based on his net income which is $5,000. On the return, he will be able to claim the $2,500 non-resident tax that was already remitted by his agent to offset his tax.
Form NR6 – Withhold Tax Based on Net Income
There is another way for a non-resident to elect under s.216 so that non-resident tax will be withheld based on net income instead of gross income. In order to do so, a non-resident and his agent must complete Form NR6 – Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property or Receiving a Timber Royalty.
- Due date of Form NR6
A non-resident should send Form NR6 on or before either: January 1 of each year, or the first rental payment is due. Note that before Form NR6 is approved by the CRA, the agent should continue to withhold tax based on gross rental income.
Once NR6 is approved, the agent can then withhold non-resident tax of 25% on the net rental income (gross income minus expenses). The agent must then pay the tax on or before the 15th day of the month after the month the rental income is paid or credited. After the NR6 approval, the non-resident must file s.216 return within 6 months of the end of the taxation year (For example, the 2020 return must be filed before June 30, 2021), otherwise he will be subject to non-resident tax based on gross rental income as opposed to net rental income. In addition, the CRA may assess the agent if the correct amount was not withheld at source.
However, regardless of whether NR6 has been completed, a non-resident must file a s.216 return for a taxation year before April 30 of the following year if the 2 following conditions are met:
- Rental property that a non-resident has previously claimed capital cost allowance (CCA) was disposed in that taxation year, and
- Recapture of CCA is included on the tax return of that taxation year.
Subsection 216(1) Late-Filing Policy
If a non-resident somehow fails to send his s.216 election on time, he is not entirely out of luck. CRA’s s.216(1) late-filing policy may grant a one-time retroactive application which acts as the taxpayer already filed each year’s tax return on time, which can make a huge difference on the overall amount of tax. Although the CRA will not apply penalties, it may still charge arrears interest to the tax owning based on the net income.
The CRA will not accept late-filed s.216 returns if:
- It has already advised the non-resident of his responsibility under Part XIII of the Act with respect to rental income or timber royalties earned in Canada, or
- It has already initiated action because of the non-resident’s failure to comply with Part XIII, or
- The non-resident has submitted Form NR6 undertaking which was already approved by the CRA.
Pro tax tips
Section 216 can make a huge difference on the non-resident tax. Although the voluntary disclosure program is not applicable to late section 216 elections, CRA’s late filing policy may still give non-residents a chance. If you want to discuss the possibility of mitigating your non-resident tax regarding s.216 election, contact our office to speak with an experienced Canadian tax lawyer for a consultation.