Tax Matters

Rental Property Investment by Non-Residents of Canada

This document is intended to provide a brief summary of the rules that the foreign investor should be aware of at the time of investing in Canadian tax laws with respect to a particular situation, but is intended to provide a brief introduction of the rules that may apply.  Each investor should consult directly with their own professional tax advisor to determine the exact consequences of their particular investment situation.  These rules are not appropriate for residents of Canada.

Investing in Canadian real property, particularly vacation properties, is becoming increasingly popular with non-resident investors.  Unfortunately, the Canadian tax consequences of investing in Canadian real property by a non-resident of Canada can be quite confusing.  Since noncompliance with the Canadian income tax rules, particularly the withholding tax rules, and the Goods and Services Tax (“GST”) rules, can result in significant penalties, the potential investor should be aware of how these rules work prior to investing.

Taxation of Non-Residents

Non-residents of Canada may be subject to Canadian income taxes if they:

- Receive rent from Canadian real estate; or

- Dispose of Canadian real estate.

Although they may be subject to Canadian income taxes as a result of receiving other income items, or carrying on other activities in Canada, these are beyond the scope of this document.

Canadian Tax Rates

If a non-resident of Canada has taxable income in Canada (i.e. income resulting from those activities listed previously) they will be require to pay Canadian income tax on this income to the Canada Revenue Agency (CRA).  This tax may be reduced by the income tax treaty between Canada and their country of residence.

Rental Property Compliance Rules

In order to ensure that non-residents of Canada comply with the Canadian income tax laws, there is a complicated system of rules involving both the non-resident and the agent, if any exists, for the non-resident.  For Canadian rental property, this compliance system includes rules with respect to withholding taxes, NR6 forms, NR4 forms and Section 216 returns.

Withholding taxes

Rents paid to non-residents are subject to a 25% withholding tax on the “gross rents”, which is required to be withheld and remitted to Canada Revenue Agency (“CRA”) by the payer (i.e. the Canadian agent of the non-resident, or if there is no agent, the renter of the property) each time rental receipts are paid or credited to the account of the non-resident by the payer.  If the payer does not remit the required withholding taxes by the 15th day following the month of payment to the non-resident, the payer will be subject to penalties and inters on the unpaid amounts.

NR6

The requirement to withhold tax on the gross rents can be waived or reduced if the non-resident selects a Canadian agent to act on their behalf and an NR6 Form is filed and approved by CRA annually and signed by both the non-resident and the agent.  The NR^ Form is used to estimate the “net rental income” (see subsequent discussion) that is expected to be the net rental income is in a loss position and CRA approves the NR6 Form then there may be no withholding requirement for the current year.  If the net rental is not in a loss position, then the 25% withholding tax may be calculated on the “net rental income” amount and remitted as rent is received.  An NR6 Form must be files and approved for each taxation year before the first rent payment is received.  In most cases, when income is being received throughout the year, the NR6 must be filed before January 1st of that year.  Any tax that is withheld can be claimed as a credit against taxes payable when filing your Section 216 personal tax return for the year (see below).  If the amount withheld exceeds the income taxes otherwise payable, CRA will issue you a refund of the difference.

NR4 Forms

An NR4 Information Return must be filed by March 31st summarizing the amount of rents paid or credited to you by your Canadian agent, as well as the amount of withholding taxes, if any, paid to CRA on your behalf by your agent.  Although the Canadian agent is required to file this form, it is often prepared by the non-resident’s Canadian accountant, and then signed by the agent, to ensure that all of the Canadian tax rules are complied with on behalf of the non-resident.

Section 216 Return

A Canadian income tax return may be filed for the taxation year of January to December.  This income tax return is pursuant to Section 216 of the Canadian Income Tax Act and will only include the income and expenses relating to the rental property.

GST and Rental Properties

The GST is a value-added tax, payable at the rate of 6% on certain sales and supplies in Canada.  The following is a brief explanation of certain GST considerations with respect o rental properties owned by non-residents of Canada.  It is not intended to be a complete explanation of the GST compliance rules, and specifically does not address periodic GST return filing, installments, input tax credits claimable in reducing GST payable.  If an individual decides to register for GST, these matters should be discussed with the non-resident’s professional tax consultant.

Short-terms rentals (i.e. rentals for hotel accommodation for periods of less than month at a time) are subject to GST.  Generally, this means that rental of a skiing cabin or condominium for one week during the winter may be subject to GST, whereas the rental of the same property for three months during the summer will not be subject to GST.  Readers are cautioned that if they do earn monthly rentals, they may be required to pay the GST on the property.  This is a complicated area and matters should be discussed with an advisor.

GST on Purchase of Property

GST may be payable on the purchase of a particular property.   Whether or not GST will be payable on the property will be dependent on, among other things, whether or not the vendor of the property is a GST registrant and the use of the property prior to its purchase.  If GST is payable on the acquisition of the property, you may be able to avoid or reduce payment of the GST on the purchase, depending on your intended use of the property.  If you intention is to acquire the property to be used primarily for short-term rental, you may be eligible to register for GST.  If you are registered for GST prior to the acquisition of the property, you will not be required to pay GST to the vendor on the purchase of the property.  While you may be able to avoid paying the GST on the purchase of the property by registering for GST, you may be required to self-assess a portion of the avoided GST and remit this directly to CRA.  For instance, if you avoid GST on purchase of the property by registering for GST, but you expect your personal use of the property to be 20%, then you can avoid payment of the GST to the vendor, but will be required to pay 20% of the GST directly to CRA.  As well, if your personal use changes in the future, you may be required to self-assess and pay additional GST to CRA.  The detailed rules related to the sell-assessment of GST re complex and you should consult with your tax advisor.

If you register for GST, you will essentially be buying commercial use property, in addition to the potential self assessment of GST explained above you will be required to:

- Collect GST on all short-term rental contracts;

- File an annual GST return (due March 31st) reporting the net GST payable for the prior calendar year;

- Remit the net GST amount to CRA (with the GST return for the first year, and possibly by quarterly installments in future years); and

- Charge GST on the eventual sale of the property.

Disposition of Real Property

A non-resident of Canada is subject to Canadian income tax on dispositions of Canadian real property.

Withholding Taxes

In order to ensure that the non-resident complies with the Canadian tax rules on the sale of property, the purchaser of the property is required to withhold a portion of the vendor’s proceeds and remit this to CRA on behalf of the non-resident vendor.  As explained below, the requirement to withhold a portion of the proceeds can be avoided if certain clearance certificates are provided by CRA, either reducing or eliminating the withholding taxes to be remitted by the purchaser.

In general, the purchaser is required to withhold 25% of the gross proceeds related to the disposition of land and 50% of the gross proceeds related to the disposition of buildings.

In order to reduce, or eliminate, the required withholding taxes, the non-resident can file certain forms with CRA in order to request clearance certificates from CRA that provide for a lower withholding tax amount.  If approved an considered as a non-business asset, the withholding taxes related to the land disposition can be reduced to 25% of the difference between the gross proceeds and the cost of the land.  In addition, the withholding taxes related to the building disposition can be reduced to a percentage of the difference between the gross proceeds and the undepreciated capital cost of the building.  The percentage related to the building may differ depending on the amount of the difference.

Once CRA issues the requested clearance certificates, the purchaser will only be required to remit the amount stated by CRA.

Income Tax Return Reporting

The non-resident will also be required to file a special Canadian personal income tax return for the year of disposition.  In this return, the non-resident would report the actual gains or losses on the sale.  In calculating the gain or loss on the property, the non-resident will be able to claim the real estate commissions and legal fees as a deduction in determining the net proceeds of the sale.  Generally, the actual income taxes payable with respect to the sale of the property will be less than the withholding taxes remitted on the sale of the property.  As a result, the non-resident will generally receive a refund of a portion of the withhold taxes that were originally remitted to CRA.

We Can Help

We at Meyers Norris Penny specialize in helping non-residents of Canada with their Canadian and International income tax needs.  We would be pleased to discuss any of your income tax and GST matters.  We can be reached by telephone at 250-763-8919, by fax at 250-763-1121, or by email at heather.weber@mnp.ca

We look forward to assisting you!

Heather Weber, BBA, CGA

 

Heather obtained her CGA designation in 1995.  She has completed both Part I and II of the CICA In-Depth GST Course.  Her practice is focused on specialized income tax services including:

- commodity tax issues (federal and provincial),

- Federal commodity tax rulings,

- extensive dealings with Canada Revenue Agency during the audit and appeal process,

- cross border and non resident commodity tax issues,

- Input Tax Credit and Rebates, and

- sale of property and business.

- If personal use and no income, no tax return

- If renting it, must file a tax return each year

- 1 week to get a GST# for non-resident

- “Clearance Certificate” required in order to sell (withhold 25%-50% of capital gain); 6 weeks.

Reproduced with the permission of Meyers Norris Penny LLP, #600-1628 Dickson Avenue, Kelowna, BC  V1Y 9X1