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How Non-Residents Report Rental Income in Canada

As one of the most livable countries in the world, Canada is increasingly attracting individuals to invest in real estate. However, with investment comes tax obligations, and properties owned by non-residents must be rented out to avoid the empty homes tax and speculation tax in British Columbia (BC). Today, we will discuss how non-residents can report rental income in Canada.

According to Canadian tax law, anyone with income within Canada is required to pay personal taxes, regardless of their status. Tax residents must report their worldwide assets and income, while non-residents only need to report and pay tax on income earned in Canada. Therefore, determining whether one is a tax resident or non-resident is crucial. The key factor is whether the individual’s family ties are primarily in Canada; this determination is independent of immigration status (permanent resident, citizen, or foreign national). For specific situations, it is highly recommended to consult a qualified accountant.

Non-residents filing taxes in Canada must apply for an Individual Tax Number (ITN). Depending on their circumstances, they may also need to apply for a Non-resident account.

The tax agency requires non-residents to prepay 25% of their rental income each month. There are two options for handling this:

  1. Pay 25% of the rental income to the tax agency monthly and choose not to file a tax return. This method is straightforward but does not allow for any deductions of rental property expenses, and there are no refunds.
  2. Pay 25% of the rental income monthly and choose to file as a non-resident under Section 216. This option is more complex but allows for deductions of rental expenses, with taxes calculated based on actual net income. The current tax rate is 22.20% of the net income. Any overpaid withholding tax from the 25% prepayment will be refunded by the Canada Revenue Agency (CRA), typically within 4-6 months.

For example, Mr. Wang, a non-resident, owns a rental property in Canada generating $3,000 CAD in monthly rent, totaling $36,000 CAD annually.

  • If Mr. Wang chooses the first option, he pays $750 CAD ($3,000 x 25%) each month, totaling $9,000 CAD for the year, with no further tax return required.
  • If he opts for the second option, he also pays $750 CAD monthly, totaling $9,000 CAD for the year, but he chooses to file a tax return. Assuming the annual property expenses (property tax, insurance, repairs, etc.) total $20,000 CAD, the net income would be $36,000 – $20,000 = $16,000 CAD. The non-resident personal tax owed would be $16,000 x 22.20% = $3,552 CAD. After accounting for the $9,000 CAD prepayment, Mr. Wang would receive a refund of $5,448 CAD.

It’s important to note that non-residents must submit their tax returns within two years after the end of the tax year in which they received rental income to qualify for a refund. For instance, if rental income was earned in 2020, the tax return must be submitted by the end of December 2022 at the latest. Monthly prepayments can often be managed by property management companies, which typically have a unified non-resident account, eliminating the need for individual applications. At the beginning of the following year, the management company will issue an NR4 slip, indicating the total amount of withholding tax paid that year. This NR4 slip must be submitted with the tax return.

Without a property management company, the process becomes more complicated. Non-residents must apply for a Non-resident account, make their own monthly tax payments, and at the beginning of the following year, submit detailed property information along with the monthly payment records to the CRA, requesting an NR4 Proforma slip. This slip must also be submitted with the tax return.

Savvy investors will see the advantages of each tax filing method. While the second option is more complex and requires maintaining records of related expenses, hiring a professional accountant can save time and effort, ultimately being cost-effective. If you need assistance, please feel free to contact us!

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