Non-resident may consider renting out the property In order to maintain a break-even cash flow.
What’s the tax impact on a rental property then?
As a non-resident of Canada, he/she can appoint a Canadian agent to submit 25% of the gross rental income withheld to the Canada Revenue Agency (“CRA”) within 15 days of each month-end. In addition, by March 31st of each calendar year, he/she also needs to file the summary of total gross rent and taxes withheld to the CRA ON form NR4, “Statement of Amounts Paid or Credited to Non-residents of Canada”.
In his/her home country, a non-resident will declare the rental income to the local tax authorities and use the tax withheld as a foreign tax credit on the local tax return. Back to Canada, what if tax is not properly withheld? The CRA will have no hesitation to impose interest from the date of each rent payment, plus a 10% penalty. What a burden!
Here is a solution to reduce withholding tax burden:
Step 1: At the end of the prior year, file Form NR6, which provides an estimate of net rental income but excluding depreciation and other non-cash expenses;
Step 2: Before March 31st of each calendar year, file Form NR4, which is to report the amount of taxes withheld by the non-resident for the calendar year;
Step 3: Within the first 6 months of the calendar year, file Section 216 return, which to report the actual rental income earned in Canada deducted by the expenses like property taxes, repairs and maintenance, interest on debt used to purchase the property, condominium fees, property management fees, etc.
There may be a refund position between the withholding tax remitted Form NR4 and the amount of income tax liability filed in Section 216. Overall, going through those filing steps will help a non-resident improve cash flow in the long run.
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