Taxation & Accounting 

TAXATION ISSUES FOR NON-RESIDENT INVESTORS

A) Rental Income

• All rental income is subject to pay tax to CCRA (Canada Customs and Revenue Agency)
• The payer, such as a tenant or property manager, has to withhold the non-resident tax at the rate of 25% on the gross amount paid
• He has to remit the withheld tax to the CCRA on or before 15th of the following month
• He has to file the NR4 return to the CCRA and to give the NR4 slip to the owner which shows the gross amount of rental income paid and the amount of non- resident tax withheld for the year
• Filing deadline is not later than March 31 of the following year

Generally, the non-resident tax is considered your final tax obligation to Canada in rental income. However, you can elect under Section 216 of the Income Tax Act. You may pay less tax. Also, you may receive a refund for some or all of the non-resident tax withheld

Election under section 216 of the Income Tax Act:

• Non-residents may elect to report rental income on a net basis rather than gross amount received
• May deduct all related expenses of earning the rental income includes capital cost allowance (C.C.A.)
• Must be reported within 2 years from the end of the taxation year that rent received
• Tax calculated under section 216 will be compared with any withholding tax previously remitted sent to CCRA
• Any overpayment may be claimed back in tax refund
• If the property is subsequently sold, there may be CCA recapture reported as taxable income
  

Example:

         
James left Toronto Canada in 2002 and became a resident of Malaysia. He did not sell the condo, but decided to rent it out for a few years. In 2003 his Property Manager in Toronto Canada withheld and remitted non-resident tax of $3,000 (25% of the gross rental income of $12,000) to CCRA. James had the following income and expenses from the property in 2003: 

• To recover all or part of the non-resident tax withheld, James can choose to file a Section 216 return.
• If he does, he will report and pay tax only on the net rental income of $5,000. On the return, he will also claim the $3,000 non-resident tax which his property manager had withheld and remitted to CCRA to offset the tax payable.
• James will receive a refund of the excess tax withheld, as long as he sends his Section 216 return by December 31, 2005.

Deductible Expenses Are:

• Property tax
• Common element expenses (condominium fee)
• Interest portion of mortgage payment
• Advertising
• Insurance
• Repair and maintenance
• Legal, accounting, and other professional fees
• Rental commission, collections fees, agency fees
• Office supplies
• Capital cost allowance/amortization of set-up fee

On Rental Loss:

• Cannot use CCA to create or increase rental loss
• Cannot charge rent below current market price
• Must show a rental income within a reasonable amount of time
• Must have a reasonable expectation of profit

B) Sales of Rental Property

• *S116 of the Income Tax Act imposes rates for non-residents who dispose of Canadian rental property
• Must obtain a tax clearance certificate before closing date
• Non-resident vendors have to prepay income tax which is equivalent to 25% of the estimated capital gain
• Otherwise the purchaser (with lawyer) is obliged to pay 25% of the purchase price to CCRA as income tax payable

For additional information and help with making Investments in Canada, please contact a Canadian Accountant