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The Canada Revenue Agency (CRA) imposes certain obligations on non-residents of Canada with respect to the reporting of both rental income and the gains realized on the disposition of real property within Canada. In general, a non-resident of Canada who owns Canadian real estate is subject to Canadian withholding tax on any rental revenue as well as income taxes on the gain realized on any dispositions of Canadian real estate. The following briefly outlines some of these implications and is meant as general guidance only, as each situation will be somewhat different. The following summary is based on the Canadian Income Tax Act in force as of October 2008 and does not necessarily incorporate changes subsequent to that date. We would urge you to seek professional guidance when dealing with any of these matters.

Rental Income

A non-resident who owns Canadian rental property is subject to a 25% withholding tax on the gross rents received. This withholding tax should be remitted by the tenant, the owner, or the Canadian agent of the owner. However, these withholding tax payments can be reduced or even eliminated if the non-resident owner files an NR6 form which enables the withholding tax to be calculated on the estimated net rental income (after deducting operating expenses paid) rather than on the gross rental revenue. This form is an undertaking by the non-resident owner and his or her Canadian agent to file a Canadian income tax return to report the actual net rental income from the Canadian real estate. The owner would then pay income tax on the net rental income at Canada’s marginal income tax rates which range from approximately 20% to 44%.

Both the NR6 form and the Section 216 income tax return must be completed and filed annually. The NR6 form must be filed before the first rents are received for a given calender year, while the Section 216 return is usually due by 30 June of the following year. If an owner does not choose to file an NR6 form, he or she can still file the Section 216 return before 31 December of the second following year to claim a partial refund of the 25% withholding tax paid in excess of actual tax computed on the net income.

Gains from Disposals

There is also a compliance requirement on the disposition of Canadian real property owned by a non-resident. The non-resident vendor must inform the Canadian government about details of the sale within 10 days of the closing or face a penalty. In addition, because the purchaser of the Canadian real estate property is also liable for any Canadian income taxes owed by the non-resident vendor, that purchaser is required to withhold 25%-50% of the gross proceeds of sale and remit them to the CRA on behalf of the non-resident owner.

To reduce this withholding, the non-resident owner can file an election requesting a Compliance Certificate enabling the withholding tax to be limited to the estimated actual Canadian income taxes which will arise from the disposition. Income tax liabilities will arise from the reporting of recapture (the reversal of depreciation claimed for income tax purposes in prior years to reduce net rental income) on the final Section 216 return, and from a gain realized from the sale of the real estate itself which is reported on a separate Canadian income tax return in the year of sale. Because of the mechanics of the calculation of the withholding from the sale proceeds, the non-resident owner should receive a partial refund of the withheld Canadian tax when he or she files the Canadian income tax return to formally report the property disposal.

If Canadian rental activity is expected to be significant, it is often carried on through a Canadian corporation which would be subject to Canadian corporate income taxes on its net income at 29%. However, if the Canadian corporation is properly structured and financed, the income can be reduced by interest expense on financing as well as management fees which may be subject to lower withholding tax rates under international tax treaties.

Goods and Services Tax (GST)

GST is Canada’s value-added tax charged at 5% on all sales of goods and services unless specifically exempted. This includes the purchase of a real estate property and the rental income earned by the property. However, the sale or rental of used residential property, unless such property is intended to be used for short-term rentals of less than 30 days, is exempt from GST. If the property is going to be subject to GST because it is going to be used in a commercial activity (i.e., short-term rentals), then the purchaser should register for GST prior to the acquisition. This way, though the registered purchaser must still remit the GST for the purchase, or collected on the rents, he or she can also claim offsetting input tax credits for any GST paid, so that only the net amount of GST collected must be remitted. GST returns must be filed on a timely basis to remit any net tax owing or to claim any net refund.

There are many intricacies in the Excise Tax Act dealing with the GST. A non-resident registrant may be required to post a security deposit, if the amounts of GST that he or she will collect in trust for the Canadian government will be significant. There are also special rebates which may be available to recover a portion of the GST paid for the purchase of a new Canadian real estate property which will be used for personal enjoyment or rented under long-term leases.