Rental Withholding Tax

A rental agency has a legal obligation from Canada Revenue to withhold 25% of the rental income on behalf of the government before any payment is made to the apartment owner. To avoid deduction of some or all of this monthly tax the property owner has to apply to the CRA for an ITN (Individual Tax Number – Form T1261) such that you are then on the system. As a non-resident, we had to engage a Notary Public to certify the application to CRA.

In our case, to reduce the repetitive monthly deduction of tax, we elected to file an NR6 form together with the accompanying T1013E form. The NR6 is forms, submitted prior to the tax year in question that allows an estimate of the likely expenses for the following tax year. Upon approval from CRA, it then allows the rental agency to withhold and remit 25% of your NET rental income only. In accordance with the filing of the NR6, there is an obligation to file the Section 216 tax return on or before June 30th of the year following the year in which the rental income was received (for example, if you elected to file under the NR6, your 2015 Section 216 return must be filed by June 30th, 2016).

However, this poses a challenge to for the rental agent, because they have no control over the filing of the Section 216 on or before the due date. By filing late or not filing at all, the undertaking to Canada Revenue Agency on the NR6 to file the section 216 return on time is invalidated, (which allows the agent to withhold and remit tax on NET rental income only), and Canada Revenue Agency disallows all the deductions we have applied. Therefore, failing to file the Section 216 return on time when an NR6 has been provided, the rental agent is then obligated to submit the difference between the 25% of your NET income and the 25% of your GROSS income owing, plus penalties and interest to Canada Revenue Agency.

When filing the Section 216 annual tax return (CRA Forms T1159 + T776 ), this must include a copy of another form, the NR4 which is provided by the rental agency and is a statement of the amount of tax that the agent has withheld from you during the year to which the 216 relates. Although the rental taxation process seems a bit complicated and long-winded, it is not that complicated and the use of an accountant to file your tax returns is not necessary at all, you can do it yourself. The process however is typical of the Canadian demand for excessive documentation but the CRA do publish on their website all the procedures and information you need to know when filling in forms.

Federal tax due is nominally 15% of NET income but then a surtax of 48% for non-residents of Canada is applied to the Federal tax amount such that the overall Federal tax works out at about 22% for foreign owner-renters. This Canadian tax rate is quite high compared to the UK but there is a tax treaty in force between Canada and the UK which basically says that the Canadian tax cannot be higher than the UK so you are entitled to a UK refund. Now in the section dealing with property sale withholding tax, one requirement of the T2062 form is a UK Certificate of Residency but to get this Certificate you will need to have completed the Foreign pages of the HMRC Tax Return to detail the Canadian property income for the years in question. This then throws up another problem in that the Canadian 216 Return is completed in $CAD and the HMRC documents in £GBP so there is an exchange rate declaration to be made.

A general summary of withholding taxation can be found HERE

Annual Rental Income Statement - T776 Application for Individual Tax Number - T1261 Application for UK Certificate of Residency Foreign Pages Tax Return Foreign Tax Return Guide - SA106 NR4 Statement of Tax Pre-Paid by Non-Resident NR4; Non-Resident Tax Guide - T4061 NR6 Expenses Estimate Sheet Rental Income Guide - T4036 Section 216 Annual Tax Return - T1159 Section 216 Guide - T4144 Undertaking by Non-Resident to File a Tax Return - NR6