What is Section 216
The real estate sector is one of the fastest-growing sectors of the Canadian economy. Income taxes in Canada are relatively high as compared to the other parts of the world. Therefore, people tend to move to gulf our other tax havens to avoid paying the Canadian tax. This can be achieved by becoming a non-resident for tax purposes.
A lot of foreign investors also like to take advantage of Canadian strong economy and political stability by investing in real estate. These foreign investors are considered non-resident for tax purposes.
For non-residents earning rental property income in Canada, CRA requires the filing of Section 216 return.
When to file a Section 216
Following conditions must apply at the time where non-residents of Canada file a Section 216 return:
1. When non-residents receive rental income from real or immovable property in Canada
2. When they receive timber royalties from Canadian timber resource property
3. When the rental property is disposed off.
How CRA defines the tax implication of rental property for non-residents?
The non-resident is required to withhold and remit non-resident tax at a rate of 25%, either;
a. On the gross rental income amount where no NR6 is required to be prepared
b. On the net rental income amount where NR6 is approved by the CRA
The tenant or the property manager, whosoever is the payer of the non-resident tax, must make the payment to the CRA. This tax payment must be made on or before the 15th day of the month following the month where rental income was paid. For example, if the rental income is earned in January, the tax must be remitted to the CRA not later than the 15th of February.
Guideline as to how to remit the non-resident tax to the CRA
The non-resident will call to the CRA at the following dedicated numbers so that non-resident account may be setup:
1. Use this number while calling from anywhere in Canada & US i.e. 1-855-284-5946
2. Use this number while calling from outside of Canada & US i.e. 613-940-8499
CRA will issue a non-resident account number and also share instructions on how to make tax deductions. Further details are provided on the following link i.e. www.canada.ca/payments.
What if the non-resident fails to remit non-resident tax?
If a non-resident fails to remit tax, CRA may charge a penalty when;
1. The tax has been deducted but it was not remitted to the CRA
2. CRA receives the tax amount after the due date
CRA Penalty levels for the late tax remittance
CRA will have 3% penalty if the tax remittance is late between 1-3 days. The penalty will increase to 5% if the tax remittance is late between 4-5 days, 7% penalty if it is late between 6-7 days and 10 % if it is late by more than 7 days and never remitted to the CRA. CRA will have up to 20% penalty if the non-resident fails to remit tax for the second time or later failures.
Requirements to file section 216 return
NR4 slip is required to be prepared; it shows the gross rental income and non-resident tax that is withheld and remitted for the current taxation year. If there is a co-ownership, the NR4 slip is required to be prepared for each co-owner separately. NR4 slip must be submitted to the CRA by the 31st of March.
If the non-resident doesn’t have the tax consultant, then simply NR4 pro forma letter can be sent to the CRA and requesting them to prepare NR4 slip on their behalf. The following information will be required for NR4 pro forma letter;
1. Non-resident’s Full Name
2. Non-resident account number
3. Social Insurance Number
4. Tax Year
5. Rental Property Address
6. Gross rent for the tax year
7. Non-resident tax withheld and remitted to the CRA
The last date to send this letter to CRA is the 31st of March. At the time of filing of section 216, if the non-resident doesn’t receive NR4 slip from the CRA, they can simply annex NR4 pro forma letter to the section 216 return and request CRA to attach the required slip with the return.
Filing of NR6 where the non-resident has the net rental income instead of gross rental income
NR6 allows non-resident to withhold and remit tax at 25% of the net rental income instead of gross rental income. In order to prepare NR6, the non-resident must provide an expected gross rental income and expected expenses for the next tax year. The due date of the filing of NR6 is the 1st of January every year.
In case of rental property disposed-off
The non-resident is required to inform CRA regarding the disposition of rental property within 10 days from the date when disposal actually happens. The non-resident must fill form T2062 which can be downloaded from the CRA website. T2062 is basically a certificate of compliance and it also notifies CRA for the property disposal. T2062 form is required to be filed within 10 days of the date of disposal other it will have a certain penalty that is ranged from $100 to $2500.
For NR4, the non-resident must complete 02 documents i.e. 1. Section 216 and 2. Rental income and expenses for the current tax year
For NR6, the non-resident must provide an 01 additional document i.e. Estimated Rental Income and expected expenses for the next tax year.
Role of GTA Accounting
GTA Accounting can help you file your non-resident tax return by preparing NR4 Slip, NR4 pro forma letter, NR6 slip and filing Section 216 rental property return. We will also contact the CRA Non-Resident Withholding Department on your behalf and iron out the details with the CRA. If you are a non-resident looking to file your non-resident return or looking to become a non-resident for tax purposes, then feel free to reach out to us.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.