Thinking of investing in real estate in Canada? Or you may have already made the investment? You must know some essential tax rules that will save you time, money and trouble with the Canadian tax authorities.

Step 1: Have a non-resident number

Any non-resident of Canada earning Canadian-source income must pay 25% of their Canadian gross revenues (before expenses) to the CRA (Canada Revenue Agency). Rental income is one of them. These payments must be made before the 15th of each month or else a penalty of up to 10% will be applied to the unpaid amount.

To make the required payments, you must obtain a non-resident tax account number by calling the CRA toll-free at 613-940-8500 (or 1-855-284-5947 if you are in the US).

Step 2: Prepare the end of the year

Before filing your tax return, you would need to produce some documents. 

Relevé 31 slip: If your rental property is in Quebec, you must file a RL-31 slip for your tenants that have a lease on December 31st. This slip will be used by your tenant to claim amounts on their tax return. Failure to comply with this rule may result in penalties of $ 100 per unproduced slip. The deadline is March 1st.

NR4: You must fill at the end of the year an NR4 slip that sums all the income you have earned and all the taxes (25%) paid. Failure to comply with the completion of this slip will result in a penalty of up to $ 2,500. Produce this slip before March 1st.

Step 3: File your tax return

Theoretically, the tax payments of 25% that you have made throughout the year are final. However, the CRA offers you the opportunity to file your tax return using the same rates as those charged to Canadian residents, ie. a progressive rate ranging from 0 to 48%. In addition, these rates apply to your net income (after expenses). This is possible with the article 216. Of course, we must study the most advantageous method, but without having advanced statistical research, we can confirm that the choice of article 216 is more advantageous in more than 99% situations.

Example of the choice of article 216:

Bao Chan, Hong Kong resident owns a condo in Montreal. It has a rental income of $ 24,000 (2000 $ / month) and annual expenses of $ 10,000. Mr. Chan paid $ 6,000 to the CRA throughout the year (24,000 x 25%) and wondered if the choice of section 216 would benefit him.

After expenses, Mr. Chan’s net income is $ 14,000 and the tax calculated is $ 3108 (14,000 x 22.2%). By filing a tax return in Canada, Mr. Chan will receive a refund of an overpayment of $ 2,892 (6,000 – 3,108). The choice of section 216 is therefore very beneficial to Mr. Chan.

NII

If you have never resided in Canada and do not have a SIN (Social Insurance Number), it is important to apply for an NII (Tax Identification Number). This request can be made by mail only by completing the form of the Revenue Agency. This process can take up to 6 weeks.

The sale of your property

You have put your property on sale? You must file for a certificate of compliance. The certificate of compliance is a kind of guarantee put in place by the CRA to ensure that it can collect the tax on the sale before the non-resident disappears.

The notary in charge of the file is responsible for withholding the amount of tax calculated by the accountant and your accountant produces the certificate of compliance request which will be sent to the CRA and Revenue Québec (for properties located in Quebec). Failure to comply with this rule will put the buyer in a delicate situation, because the tax authorities will claim 38% of the total amount of the sale (ouch). The notary responsible for the transaction can slip you a word.

As a rule, the tax that will be withheld from the sale is higher than the actual tax that has to be ultimately paid. It is therefore highly recommended to file a tax return in the month of March or April of the following year in order to recover the overpayment.

Conclusion

We discussed the most important points in this article, but the taxation of non-residents can get complicated very quickly. And for this, we always advise you to seek the advice of an expert before you engage in any process. For any additional information, you can book a telephone consultation with a senior accountant or you can entrust us with the mandate of filing your tax return by submitting your information online.