I am a Non-Resident and I own a Rental Property in Canada

It’s been a while since I’ve been able to write a blog. Personal life has taken a big chunk of my time, after getting married and with the birth of our son it’s been a challenge to find the time. He is now 1 year old and can give both myself and my wife some time to wind down when he naps, which gives me the opportunity to sit down and write these blogs. 

I am writing today about a topic that has been a challenge to non-resident Canadians for a very long time now – owning a property while residing outside of Canada. Many non-residents who own property in Canada are challenged in understanding the income tax act, and how it applies to them when it comes to owning property or properties. 

First is the issue of requirements, which includes having either a Social Insurance Number (SIN) or an Individual Tax Number (ITN). Social Insurance Numbers are granted to residents/citizens of Canada through application and allow you to invest or work in Canada – including owning a property. Alternatively, those who are not eligible for a Canadian SIN apply for Individual Tax Numbers by filing form T1261, which is subsequently filed with the income tax return. T1261 forms are not easy to file, for your own benefit enlist the help of a professional to file it. 

Second and most important is the issue of withholding taxes. Non-residents of Canada who collect rental income are required to pay the government 25% of this income to an NR tax account as a withholding tax.  

What does this mean? Let’s look at an example below.

Leon is a non-resident of Canada, he has always lived in the US from birth, although he’s visited Canada on numerous occasions. When he was 30 years old, he visited Canada and one of his friends Jerome, a real estate agent, showed him the benefits of investing in Toronto’s great real estate market. 

Leon was intrigued and he purchased a property in the downtown Toronto market with the help of his friend. He decided to rent it out to a Canadian Resident. 

Jerome told Leon that he may want to consult with an accountant about the tax implications and how he should go about reporting. He also introduced Leon to a Property Management expert, Dana, to explain to Leon how to go about remitting taxes.  Due to the complexities of withholding tax and filing taxes as a non-resident, Leon would be in a better position to hire a property management firm to take care of his needs. 

He is a non-resident and shouldn’t have to come to Canada every time he needs to replace a tenant or deal with maintenance issues. Also, dealing with the government is a situation better left handled by professionals. The Property Manager would open an NR tax account for his/her client and remit taxes (25% of total rental income) on a monthly basis for them from the gross monthly rentals collected, deduct their fees and send the rest to the client. 

house-for-rent-tax

Once the calendar year is done, the property manager would prepare the numbers to send to the accountant so that they can prepare NR4 forms to file the personal taxes with the government. 

Conversely if the non-resident decides to file taxes themselves they will have to remit the withholding tax every month on the 15thfollowing the month of rent collection. Once the calendar year has passed, they will need to send a letter to the CRA and request an NR4 form to be prepared for them. 

If anyone knows the processing time of the CRA for anything this could take multiple requests and take several months. NR4 forms needs to be filed by the 31stof March by all accountants to avoid any penalties charged to the non-resident NR accounts. 

Back to our example above… Leon decided to enlist the help of Dana to have his property management taken care of from the tenant side and the government remittance side of things. She took care of remitting the taxes on the 15thof every month following the receipt of rent, and took care of every issue his tenant had. 

Once the year was over, the property management’s accountant was given the information, filed the NR4 form and issued one to Dana to pass onto Leon. Leon then enlisted a designated accountant to file the Income tax return.

A non-resident Canadian does not need to report any income that they earn outside of Canada. They only report their rental income and any expenses paid towards that rental property. After including the taxes that were withheld, they will get the majority of the withholding tax as a tax refund.  

Looking at our example above… 

Leon receives 2k in rental income every month, Dana withholds $80 per month in property management fees, and 25% of the 2k for CRA withholding tax. 

He has the following monthly expenses:

When Leon files his tax return and on an annual basis reports an annual income of $24,000 with income tax withheld of $4,800. With his net rental income at $4,800 (minus any other small expenses like accounting fees etc.…), his taxes will be around $1,065 – totaling around 22%. 

This means that Leon will receive a refund of $3,735, meaning his net cash flow from this investment would be around $311 a month when it’s all said and done. 

Non-residents would also have the ability to remit taxes on the net rental income basis (rental revenue minus all rental expenses) by completing an NR6 form. Note that most property management firms do not offer filing through this method as it creates additional responsibilities and penalties for non-compliance. The non-resident cannot request to file an NR6 form themselves, as it must be completed through an agent and that agent cannot be a family member. Even though there is a turnaround time for CRA to process your return and give you back your refund, it really is a short term cash flow issue when you think about it. 

A few years have passed since Leon purchased his property and he has now decided to sell it. He’s wondering what he’s supposed to do, and what forms he needs to file. Tune in next week to read my article on selling your property as a non-resident. 

What does the HST Rebate mean for home or condo purchases from a builder and why is the government asking for money back from investors?

HST-tax

What is the HST Rebate and what are the differences when applied to the purchase of a principal residence or investment property?

The HST Rebate has been around now since mid-2010 when the CRA introduced the HST system in Ontario. The purpose of the rebate is to discount a portion of the HST on the purchase of newly constructed property by first-time home buyers or investors of real estate, provided that certain conditions are met.

The breakdown of the rebate is as follows: The HST, as most are aware, includes both the Goods and Services Tax (GST), accounting for 5%, and the Provincial Tax (PT), contributing the remaining 8%. The GST credit represents a refund of anywhere from 0-36% on the eligible GST amount attributed to the purchase. The definition of “eligible” GST will depend on whether the purchased property is to be a principal residence or investment property. We’ll assume principal residence for now and address how this differs from an investment property in the next section. The maximum 36% refund applies to any purchase up to and including $350,000. Beyond $350,000, the refund percentage is gradually reduced until $450,000 and above, where the refund goes to 0. The provincial portion of the rebate is 75% of the PT paid (for both residential and investment) but is capped at a purchase price of $400,000. What this means is that if you buy a property for more than $400,000, while you will still be eligible for a PT refund, it would be based on the $400,000 cap. Since the PT on $400,000 is $32,000, this means the maximum PT refund is capped at $24,000 (75% of $32,000). Let’s look at a couple of examples.

Example 1:
Purchase price of a principal residence is $350,000 + HST (GST: $17,500, PT: $28,000). The credit for such a purchase would be 36% of the $17,500 = $6,300 for the GST portion and 75% of the $28,000 = $21,000 for the PT portion, totalling $27,300.

Example 2:
Purchase price of principal residence is $470,000 + HST (GST: $23,500, PT: $37,600) Since the property value exceeds the $450,000 upper limit, the GST portion of the credit is reduced to 0 while the 75% PT credit is only applied to the $400,000 cap, which results in the rebate cap of $24,000 instead of $28,200, which would have been the rebate had the credit applied to the full $37,600 amount of the PT.

Now I will discuss some of the differences in the process between residential and investment property. Firstly, they require different forms that have to be filled out. In the case of a principal residence, especially condos,  the builder usually handles the rebate and will already have included the HST rebate in the purchase price; be aware that you are signing this credit over to them to get a discounted price on the purchase. Keep in mind Housethat for a principal residence, you or a relation to you must be the first occupant of the property.  If someone else occupies the property, even before closing, you have forfeited your right to the  HST rebate.  In the case of investment properties, the full HST is paid up-front, and the purchaser bears the responsibility of applying for the rebate. Consequently, your purchase price will always be higher for an investment property. Make sure that the intended use of the residence is clear to the builder to prevent them from applying for the rebate as a principal residence, only for you to end up using it as an investment property instead. This could create problems in the future if the CRA audits you and discovers the wrong information was given.

Most crucially however, is the difference in the application of the GST rebate between the two types of properties. Recall earlier I had mentioned that the GST credit is applied to the eligible amount of GST. When applied to a residential property, the eligible amount of GST is simply the amount paid at purchase, however, this is not the case for an investment property. For the latter, the eligible amount of GST is based on the fair market value of the property at the time of transfer of ownership from the builder (closing, not occupancy), not the actual GST paid on the purchase. This often results in a smaller rebate for an investment property when compared to a property being purchased as a principal residence. If, for instance, a property was purchased 4-5 years prior and the fair market value has increased significantly by the time ownership was transferred, then the GST rebate portion could be substantially smaller.

Let’s look at how this would affect example 1 when applied to an investment property instead of principal residence:

Example 1A
Purchase price of investment property is $350,000 + HST (GST: $17,500, PT: $28,000). Fair market value at the time of ownership transfer is $500,000. The PT credit is unchanged:  75% of $28,000= $21,000. However, the GST component is no longer based on the $350,000 purchase price, but instead the $500,000 fair market value. Since the fair market value is greater than $450,000 upper bound, the GST credit is reduced to $0 instead of the $6,300 refund we calculated for a residential purchase.

It’s very tempting to flip your property with a hot Toronto Market, but should you? Investment property owners should be aware that in order for you to keep the HST rebate, the property must be leased for at least 1 year from occupancy.

Recently the government has been asking many investors who purchased properties and flipped them upon closing to pay the HST rebate back. This is a substantial repayment of taxes. Make sure you’re informed about the rules and understand the costs before you make any decision.

Also, if the property is your principal residence, there is no period of occupancy specified by the CRA required to allow you to keep your refund. That is, there is no minimum amount of time you, or a relation to you, must use it as a principal residence in order to keep the HST rebate.  Each case is handled on a case-by-case basis by the CRA as required. If the residency period is fairly short, less than a year for instance, as long as you can justify the reasoning for such a short residency, it may be enough to satisfy the CRA. For example, a qualified reason might be that shortly after moving into the property, your parents fell ill, thus requiring you to live with them. Another possibility is that you moved to a different city for work purposes.

The best advice is to talk to your accountant when you buy or sell your property, to understand the tax implications both from HST rebates and any potential capital gains taxes when the property is sold.

Disclaimer: The information contained herein is not meant to be professional advice but for educational purposes only. You should consult with your accountant when handling such matters.