I am a Non-Resident and I am selling my Rental Property in Canada

Last week we looked at how a non-resident individual who owns property in Canada would report rental income. With this week’s topic, we’ll look at what non-residents who want to sell their property would need to do in terms of reporting this property.  

The easy answer is that a resident would have to report capital gain or business income on their T1 personal tax return. However, non-residents face further complexities because the Canadian government does not want to chase after a non-resident to pay their taxes. Therefore it has established a system which requires the non-resident to pay and remit withholdings tax and subsequently file a tax return the following year to potentially recoup some of the funds back in the form of a refund when they file a non-resident return.

Let’s look at Leon’s situation from the previous blog.Leon had purchased a property in 2018 and had filed his rental S.216 returns in 2018 and 2019. The requirement was for him to get an Individual Tax Number (ITN) by filing form T1261. Please read the other blog here to see how you can acquire one.

We are now in the year 2020 and Leon has decided to sell his Canadian condo and use the funds to buy a house for himself in the States. His friend Jerome who initially helped him with the purchase in 2018 has since moved on from the real estate business and he gets a referral to talk to Lara. An experienced real estate professional, she immediately does her comparable and figures out the listing price that makes sense.

Outside of selling the property, Lara is aware that there will have to be withholdings tax on the sale of the property, she immediately tells Leon to contact his accountant to find out what his options are.

Leon’s accountant tells him there are 2 options.

The first option (which is not the most desirable) is to notify a lawyer once you have received and accepted an offer on your property. The lawyer will have to do a withholdings tax of 25% on the sale price.

For example, let’s say the property in question was purchased for $500k in 2018 and Leon has taken advantage of the hot Canadian market and now sold the unit for $650k. If he doesn’t elect for any deductions the lawyer would have to withhold 25% of $650k which would mean $162,500 would be withheld and sent to the government. This is a significant amount of funds and in most cases a large amount of the profit for an individual.

Most lawyers ask for a SIN to finalize a sale to make sure someone is a resident of Canada, however someone can have a SIN and be a non-resident. The onus is on the selling agent and the seller to disclose this, or else the CRA goes after the buyer and puts a lean on the property that is being sold. It is unfair treatment, but the CRA does not want to chase a non-resident to get paid for a capital gain.

So with this first option above the non-resident can then file a full non-resident tax return and report their expenses related to the property and receive a large chunk of the taxes back as a refund. As long as the property was not purchased with the intention of a short period return (speculative purchase) and they sold it within a reasonable number of years later (note that the number of years not defined in the income tax act) that individual can sell that property and only pay capital gains tax. How is Capital Gains Tax calculated you ask?

However if this person earns a low income in their own country (below $11k for the year) they are able to get an exemption up to that first $11k like any resident in Canada and potentially lower the tax liability even further.

If Leon had not made any election he would have had $162,500 withheld and with the help of his accountant file a tax return to get $153,065 back as a refund from the Canadian Government.

I have dealt with many such filings with CRA and there is no specified turnaround for these types of non-resident returns, they are usually on a first in first out basis and CRA does not have enough resources to file these quickly, also sometimes these returns are quite complex, the example above is a very simple one.

Leon’s accountant suggested a second option: an election T062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property. What this election would do is request that the Canadian government only withhold 25% of sale price minus purchase price and costs incurred during original purchase. This formula wouldn’t include the real estate fees and the legal fees on sale because an individual is applying for this election before the sale is completed. Even if it is after disposition the CRA has a stance not to consider final closing costs. 

This concept was intriguing to Leon because it meant the withholdings tax would be significantly lower. Lara was quite successful in receiving multiple offers on this unit that within 2 weeks Leon confirmed to sell the property for $650k the figure that Leon was happy from the beginning to sell the unit for. So now Leon asked his accountant to prepare the election and fill in the T2062 form. Upon preparing the documents and putting together all the requests including prior rental returns filed for this unit. The accountant came to the amount the lawyer would need to withhold to remit to CRA.

This figure is a far cry from the original withholdings tax of $162,500 however in order for Leon to get a refund back on the extra taxes withheld he will still need to file the non-resident return.

Leon’s accountant filed the election form with the proper documents and Leon’s lawyer held out remitting the withholdings tax to CRA until Leon’s accountant was able to acquire the certificate of compliance on the disposition of the property.

He still has some work to do when it comes to filing his taxes the following year, and it is important to make sure he files with a professional accountant so that he received the best advice.

This was a simpler case, but if Leon had decided to sell the property in a short period of time the CRA may have considered the property sold as a “speculation sale” and thus charged business tax on the unit. To get a clearer picture on what this means and what are the taxes involved, please read my assignment article here which have the same conditions and repercussions when selling a property in a short period of time. See you next week for another blog… Please feel free to email me a specific topic that interests you and I will make every effort to write about it.

See you next week for another blog… Please feel free to email me a specific topic that interests you and I will make every effort to write about it here.


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.