When a non-resident of Canada generates rental income from a Canadian rental property, the tenant (or agent for the non-resident) must withhold 25% of the gross rental payment (unless a tax treaty reduces the withholding rate) and remit it to the Canada Revenue Agency by the prescribed date. It’s important to note that no deductions nor credits are permitted thus, the withholding is on the full rental payment.

Rental Income Received by a Trust

In the context of a trust that receives rental income from real or immovable property in Canada, and where the trust has a non-resident beneficiary, it’s the duty of the trustee to withhold 25% of the gross rental income on the distribution of all, or a portion, of the rental income paid or credited to a non-resident beneficiary. The trustee must pay the withholding tax to the Receiver-General on or before the 15^th day of the month following the month in which the rental income is paid or credited to the non-resident. In addition to remitting the taxes withheld, they must also provide the non-resident beneficiary with copies of Slip NR4. This tax withholding is considered the final tax obligation to Canada on the rental income for the non-resident beneficiary.

Electing under section 216

The non-resident beneficiary can opt to send the CRA a separate Canadian tax return (Form T1159) called “Income Tax Return for Electing under Section 216.” This is an opportunity for the non-resident to report the rental income from real and immovable property in Canada on a separate Canadian tax return and pay tax on the net rental income instead of the gross amount.

If you elect under section 216, you can elect to have tax withheld on your net rental income instead of the gross amount by filing form NR6. In the case of a Trust, the trustee must withhold the amount but if the non-resident beneficiary elects under section 216, the trustee may withhold the tax on the net rental income. The trustee and the non-resident beneficiary must also complete Form NR6 and send it to the CRA for its approval. The Form NR6 must be sent to the CRA on or before January 1 of each year or before the first rental payment is due.

If the Form NR6 is approved, the non-resident must file a section 216 return for the tax year within six months from the end of the year, even if there is no tax payable. If the section 216 return is filed late, the election will be invalid and if the trustee has withheld an incorrect amount (withheld on the net amount instead of the gross amount), the CRA will assess the trustee for the full 25% withholding requirement on the gross rental income and charge interest on the amount owing.

Death of a Non-Resident Owning Canadian Rental Income

At the STEP CRA Roundtable (2020), the CRA confirmed that on the death of a non-resident who owned a Canadian rental property, the non-resident estate can qualify as a graduated rate estate, elect under section 216 and file a section 216 return. Estate advisors will likely need to be proactive on this, especially when dealing with a non-resident executor.

Also, a non-resident beneficiary who acquires beneficial ownership of the Canadian rental property can then elect and file a section 216 return on their share of income derived from the rental property. Again, the estate advisor may need to assist the non-resident beneficiary who just inherited the Canadian rental property, and the associated Canadian tax implications.