Gedeon Law & CPA has many Canadian clients who depart Canada to become US tax residents while leaving a Canadian rental property behind.
In fact, for our Canadian clients who do not want to sell their Canadian principal residence before departing Canada, we recommend converting it to a long term rental property (six months or longer) to facilitate claiming Canadian non-resident tax status.
In our previous article, we discussed the US tax consequences of owning a foreign rental property in the US. In this article, we’ll focus on the Canadian tax consequences when a non-resident of Canada, like our client Burton, owns a Canadian rental property.
Our client, Burton, grew up in Winnipeg during the psychedelic era. When the time came for Burton to accept a job transfer from his Canadian company to become the president of its American parent company, Burton knew he wanted to “Share The Land” by renting, as opposed to selling, his large Rosedale mansion in Toronto.
What Burton didn’t know was the Canadian tax consequences he faced as a result of becoming a non-resident landlord. While being a non-resident landlord can be “Sour Suite”, with our guidance, Burton was able to avoid coming “Undun” as he dealt with his cross-border move.
We first explained to Burton that as a non-resident, he would be subject to a 25% withholding tax under Part XIII of the Canadian Income Tax Act on his gross monthly rental income and that this withholding tax would need to be remitted to CRA monthly.
Burton then learned that he could let CRA keep the 25% withholding tax as his final tax obligation to Canada on his Canadian rental income. Alternatively, he could elect to file a Section 216 return, which would allow him to claim the same rental deductions, including CCA, as a Canadian resident and pay tax on his net rental income instead of the gross rent. Moreover, with the latter option, Burton would receive a refund from CRA for the difference between the non-resident tax withheld and the income tax payable on the 216 return.
As you would expect, we advised Burton to file a 216 return. But, since Burton has a large mortgage on his Rosedale home, losing 25% of his gross monthly cash flow to CRA was going to put him in a cash crunch. Moreover, because he was going to file a 216 return and we expected the property to breakeven on a monthly cash basis, we explained to Burton that he was better off making another election that would apply the 25% non-resident withholding tax on his net, as opposed to gross, rental income.
To make this additional election, we filed a Form NR6 with CRA and appointed a Canadian resident withholding agent. By making this election, Burton now had to file his 216 return within 6 months of the end of the calendar tax year, as opposed filing it within 2 years if he didn’t file the NR6.
Since Burton’s tenants had “No Time” to remit his monthly withholding taxes to CRA, we recommended he engage a property management company (in the Toronto area we recommend HighGate Property Management) to act as his withholding agent and to file his NR4 with CRA by March 31 of the following year.
While Burton wasn’t initially happy about paying 25% of his rental income to CRA, with our guidance on how to structure his non-resident tax situation, Burton was left “Laughing”.
In our next article, we’ll discuss how to make a treaty election on your US tax return to reduce US capital gains tax on the sale of a Canadian property and the Canadian tax obligations involved with selling a Canadian rental property as a non-resident.