If you are a non-resident investing in the Canadian real estate market, here are the top 5 tax tips that will help you save tax and avoid trouble from the Canada Revenue Agency.
Canada’s Real Estate Market is booming. In the past 3 years, real estate prices in Canada have risen by a whopping 30%. In fact, in 2015, Canada’s real estate market had a record-breaking year. This is mainly because of Canada’s robust economy and low mortgage rates.
1. Know Your Tax Obligation
As a non-resident earning rental income from a Canadian property, you are required by the CRA to remit a withholding tax amounting to 25% of the gross rental income. This must be remitted to the CRA on, or before the 15th day of the month following the month the rental income was paid.
To make the monthly tax remittance and pay directly through your CRA account, use the following link: http://www.cra-arc.gc.ca/mypayment/
- Select start my payment → Then select either: individual, business, non-residents
- Select non-residents and make the payment to Part XIII-non-residents withholding tax
- Select regular remittance
- Input account number (fill in non-resident account number) → Report year and month the payment is for
2. Receive a Refund of the Tax Remitted by Electing to File a Section 216 Return
Once you have remitted tax at 25% of your gross rental income, consider filing a section 216 return to receive a refund of the tax paid for the year. The section 216 return takes into account the gross income and expenses incurred for the year and allows you to be taxed on the net rental income earned. The refund is calculated by taking the difference between the total tax payable and the non-resident tax already remitted for the year.
3. Keep Proof of All Your Expenses
You can claim all the expenses incurred in respect of earning this rental income. This would help you reduce your net rental income and therefore increases your refund. You should also keep vouchers in respect of any capital expenditure such as a roof change as this will help you increase the cost of your rental property that can be depreciated.
4. Consider Maximizing Your Refund by Claiming Depreciation
To maximize the refund, you can depreciate the building portion of your rental property. The benefit of this is that it helps reduce your taxable rental income. In the initial years of renting, the depreciation claimed may match the net rental income and therefore you may get a refund that totals the amount of tax you remitted to the CRA for the year.
However, if you are going to sell your rental property in the near future, you may not want to depreciate it. This is because depreciation claimed will be recaptured or included in your taxable income in the year of sale.
If you do not wish to depreciate the building portion of your rental property, you can instead, consider depreciating furniture, fixtures, etc. This can help to reduce your net rental income and if you do decide to sell your property, there will not be any recapture of depreciation.
5. Reduce the Tax You Remit by Filing an NR6
An NR6 is an optional filing you may consider to help reduce the tax you are remitting to CRA. The NR6 reports the estimated amount of gross rental income and expenses you expect to incur in the year. If approved by CRA, you can remit the non-resident tax at 25% of the net rental income amount instead of the gross amount.
For example, assume that the gross rent collected for the year is $10,000 and expenses incurred are $6,000, leaving a profit of $4,000.
With an approved NR6 waiver, what’s the amount of tax you have pay?
Rents collected: $10,000
Taxable profit: $4,000
Rate of tax [25%]: x (25)%
Taxes payable with NR6 waiver: $1,000 for the year
Taxes payable without NR6 waiver: $2,500 (25% x $10,000 rents)
If the NR6 is approved the tax would be $1,000 instead of $2,500. Be sure to file your NR6 and get it approved by CRA before your first rent payment is due.
Please note in order to qualify for an NR6 you must appoint an agent who is a Canadian resident, this can be a property manager or a family member. The agent is expected to act on your behalf and make the monthly tax remittance.
Also, it is important to note that the agent must continue remitting at the gross amount until the NR6 is approved by the CRA in writing. These are the top 5 tax tips which may help you to maximize your benefits of investing in the Canadian real estate market.
These are the top 5 tax tips which may help you to maximize your benefits if you are a non-resident investing in the Canadian real estate market!
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.