A non-resident of Canada who owns real property in Canada has an obligation to report any rental income earned to the CRA. Many property owners believe that once they are no longer living in Canada, that they not required to report any of their income to the CRA. Or they may believe, that since there is no net profit on this property (i.e. expenses of owning the property are higher than the income earned from renting it), that there is no tax obligation. However, if they are earning income from real estate in Canada, that income is considered Canadian-sourced, and this income should be reported.
Non-residents earning rental income from Canadian real property are required to remit 25% of the gross income from the property to the CRA. The person who is paying the rent is the one who has the obligation to withhold this 25%, but many renters are unaware of this requirement and pay the full rent to the owner.
If the owner is also unaware of this obligation, there can be huge penalties involved. The non-resident owner will be expected to pay the outstanding 25% tax on gross income – plus interest and penalties. If there is a narrow profit margin on the rental income, this tax can often be more than the amount the owner netted on the rental.
In order to pay tax on the net income using graduated tax rates, the owner can submit an NR6 form, requesting to file a tax return to report income and expenses. However, to make this request, the non-resident must first be up-to-date on their past taxes. And the idea of paying 25% of gross income plus interest and penalties is very daunting.
The section 216(1) late filing policy at the CRA is to apply a one-time retroactive application of the NR6 election. The CRA may charge arrears interest on the full amount that should have been deducted, but if it determines that a non-resident’s circumstances warrant the one-time relief, it has an administrative policy to act as though each year’s tax return was filed on time. This means that the non-resident will only have to pay interest on the late monthly 25% remittances up to April of the following year. The CRA will then apply interest to the tax owing on the net income as reported for that year moving forward.
This policy has the potential to reduce a huge burden for non-residents who did not know or understand their Canadian tax obligations. In a recent case, over $40,000 of back taxes, interest, and penalties was reduced to approximately $2,000. This policy may allow non-residents to come forward, file their back taxes, and be onside with their taxes in the future. This is especially important for non-residents who are hoping to move back to Canada, or who would like to dispose of their Canadian real property.
If you are a non-resident who has not been properly reporting your Canadian real property income, please contact us for further information on submitting your back taxes under this policy.