Who Is a Non-Resident?
If you receive income from rental property in Canada, but live outside of Canada, it is very likely that you are a non-resident of Canada for income tax purposes.
Whether you are a Canadian citizen or permanent resident is not the issue. In this case non-residency is a tax status, not an immigration status.
The determining factor is whether you pay your regular income tax to the Canadian government or not. If you do then you are a resident for income tax purposes. If you do not then you are most likely a non-resident for income tax purposes.
25% of Gross?
Non-resident property owners are required to remit 25% of gross income to the Canada Revenue Agency on a monthly basis in anticipation of filing a tax return on the income prior to June 30 of the following year. Clearly, this can create cash flow problems if you have mortgages, taxes, repairs and condo fees to pay.
Adding to that is the fact that smart tax planning often creates an ownership model wherein the rental property is cash flow neutral or negative. Remitting 25% of gross income in this scenario means the the owner has to reach into his pocket every month and supplement the property, even though, in all likelihood the owner will receive a tax refund from CRA the following year.
Is There a Better Way?
There is a way to avoid this, but it requires the owner having a Canadian agent willing to sign an undertaking with CRA to remit any tax due should the offshore owner default. Under this program the Canadian agent receives the income, makes the remittances to CRA, and forwards the balance to the owner. There is specific paperwork to be filled out, and each tax year is handled over a three year period (preparing the paperwork prior to January 1 of the taxation year, making the remittances during the taxation year and filing the tax return prior to June 30 of the year following the taxation year).
What is the Advantage?
The advantage to this system is that the owner is only required to remit 25% of net rent. If the net rent is zero, for example, with a negative cash flow property, 25% of $0 is $0. Even if the net rent is a positive figure, it is calculated after mortgages, taxes, repairs and condo fees have been paid.
Why Should I Care?
Most non-resident owners eventually sell their Canadian properties. When they do so their non-resident tax status is noted, usually right on the contract of purchase and sale. The lawyer or notary who conveys the title of the property will withhold a percentage of the proceeds in order to make sure that the taxes are paid (if they do not CRA may hold them responsible, so they are very careful to do so).
To get these proceeds the non-resident owner has to acquire a clearance certificate from CRA indicating that all taxes have been paid.
This certificate is much easier to obtain if the non-resident paperwork and remittances have been made properly and consistently over the life of the investment. Additionally, filing tax paperwork properly saves you the eventual expense of penalties and interest charges.
Where Does Coronet Realty Come In?
We have handled the accurate filing of non-resident taxation paperwork for years. We are very good at it and will shepherd you through the whole process, whether you’ve just acquired your property, just become a non-resident for income tax purposes or even if you’ve been in breach of non-resident rules.
Contact us. We can help.
For more information please do not hesitate to contact us by telephone at 604-298-3235, mail at 3582 East Hastings Street, Vancouver, BC, V5K 2A7, or by email.