Canada continues to attract individuals from outside the country who want to buy Canadian real estate. Sometimes these properties will be purchased solely as a rental property and sometimes they will be both rented and used on a personal basis. This newsletter will look at some of the considerations to keep in mind if you own a rental property in Canada but are not a Canadian resident.
The first hurdle for non-residents interested in purchasing and renting out Canadian real estate is the new Federal Foreign Buyers Ban which prevents non-Canadians from purchasing homes in Canada for a 2-year period starting January 1, 2023. Certain exemptions apply including properties located outside a Census Metropolitan Area (CMA) or a Census Agglomeration (CA). For a review of exemptions and their definition, you should consult a BC realtor or lawyer.
Assuming you meet one of the exemptions for the foreign buyers ban or were fortunate enough to purchase your Canadian property before 2023, the next step is to understand the Canadian tax implications of holding the property for personal use or rental purposes.
Basic Filing and Reporting Requirements
Canada taxes non-residents on any income earned from property in Canada which includes rental income. To ensure that a non-resident pays this tax, the Canada Revenue Agency (“CRA”) requires that anyone who is paying rent to a non-resident must withhold 25% of the gross income, which would be the rental payment.
Three options for remitting the withholding are:
- You can hire a local property management company that has experience with non-resident clients. The property manager will remit the non-resident withholding tax on your behalf;
- You can ask a family member or close friend, resident in Canada to agree to be your Canadian agent. Your Canadian agent must contact CRA’s Part XIII non-resident department a request a NR account in their name by providing the rental property details.; or
- You can take responsibility for the non-resident withholding tax and remit the tax yourself. If you are not using an agent, CRA’s present policy is that they issue the Form NR4 for the year. You must request this by March 31st of the following year by faxing CRA a request to produce a proforma Form NR4 tax slip. An authorized accountant can also make this request.
It’s important to note, in Canada you file on an individual basis, even when married. This means if you hold your Canadian property jointly with your spouse, you and your spouse must both have tax withheld on your share of the rental income. For example, if your property generates $10,000 in gross rental income, you and your spouse must each pay $1,250 to your respective NR accounts (25% of your 50% portion assuming the property is owned as joint tenants).
You may choose to elect to file the Income Tax Return for Electing under Section 216 (“section 216 return”) with CRA to claim the expenses that were associated with the rental income and calculate and pay tax on only the net rental income. To make this election, you, and your spouse (or co-owner) must each file a Section 216 return reporting your portion of the gross rental income and related expenses.
With Canada’s graduated tax rate system, the income tax is usually less than the 25% withholding amount and you would likely receive a refund. This tax return is due within two years after the calendar year in which you earned the income. For example, if you earned rental income during 2022, the s.216 return would be due by December 31, 2024. If you have more than one rental property this election must include all properties. If you do not make this election, you are not required to file a Canadian income tax return, but you will have paid Canadian tax on your gross rental income at 25%.
A non-resident will need a Canadian tax identification number if you do not already have a Canadian Social Insurance Number. This is obtained by filing Form T1261 Application for a Canada Revenue Agency Individual Tax Number (ITN) for Non-Residents with the CRA.
You have the option to request that the tax be withheld on your net rental income instead of your gross income. To use this option, you must have an agent who is a resident in Canada to submit your withholdings as they are liable to ensure that you file an income tax return reporting the expenses incurred.
Additionally, you must file your Section 216 return by June 30th of the year following the year in which the rental income was earned. If you earned rental income during 2022, your s.216 return would now be due on June 30, 2023. If you do not file your return by June 30th the expenses will be disallowed, and your agent will receive an assessment for tax at 25% of the gross rental income.
To request that the withholding tax be based on net rental income, you and your agent must complete Form NR6 Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property or Receiving a Timber Royalty and send it to the CRA for approval. This form will report the expected gross rental income and expected expenses related to the rental property such as mortgage interest, property taxes, insurance, and utilities. Once the CRA has approved the form and returned it to your agent, the tax can then be withheld at 25% of the net rental income. The agent must continue to withhold 25% of the gross rental income until the approval is received. You and your agent must apply and receive approval each calendar year.
The Vacation Property
If you have a vacation home that you want to rent out using a vacation website and not incur the cost of a management company, there is an option available. The CRA will let you set up your own non-resident account in order to remit the required withholding tax. Note that if you are not going to use an agent resident in Canada then you will not be eligible for the reduced withholding tax based on net rental income. Instead, you will have to remit withholding tax based on 25% of your gross rental income. The payment to the CRA is due on the 15th of the month following the month you collected the income. For example, if you received $5,000 of rental income for the month of July, you must remit $1,250 to the CRA by August 15th.
Expenses You Can Claim
As mentioned above, you can claim expenses relating to your property such as mortgage interest, property taxes, insurance, repairs and maintenance, and management fees. Travel expenses can only be deducted if you have two or more rental properties, and you cannot deduct any accommodation expenses. With respect to repairs and maintenance expenses, Canada considers expenses to maintain the property in its existing condition as deductible in the year. Any expenses that upgrade or increase the value of the home must be capitalized and depreciated over time.
In Canada, the claim for depreciation is called capital cost allowance (“CCA”) and it is a discretionary claim to a maximum allowable depending on the type of asset. Buildings are depreciated at a rate of 4% and most furniture and fixtures at a rate of 20%, both on a declining balance basis. Canadian tax rules prevent you from creating a loss by claiming CCA. Any CCA claimed must be recaptured and included in income when the property is sold. Before claiming CCA you should consider the change in use rules, discussed below.
If you use the property personally for a portion of the time, you must prorate your expenses between your personal use and rental. This is generally done on a basis of total days used personally over the calendar days in the year.
Change in Use
An individual who purchases property in Canada may decide that they would like to stop renting it and use it as a personal residence either after moving to Canada or as a seasonal home. In this case, the CRA will consider you to have sold all or part of your property even though you did not actually sell it.
Every time you change the use of a property, you are considered to have sold the property at its fair market value (“FMV”) and to have immediately reacquired the property for the same amount, unless you can make an election as described below. The resulting capital gain or capital loss (in certain situations) must be reported in the year the change of use occurs. If you own a vacation property that was partly rented and partly used personally, you will have to look at the facts pertaining to the rental to determine if there has been a change in use.
If you move to Canada and change your rental property to your principal residence, you may be able to elect to postpone reporting the disposition of your property until you actually sell it. However, you cannot make this election if you deducted CCA on the property at any time before the day you change its use.
As a result of this rule, we often recommend that you do not claim any CCA on your Canadian tax returns. Each situation should be reviewed individually with your tax advisor.
Annual BC Speculation Tax
In 2018, the BC government announced a new speculation tax for certain properties within BC’s largest urban areas. The tax is designed to capture foreign and domestic speculators who hold vacant property in designated urban centers. This tax applies to certain municipalities on Vancouver Island, the lower mainland and parts of central Okanagan.
Primary residences of BC residents and long-term rentals will be exempt from the tax. To qualify as a long- term rental, the property will need to be rented for a minimum of 6 months in increments of 30 days or more.
Calculation of BC Speculation Tax
Non-exempt properties will be subject to the speculation tax, calculated as follows:
- For 2019 and future years
- 5% for Canadian citizens or permanent residents who reside in BC;
- 1% for Canadian citizens or permanent residents who do not live in BC; or
- 2% for foreign investors or satellite
The BC government describes satellite families or “untaxed worldwide earners” as individuals whose whole unreported income in Canada is greater than their reported total income in Canada. An individual’s income is combined with their spouse’s income for the purposes of this calculation. The reported and unreported income used are from the year before the speculation tax year. A portion of the speculation tax can be offset with a non-refundable tax credit if income is reported in BC.
Exemptions to the BC Speculation Tax
There is a number of exemptions which if applicable eliminate the application of tax on declaration, the most common being the principal residence exemption. For a full list of exemptions, visit the Government of BC website. The exemptions are specific and sometimes difficult to interpret so you may wish to consult with one of our tax professionals to confirm if you meet an exemption.
Note, each owner on title of BC real estate must file a declaration annually by March 31 of following year, regardless of whether an exemption applies or not.
Annual Vancouver Empty Homes Tax
Vancouver homeowners are required to submit a declaration each year to determine if their property is subject to the Empty Homes Tax. Properties deemed or declared empty in the 2022 reference year will be subject to a tax of 3% of the property’s 2022 assessed taxable value. The tax rate for the 2023 tax year will increase to 5%.
Vancouver’s empty homes tax is different from the BC speculation tax. The rules for each tax and how they apply are not the same. This means that if you own residential property in the City of Vancouver, you must declare separately for each tax and may be exempt from one tax but have to pay the other. To determine whether the Vancouver empty homes tax applies, visit: Empty Homes Tax questionnaire | City of Vancouver.
Similar to the BC Speculation Tax, if you’re an owner of Vancouver real estate, you must file a declaration annually even if an exemption applies.
Annual Federal Underused Housing Tax
The Underused Housing Tax (UHT) is the most recent Canadian property related tax, this one introduced by the Government of Canada. These measures are different from the BC Speculation and Vacancy Tax. The Underused Housing Tax is an annual 1% tax on the ownership of vacant or underused housing in Canada that was enacted on June 9, 2022 and will apply to the properties owned on December 31, 2022. The tax usually applies to non-resident, non-Canadian owners. In some situations, however, it also applies to Canadian owners. The tax is assessed through filing a new UTH return which is due on April 30 of the year following. If you are required to file a return and fail to do so there is a minimum penalty of $5,000 for individuals and $10,000 for corporations.
For a discussion of the UTH and the filing requirements please see our newsletter Canada’s Federal Underused Housing Tax.
Sale of the Property
If the Canadian property is sold while you are a non-resident of Canada, the purchaser is required to withhold 25% of the gross selling price until you receive from CRA a Certificate of Compliance. You must also obtain a Certificate of Compliance if you are a non-resident and you change the use of the property from personal to rental, or vice versa, as a change in use is considered a disposition.
The Certificate of Compliance is received by filing Form T2062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property (“T2062”) with the CRA along with supporting documentation. The CRA will also review the withholding tax remittance history on your rental income at this time to ensure they have been performed correctly. Once they are satisfied, they will ask for 25% to be withheld on the net gain in order to issue a Certificate of Compliance to the purchaser as proof that the non-resident vendor has met the necessary requirements.
You must send Form T2062 to the CRA within 10 days of the closing of the sale. As it can take three to six months to process the form, it is best to send in the request as soon as the closing subjects have been removed.
You are required to file a Canadian non-resident income tax return to report the disposition. A tax refund will generally arise because the overall Canadian tax rate will often be less than the tax withheld and the CRA does not take into account the selling costs when the original tax remittance amount is determined.
The new UHT legislation includes a provision which allows the CRA to decline a request for a Section 116 certificate of compliance where a non-resident vendor has not fully complied with its UHT tax and reporting obligations for all periods up to the date of sale. CRA can also reject your request for certificate of compliance if you are not compliant with non-resident withholding tax or Section 216 elective tax returns; therefore, it’s important to stay on top of the annual non-resident tax remittance and reporting requirements.