New Tax Collection Requirement for Non-Resident Landlords and Their Renters

The Canada Revenue Agency (CRA) has introduced a new regulation that requires tenants renting from landlords residing outside of Canada to withhold a portion of their rent and remit it directly to the CRA. The CRA has released a guide to explain the details of the tax-reporting requirements.

Tax Obligations of a Non-Resident Landlord

Those who earn rental income from property in Canada but live outside the country have specific tax obligations. 

Now, when a tenant pays rent to a non-resident landlord, the tenant is required to withhold a non-resident tax of 25% on the total rent amount.

This tax must be paid to the Canada Revenue Agency (CRA) by the 15th day of the month after the month in which the rental income was paid. Non-resident landlords should communicate with their tenants to ensure they withhold and remit the correct amount of tax to the CRA.

Failure to withhold and remit this tax can result in compound daily interest charges and penalties from the CRA.

Tenant Requirement Under This Process

The tenant must provide the landlord with two copies of Slip NR4, which outlines the gross rental income during the year and the amount of non-resident tax withheld. Additionally, they must submit an NR4 information return to the CRA.

Options for the Non-Resident Landlord

Typically, the tax withheld by the tenant is considered the final tax obligation to Canada on the rental income. However, there is an option to elect under section 216 of the Income Tax Act. This allows the rental income to be reported on a separate Canadian tax return, enabling the landlord to pay tax on the net rental income rather than the gross amount. Form NR6, which is an undertaking to file an income tax return, must be completed with a Canadian agent. This form must be submitted to the CRA for approval before January 1st of each year or before the first rental payment is due.

Once the Form NR6 is approved, the Canadian agent can withhold 25% tax on the net rental income, which is the amount left after deducting rental expenses. This tax must be remitted to the CRA by the 15th day of the month after the one in which the rental income was paid.

Non-resident landlords must submit a Section 216 return to the CRA within two years from the end of the year in which the rental income was paid, even if there was no tax payable or refund expected.

Concerns With The Tax-Withholding Change

In the past, property managers were tasked with handling the withholding tax associated with rental income from non-resident landlords. But now, at a time when the federal government is looking to improve conditions for Canadian renters, this CRA change creates new challenges for them.

It has led to confusion for renters and fears of the threat of eviction from landlords over the withheld amounts. A key challenge is that tenants may not know the residency of their landlord, and it can be difficult to determine it, especially since the CRA will not divulge this information due to privacy factors. At a minimum, the change adds responsibility and administrative burdens onto tenants. 

While the outcry may lead to changes, in the meantime, both landlords and tenants need to be aware of the rules.