With limited ability to travel this summer, many Canadians are looking to rent or purchase vacation properties closer to home. At the same time, non-residents who own Canadian property may also be faced with travel restrictions and offering their cottages for rent or for sale. Before you rent or buy a vacation property from a non-resident, there are a few important tax implications that you should know.
Renting from a non-resident: Will you need to pay their withholding tax?
Non-residents who rent out Canadian property are required to pay Canadian tax on that income. The payer, such as the tenant or agent, is required to withhold 25% of the gross rental income paid and remit that amount on behalf of the non-resident by the 15th day of the month following the month in which the rental income is paid. Most non-residents hire an agent or property manager to collect the rent, remit the withholding tax to the CRA and file the appropriate NR4 information return.
If you rent a property from a non-resident directly, you, as tenant, could be held liable if you do not withhold and remit this tax properly.
Generally, where 25% of the tax is withheld at source, that is the non-resident’s final tax obligation in Canada. However, the non-resident can elect to file a tax return and pay tax on the net rental income instead of the gross income. They can do this by filing a return reporting the rental income and expenses within two years after the year in which the rental income is earned. Any excess withheld over the amount of tax payable will then be refunded.
The non-resident can also apply to have tax withheld on the net rental income rather than the gross rental income by filing a Form NR6 prior to January 1 each year or prior to collecting the rent for that year. Once the NR6 has been approved by the CRA in writing, the agent or tenant can withhold 25% of the net rental income and remit this reduced amount to the CRA. The non-resident in that case is required to file a tax return within six months of year end or the non-resident will be taxed at 25% of the gross rental income.
The liability to withhold tax when you rent a Canadian property from a non-resident owner may come as a surprise. It is important to determine if you should withhold 25% of the gross rental payment or whether the non-resident has obtained the necessary waiver to reduce the withholding to 25% of the net rental income. Failure to check could mean that you are on the hook for 25% more than the rent you agreed to pay.
Buying from a non-resident: Ensure the right steps so you’re not liable for the seller’s capital gains tax
Canada also retains the right to tax non-residents when they sell Canadian property and realize a gain. To ensure CRA can collect this tax, the purchaser is required to withhold and remit 25% of the gross purchase price paid to the non-resident unless the vendor has obtained a clearance certificate from the CRA in advance of the transaction authorizing a reduction or elimination of the withholding.
If the non-resident vendor has not obtained a clearance certificate from the CRA in advance of the sale, the vendor must notify the CRA of the disposition and request a certificate of compliance within 10 days of the sale date. The non-resident vendor may not be aware of the purchaser’s requirement to hold back some of the proceeds or their own obligation to notify the CRA of the disposition and file a Canadian tax return.
Whenever you’re buying property, it’s important to be diligent and make reasonable inquiries to determine if the seller is a resident of Canada prior to finalizing the sale transaction. If the vendor is a non-resident or his or her residency status is unclear, you should withhold a portion of the purchase price and the vendor should request a clearance certificate. If you fail to do so, you or your agent could be held liable for the non-resident’s capital gain tax. For example, in a recent court case (2017 BCSC 226), the agent had to reimburse the purchasers for the additional $695,000 that CRA demanded for a property they purchased from a non-resident seller!
Given the requirements placed on both the vendor and purchaser when a non-resident sells Canadian property, we recommend that both parties obtain advice from professionals familiar with these requirements well in advance of the purchase and sale. For more information on this topic, please speak to your IG Consultant.
Written and published by IG Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on up to date withholding rules and rates and on your specific circumstances from an IG Wealth Management Consultant. Trademarks, including IG Wealth Management and IG Private Wealth Management are owned by IGM Financial Inc. and licensed to its subsidiary corporations.