Are you a non-resident property owner earning rental income from Canadian real estate? A Section 216 election is probably something you've heard about before, both on this site and others. Here's a bit of a refresher.
What is a Section 216 Election?
A Section 216 election under the Canadian Income Tax Act allows non-residents of Canada to file a separate Canadian tax return to report their rental income. This strategic move is designed to let you pay tax on your net Canadian-source rental income, rather than the gross amount. This can sometimes mean a lower tax bill, and potential refunds if too much tax was withheld.
How It Works, Step By Step.
- Earn income: Buy a Canadian property. Find tenants. Start collecting rent.
- Withhold taxes: Usually this step involves a Canadian property manager, a CPA firm, a Canadian-resident family member, or the tenants (Slightly awkward). Whoever you go with, your Agent will generally take 25% of the rent collected, and send it to CRA on the 15th of the following month. You'll need an "NR Account" set up (Sort of like a payroll/RP account. Same-Same but different....) At the end of the year, the Agent should prepare and file an NR4 slip.
- Determine Eligibility: Consider if the non-resident is eligible to make a Section 216 election. According to Section 216(1), a non-resident person (or a partnership of which that person was a member) may file a return of income under Part I for that year if an amount has been paid during a taxation year as rent on real or immovable property in Canada or a timber royalty. Collect rent = Good to go.
- Submit Form NR6: If the non-resident elects under section 216, they can elect to have tax withheld on their net rental income instead of the gross rental income amount. To do this, the non-resident and their Canadian agent have to complete Form NR6 and send it to the Canada Revenue Agency (CRA) for approval. Form NR6 should be sent on or before January 1 of each year or before the first rental payment is due. The agent must continue to withhold non-resident tax on the gross rental income until the CRA approves Form NR6 in writing.
- Approval: If Form NR6 is approved by the CRA, the non-resident must file a Section 216 return for that year, even if they have no tax payable or are not expecting a refund. The Section 216 return must be filed within two years from the end of the year that the rental income was paid or credited to the non-resident.
- Papers Please: The non-resident should gather any NR4 slips that have information about their rental income and supporting documents for any rental expenses or deductions they plan to claim.
- Complete Section 216 Return: The non-resident should complete their "Section 216 return". This is tax-jargon for "Go fill out Form T1159 and Form T776" (Generally-speaking.) There may also be some extra schedules needed, depending on the circumstances.
- Send To CRA: The non-resident should submit their completed Section 216 return to the CRA. (Can be efiled or paper, depending on circumstances.) If the non-resident tax withheld on their income is more than the amount they have to pay under section 216, the CRA will refund the difference to them.
Reporting Multiple Properties
If you have several rental properties in Canada, you must report all Canadian rental income and expenses in one consolidated Section 216 return.
Consequences of Missing the Deadline
Failing to submit your Section 216 return on time (June 30th) means your election won't be valid. Incorrect withholding by the payer will lead to a non-resident tax assessment from the Canada Revenue Agency (CRA). In normal-speak: This is bad. Don't be late.
Payment Deadlines
Any tax owed must be paid by April 30 of the following year. Late payments will accrue interest starting May 1.
The Role of Agents
When a non-resident appoints an agent under subsection 216(4), the agent is responsible for withholding Part XIII tax on payments. Tenants are generally not expected to withhold this tax, with some exceptions.
Final Thoughts
It's not rocket science. Let's say you have $50,000 in rental income, and $10,000 in expenses = $40,000 net income.
Do you want to pay $12,500 in tax? (25% x $50,000 gross), or pay $8,900 in tax? (Marginal tax rate x $40,00)
Further reading: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4144.html
**Usual Disclaimer: What is written here is not formal tax advice. I’m not your CPA. It’s possible, or dare I say even probable, that the comments and opinions expressed here contain material errors, are out of date, or that important stuff has been left out. Don’t use this info to make tax decisions. Hire a pro to help you.