In my prior blog, I wrote about how Canada and US taxes your income, and how your properties (including your rental properties) are deemed to be disposed at fair market value when you file an exit return. Recall that by filing an exit return in Canada, you are essentially telling Canada Revenue Agency - "I am leaving Canada for now. I own bank accounts in Canada, I own rental properties in Canada, I have a Canadian passport, etc. Though these make me a factual resident of Canada, for tax purposes, please do not consider me to be a Canadian resident anymore." This frees you from the worldwide income taxation of Canada, and then subjects you to tax earned only from Canadian income sources. This means, Canada Revenue Agency, wants a share of any income earned only in Canada - rental income included. Any income earned outside Canada is no longer subject to Canadian taxation.
In this blog, I will discuss your tax obligations of your rental properties in Canada, while living in the US.
As we have seen, a Canadian non-resident is subject to taxes from income sourced in Canada. As such, your rental income earned from your Canadian rental properties is subject to Canadian income tax. (The US has a similar rule for nonresident aliens where US sourced income is taxed, but this is a separate topic altogether).
There are two methods allowed.
1. Gross Income Method:
Collect your rental income, pay 25% of it to Canada Revenue Agency, and then "call it even" with CRA. (Part XIII, Section 212(1)(d)). Generally, this is to be remitted by the person giving you the rental income (your tenant, or your property manager who is collecting rent). Even if you do not file any tax returns in Canada, CRA is happy as they got their 25% share of your gross income.
But now, you may be thinking - I have incurred a lot of expenses - how do I account for that? 25% of my rental income seems excessive. Well, read on...
2. Net Income Method:
Section 216 return.
CRA allows you to deduct your expenses to offset your rental income. However, to inform CRA of the expenses, you need to file a tax return and pay your tax obligations. In return, CRA gives you the privilege of offsetting your expenses against your rental income - this is called Net Income method, and is filed using a T1159 form.
Even with the Net Income method, CRA expects tax from your net rental income every month. This means, your tenant (or your agent which could be your property manager) takes the rent, subtracts expenses paid in that month, and then remits 25% of the remaining (net) amount as taxes.
But wait, how does CRA know that the tenant (or property manager) is remitting the taxes on your behalf? As the owner living elsewhere (US), you are supposed to request permission by filing a form NR6 informing CRA. This form essentially tells CRA that you are a non-resident, and that you are designating a Canadian resident (tenant or agent) to remit the taxes on a net basis.
At the end of the year, the tenant (or agent/property manager) issues you (the owner of the property) a NR4 informing the rent collected and taxes remitted to CRA. They file a copy to CRA as well. If the tenant (or agent) does not remit the taxes in a timely manner, or does not issue the NR4 forms, there are separate penalties.
No tenant is willing to sign up to do this. You can find agents willing to do this for a hefty monthly fee. Or you can designate your friend/relatives living in Canada to be your agent.
Alternative:
There is a lesser known method where you can avoid having your tenant (or agent) to remit these taxes on a monthly basis. You can do these yourself by following these steps:
a. Call CRA at 800-959-8281 and obtain a Non-Resident tax number. This generally starts with NRK followed by 5 digits. If your property is jointly owned with your spouse, you need two Non resident tax numbers. Due to privacy reasons, your spouse has to talk to the agent independently. If you choose to, you can add yourself as an authorized user on your spouse's account, so you can discuss matters regarding your account and your spouse's account.
The agent will ask for the approximate monthly rental income. Note down the NRK number - the agent usually mentions these on the same call, though you will get it in the mail as well.
b. Since you are not using the services of a Canadian agent, CRA expects 25% of the gross rental income to be paid as tax each month. For joint properties, it is 25% of each person's share of rental income. This needs to be paid by the 15th of the following month. For example, if you collect $2,000 CAD of rental income for April 2019, your share is $1,000 (or whatever ratio you use) and your spouse's share is $1,000 (or remainder). You remit $250 each (25% of $1,000) to CRA against your respective NRK account. This is due before May 15, 2019.
Make your payment using the CRA site - https://www.canada.ca/en/revenue-agency/services/make-a-payment-canada-revenue-agency/make-payment.html and use the Part XIII - Nonresidents option, and then use the correct NRK number and the correct month (namely April 2019).
The system is integrated with the major Canadian banks. You can use one of the applicable methods to remit your taxes to CRA.
c. Print the proof for your records.
d. After the year is complete, you need to request CRA to issue you a pro-forma NR4 form for each of you. This functions as official proof of the rental income you paid, and the taxes remitted. Request this by mail after you paid your December tax remittance. Expect to get this in approximately 6-8 months (or longer).
e. Once you get your NR4 form in the mail, you are ready to file your Section 216 tax return on a net basis. You need a qualified tax preparer to prepare these, as you can be inundated with questions such as depreciation, or what expenses to deduct etc. Usually, with depreciation and expenses, and the fact that you paid 25% as taxes throughout, expect a refund.
I hope this gives you some idea of the taxation and the things that need to be done if you own a rental property in Canada.
Please feel free to email me at PhoenixITIN@gmail.com or call me at +1-480-442-7063 if you need to engage me for preparation of your cross border taxes.
DISCLAIMER: The above blog is to give you a general idea and is not to be construed as tax advice. Each person's tax situation is unique, so consult a qualified tax professional.