Canada is very welcoming to foreign investors. The set-up to begin investing is typically easy and smooth, provided you have the proper guidance and armed with good information.
Here are some tax implications to be aware of as a property investor in the Canadian market. For instance, if you own or plan on buying an investment property, know that the rental income you generate is subject to tax. Also, you will owe capital gains tax on the sale of the building, home or unit. The focus here will be on mitigating your tax owed on rental income. Each month the property management company or agent you employ to collect rent from your investment property is obliged to withhold 25 per cent of gross rental income and remit this to the Canada Revenue Agency (CRA). The remittance can be paid monthly, due on the 15th of the following month, every month.
By year-end, the property management company will provide you and the government with a NR4 slip outlining the rental income you received throughout the year and the taxes withheld on your behalf. This is considered your final tax obligation for the year.
There are some ways to reduce the tax you owe. For instance, many property investors choose to file their taxes under section 216 of the Income Tax Act. This allows them to pay tax on 25 per cent of their net income, rather than gross.
This is done by withholding 25 per cent of gross rental income throughout the year. At year-end when filing your income tax return, the difference between gross and net rental income will be repaid to you by the government.
In this case, net rental income is defined as the funds you receive after expenses relating to your property have been paid. Qualifying expenses include maintenance and renovations, utilities, interest on your mortgage, property taxes, condo fees, and management and professional fees you paid throughout the year. This can substantially decrease the amount of tax you owe and give you a nice income tax refund by fiscal year-end.
If you choose to file under section 216 of the Income Tax Act, non-residents of Canada can also choose to jointly file an NR6 form with the property management company they retain to reduce the amount of tax owing. In this case you can remit 25 per cent of net income each month, rather than gross. This calculation is based on your best estimates of monthly expenses. If anticipated expenses are higher than income, then no tax is due, though the paperwork will still need to be remitted.
Be aware that as a non-resident, you need to file your income tax return each year by June 30. If your net income was zero, your income tax return still needs to be submitted for review, without exception.
As well, your NR6 form must be completed and submitted to CRA for approval on an annual basis, before January 1 or when first rental period is due, whichever comes first.
We are living in an era where big moves from country to country have become commonplace, even easy. Many clients find themselves in a new country as jobs relocate or as families want to reunite. If you plan on moving to Canada or if curious about implications such moves might have on a residency claim in Canada, here’s what to be aware of.
The CRA has developed a questionnaire, the NR73 form entitled the ‘Determination of Residency Status’, which must be filed with CRA. CRA reviews the form and makes their residency determination accordingly. Only a letter from CRA confirming your status is valid proof of residency.
Consider filing your NR73 form as soon as your move is confirmed to avoid any delays.
As always, the best position to be in, is one that is fully informed. Because what you don’t know can certainly hurt you.
The writer is a Director at Buttonwood Property Management.