Renting from a Non-Canadian Tax Resident? You May Have Tax Obligations 

The landlord collects the full value of the monthly rent and pockets the full amount without sending any withholding to the CRA

The non-resident landlord generally does not understand they have to complete the applicable withholding remittance, as they generally would have included the income on their domestic tax return where they normally file their personal taxes and believe they are doing the correct reporting.

Our experts typically see this scenario arise when the non-resident is selling the Taxable Canadian property and goes to complete a certificate of compliance application for a reduced withholding. In that form, they need to disclose if they rented the property and if they withheld appropriately. At that point, the non-resident wants to become compliant with its unfiled elective non-resident rental returns. Historically, the non-resident has an interest amount due for the unfiled NR4 reporting on their non-resident tax account after the Section 216 returns and Part 1 disposition returns have been processed and the accounts reconciled.

The certificate of compliance process is a whole other process that non-residents should be speaking to their advisors about in both countries. First, they should speak to the advisor in the domestic country they are filing their personal taxes each year and then an advisor in the country where they have a property.

The non-resident landlord uses a property manager (or another Canadian agent) to collect the rent, submit remittances, and complete administrative duties

We see this fact pattern frequently where a property manager at, for example, a ski hill manages the short term rentals administration of the property on the non-resident’s behalf and is included as part of the management fee charged. The property manager will collect the income, remit the appropriate 25% withholding [or a lessor amount under certain circumstances], and prepares and issues an annual NR4 form to the non-resident. This NR4 form will summarize the amount of gross rental income earned in Canada and the amount of withholding remitted to the CRA. 

**Note that an NR4 form is not used solely for this purpose but for a multitude of different payments. It is important that anytime a taxpayer (individual, corporation, or trust) pays any income to a non-resident that there could be a requirement to file a special slip annually along with diligently withholding the appropriate amount of tax.

See Guide T4061 for more information on the NR4 process

The landlord submits all remittances to a non-resident tax account they’ve opened and completes the administrative duties themselves before the due dates

Technically, it is not the correct process for the landlord to complete the NR4 annually. The NR4 is to be completed by the payer or the agent of the Income Tax Act. The landlord can be neither of these.

The risk of the non-resident landlord completing the administration of the NR4 filing this way is that CRA adds this to one of their annual matching programs or self-reporting inquiries and sees that the payer and recipient names match, and then takes action accordingly. 

The action, as our experts understand it via multiple discussions with various CRA agents, is that the CRA would deny all of the expenses claimed on the non-resident rental return, or the Section 216 return filed by a non-resident. This would mean that the 25% withholding on the gross income would be the final tax for the non-resident and any reduced tax payable or refund paid to the non-resident would be reversed with interest with a penalty potentially applied.