Yes. The tenant or property manager who pays rent to the non-resident (the ‘Payer’) must withhold and remit non-resident withholding tax. The general rule is that this withholding tax is 25% of the gross rental income. However, the withholding tax can be reduced to 25% of the net rental income if the Canada Revenue Agency approves a Form NR6 (discussed below).
Please note that there other taxes should be considered, especially with respect to vacation properties, such as the Goods and Services Tax/Harmonized Sales Tax and in some cases provincial sales tax.
The non-resident withholding tax must be remitted on or before the 15th day of the month after the rent is paid to the non-resident.
In addition, the Payer must provide the non-resident with a NR4 slip and file a NR4 information return (this includes NR4 slips and the related NR4 Summary) with the Canada Revenue Agency by the last day of March following the calendar year in which rent was paid to the non-resident.
In most situations, the non-resident will pay less Canadian tax if they voluntarily file a return under section 216 of the Income Tax Act (the ‘Section 216 Return’). This will likely be beneficial because the Section 216 Return taxes the net rent, not the gross rent. The Payer must still withhold and remit non-resident withholding tax, but if the tax liability calculated under the Section 216 Return is lower than the non-resident withholding tax which had been remitted, the Canada Revenue Agency will refund the difference to the non-resident.
Rather than wait for this excess non-resident withholding tax to be refunded, the non-resident can request permission from the Canada Revenue Agency so that the Payer calculates withholding tax as 25% of net rent, not gross rent. The non-resident and their Canadian agent request this permission by completing Form NR6, Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Immovable Property or Receiving a Timber Royalty. The Canada Revenue Agency grants permission for one year at a time. Therefore, Form NR6 should be filed before the end of each year (such as November) so CRA has the opportunity to review the request and grant permission before the start of the next year.
By filing the Form NR6, the non-resident undertakes to file a Section 216 Return by June 30 of the year following the calendar year in which rent is received. Further, the Canadian agent agrees that if the Section 216 Return is not filed on time, the Canadian agent will have to pay the full amount of non-resident tax required. For example, if gross rental income was $20,000 and net rental income was $5,000, the agent would have withheld 25% of $5,000 or $1,250. If the Section 216 Return is late, the Canadian agent must pay the difference between 25% of gross rent and the withholding tax actually remitted. In this case, that would be $5,000 less $1,250 or $3,750. Please note that while the Section 216 Return is due by June 30, any taxes are due by April 30.
The Canada Revenue Agency also imposes additional obligations when the non-resident disposes of the Property (see FAQ below)