Non-Resident Taxation For Owners of Canadian Real Estate

Residential rental property is an excellent investment and can produce long-term, stable income. It has to be bought wisely, and managed with care, but as long as it’s in a desirable area it will always be rented.

Canada is a safe place to own rental property. Canadian citizenship is not a requirement for owning property in Canada. All you need to do to buy property in Canada is have valid identification, and be able to afford it.

However, if you are not a Canadian resident for income tax purposes, you will have to pay non-resident tax.

First things first. “Canadian resident for income tax purposes” is a taxation status, not an immigration status. Anyone who files a tax return on their personal income in Canada is likely a Canadian resident for income tax purposes. It’s possible for a person to actually live in another country and still be a resident of Canada for tax purposes. However, most offshore investors in Canadian real estate pay personal taxes where they actually reside. The result is that they are also non-residents in the eyes of the Canadian Revenue Agency (CRA), so long as they receive income from Canadian property.

This status requires that tax remittances be made to the CRA. The rate is 25% of gross income. When the tax year is over you can file a tax return and get a tax refund, if the tax due is less than what you remitted. The problem is a cash flow one. Even if you own the property free and clear, you still have maintenance costs, insurance, property taxes, condo fees and perhaps utility bills to pay. A 25% bite of your gross restricts things a little. But what about if you have a mortgage (a wise thing with investment properties, after all)? If you’ve structured your property to be break even, cash flow wise, you’ll have to dig into your pocket to pay the non-resident remittances.

There is a solution. If you retain a Canadian who is willing to sign a specific CRA undertaking you can reduce the remittance from 25% of gross to 25% of net. If you break even, or even loss money on the property you can still remit 25% of the net, because if the net is zero, or a loss, the 25% is zero, and all that gets filed is paperwork. The following year you file your tax return, and then pay what is due and owing (if anything).

The key requirement is a Canadian willing to sign the undertaking, because the undertaking has teeth. The undertaking states that, should the non-resident not file a tax return and pay any tax owing, CRA may collect any tax owing from the person who signed the undertaking. Clearly, there is a risk there for the person signing the undertaking.

That said, some people will do it, especially certain full service property managers, like me. Because I work with many off shore investors, and because I collect their rent, pay their bills and oversee their non-resident taxation matters I am able to sign the undertaking and ensure that the tax returns are filed. That allows me to offer my client the option to remit 25% of net, rather than 25% of gross. When you take the effect of the leverage afforded by a mortgage and factor that into the return on the property, you can see that the amount of money we’re talking about far exceeds the simple difference between the 25% gross and 25% net.

The system has a few other simple requirements. Paperwork (except in the initial year) must be filed before the tax year begins, and a reasonably accurate estimate of income and expenses must be submitted. During the tax year itself the remittances must be made, and then, before June 30 of the year following the tax year a tax return must be filed. All of these things can be done for the client by a professional property manager.

For more information on non-resident taxes applicable to non-resident owners of Canadian real estate, please feel free to contact me.