A non-resident may earn two types of income from Canadian real property:
Whether a particular income is rental income or income from business depends on the level of business activities in the underlying business. For example, if the owner’s activities are limited to occasional maintenance, the income from this business is likely to be viewed as rental income. As a rule of thumb, the more effort the owner has to expend on a particular property, the more likely it is that these activities would constitute a business.
A non-resident receiving rental income from Canadian real property is subject to income tax in the amount of 25 percent of the gross amount of rental income. For example, a U.S. resident who owns an apartment building in Canada and earns rental income in the amount of $1,000 per month is subject to 25 percent of Canadian income tax, without any regard to the expenses incurred in order to earn the income, such as building upkeep, maintenance, etc.
Canadian income tax conventions generally do not reduce the rate of withholding tax on the rental payments made to a non-resident for the use of Canadian real property. A payor (i.e, a rentor) is liable to withhold from his payments and pay to the Canadian tax authorities 25 percent of the gross amount of rent or any payment in lieu of rent. The failure of a Canadian payor (or a person deemed to be a Canadian payor) to withhold and remit funds will result in the payor’s personal liability to pay unremitted amounts to the Canadian tax authorities.
Where a non-resident is carrying on a real estate business in Canada, their taxable Canadian income would be computed with reference to the taxable income earned in Canada. The non-resident’s income would be computed under the same rules as applicable to a Canadian resident. The non-resident can claim, as deductions, all expenses incurred to earn the business income, including the capital cost allowance for the building (tax depreciation).
The profits earned in Canada by a non-resident corporation are subject to an additional 25 percent branch tax collected under Part XIV of the Income Tax Act. The branch tax can be significantly reduced under a relevant Canadian tax convention with the country in which the non-resident is a resident for tax purposes.
In certain circumstances, a non-resident earning passive rental income from Canadian real property may make a section 216 election. The effect of a section 216 election is to impose Canadian income taxation on the rental payments on a net income basis, as if the non-resident carried on an active rental business in Canada and was subject to regular rates of income taxation. For example, if a non-resident individual received $1,000 as rental income and incurred $600 to maintain the building, provide utilities, and hire staff, only $400 would be considered to be subject to Canadian income tax.
Importantly, a section 216 election is not obligatory and can be filed on an annual basis. A non-resident may file the election in respect of a particular taxation year up to 2 years after the end of the taxation year at question.
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