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Non-Resident Taxation

Tax rules and obligations for non-residents earning income in Canada, including withholding taxes.

Sections

Who is a Non-Resident for Tax Purposes?

You are considered a non-resident for tax purposes in Canada if:

  • You normally live in another country and do not have significant residential ties to Canada.
  • You stay in Canada for less than 183 days in a calendar year.

Key Note: If you have significant residential ties (e.g., a home, spouse, or dependents in Canada), you may be considered a resident or deemed resident for tax purposes, which changes your tax obligations.

2. Types of Income Taxed for Non-Residents

Non-residents are taxed on specific types of Canadian-source income, including:

a) Employment Income

  • If you work in Canada, your income is subject to Canadian tax.
  • Employers are required to withhold taxes at source.

b) Business Income

  • If you operate a business in Canada, you must report and pay taxes on the income earned in Canada.

c) Rental Income

  • Rental income from Canadian properties is subject to a 25% withholding tax on the gross amount, unless you elect to file a tax return under Section 216 of the Income Tax Act (see below for details).

d) Pension and Retirement Income

  • Canadian pensions (e.g., Old Age Security, Canada Pension Plan) and other retirement income are subject to a 25% withholding tax unless reduced by a tax treaty.

e) Investment Income

  • Dividends, interest, and other investment income from Canadian sources are subject to a 25% withholding tax, unless reduced by a tax treaty.

f) Capital Gains

  • Non-residents are generally not taxed on capital gains unless the gains are from the sale of "taxable Canadian property" (e.g., real estate, shares in private Canadian corporations).

3. Withholding Tax for Non-Residents

a) Standard Withholding Tax Rate

  • The default withholding tax rate for non-residents is 25% on most types of Canadian-source income (e.g., rental income, pensions, dividends).
  • This tax is withheld at source by the payer (e.g., employer, financial institution, or tenant).

b) Tax Treaties

  • Canada has tax treaties with many countries to avoid double taxation and reduce withholding tax rates.
  • For example:
    • U.S. residents may benefit from reduced rates under the Canada-U.S. Tax Treaty (e.g., 15% on dividends, 0% on certain interest income).
    • Check the specific treaty between Canada and your country of residence for applicable rates.

4. Filing a Tax Return as a Non-Resident

Non-residents may need to file a Canadian tax return in certain situations. Below are the key scenarios and procedures:

a) When to File a Tax Return

You must file a Canadian tax return if:

  • You earned employment or business income in Canada.
  • You elect to report rental income under Section 216.
  • You disposed of taxable Canadian property (e.g., real estate).
  • You want to claim a refund for overpaid withholding taxes.

b) Filing Deadlines

  • April 30: For most non-residents with employment or business income.
  • June 15: For non-residents with business income (if self-employed).
  • April 30: For Section 216 rental income elections.

c) Required Forms

  • T1 General – Income Tax and Benefit Return for Non-Residents: The main tax return form.
  • NR4 Slip: A statement of amounts paid or credited to non-residents and the taxes withheld.
  • Form NR6: Used to request reduced withholding tax on rental income.
  • Form T2062: Required when disposing of taxable Canadian property.

5. Rental Income and Section 216 Election

If you earn rental income from Canadian property, you can choose to file a tax return under Section 216 of the Income Tax Act. This allows you to pay tax on your net rental income (income after expenses) instead of the standard 25% withholding tax on gross rental income.

Steps to File Under Section 216:

  1. Notify the CRA by filing Form NR6 before the first rental payment of the year.
  2. File a Section 216 tax return by April 30 of the following year.
  3. Deduct eligible expenses (e.g., property management fees, repairs, mortgage interest) to reduce your taxable income.

6. Disposing of Taxable Canadian Property

If you sell taxable Canadian property (e.g., real estate), you must:

  1. Notify the CRA within 10 days of the sale using Form T2062.
  2. Pay a withholding tax on the sale proceeds (usually 25% of the gain).
  3. File a Canadian tax return to report the sale and claim any refund for overpaid taxes.

7. Tax Treaties and Double Taxation Relief

Canada has tax treaties with over 90 countries to prevent double taxation. These treaties:

  • Reduce withholding tax rates on certain types of income.
  • Allow you to claim foreign tax credits in your home country for taxes paid in Canada.

Example: If you are a U.S. resident and pay Canadian tax on rental income, you may be able to claim a foreign tax credit on your U.S. tax return.

8. General Costs and Considerations

a) Tax Preparation Costs

  • Hiring a tax professional to prepare a non-resident tax return typically costs between CAD 200–500, depending on the complexity of your situation.

b) Penalties for Non-Compliance

  • Failure to file required tax returns or notify the CRA of property sales can result in penalties and interest charges.

c) Currency Conversion

  • All amounts must be reported in Canadian dollars. Use the Bank of Canada exchange rate for the date of the transaction.

9. Practical Tips for Non-Residents

  1. Obtain a Canadian Tax Identification Number (TIN):

    • You may need a Social Insurance Number (SIN) or an Individual Tax Number (ITN) to file taxes.

  2. Keep Detailed Records:

    • Maintain records of all Canadian income, expenses, and taxes withheld.

  3. Consult a Tax Professional:

    • Non-resident taxation can be complex, especially if you have income from multiple sources or are subject to tax treaties.

  4. Stay Informed About Tax Treaties:

    • Review the tax treaty between Canada and your country of residence to understand your rights and obligations.

  5. File on Time:

    • Avoid penalties by adhering to filing deadlines.

10. Resources for Non-Residents

By understanding these regulations and procedures, non-residents can ensure compliance with Canadian tax laws while minimizing their tax liability. If you have specific questions or need personalized advice, consider consulting a tax professional familiar with non-resident taxation in Canada.