Are you living in a rental apartment in Canada? Then please check your landlord’s residential status to avoid a huge tax bill and penalty. As per the Canadian tax system, the tenant has to pay rent to their non-resident landlord after deducting a 25% withholding tax. Failing to do so could attract compounded daily interest on the withholding tax amount not deducted. 

In this article, we will see how withholding tax on rent works and what a tenant and a non-resident landlord should do to comply with this tax. 

Who Is a Non-Resident Under Income Tax Act? 

The Income Tax Act defines a non-resident as someone who;

  • Is a tax resident in another country 
  • Who lived outside Canada for the tax year 
  • And stayed in Canada for less than 183 days in the tax year. 

It is better to consult a legal expert to confirm the tax residency status of the landlord. 

How Withholding Tax On Rent Works For the Tenant 

Suppose John pays $3,500 gross rent per month to his landlord Asha. If his landlord is a non-resident, he will deduct $875 ($3,500 x 25%) as withholding tax and give Asha $2,625 as rent. If John paid rent in June 2023, he has to remit the $875 tax to the Canada Revenue Agency (CRA) by July 15, 2023. He must have a particular non-resident tax account, fill out the NR4 slip and NR4 Information Return, and make the payment. The NR4 slip contains the gross amount of rental income paid and the amount of non-resident tax withheld during the year. 

If John fails to pay the $875 tax to the CRA, a compounding interest will apply on this amount, along with a penalty. Once he remits the tax to the CRA, it reflects in his landlord Asha’s account as tax paid on gross rent. 

Note: A lease agreement stating that the landlord is a Canadian resident is insufficient. It would be best to ask your landlord to provide a Canadian tax return or a tax residency certificate to determine their residential status. If the landlord fails to provide residency proof, you can hold the tax amount in escrow or trust until the residency is confirmed. If your landlord is a resident, you can credit all the tax to the landlord. And if your landlord is a non-resident, you can remit the entire withheld tax to the CRA. 

But if you withhold tax without the landlord’s consent could cause a legal dispute. Hence, talk to your landlord and keep the communication documented. 

How Withholding Tax On Rent Works For the Landlord 

Now we will move to the account of the non-resident landlord. Returning to our previous example, John is the tenant, and Asha is the landlord. Asha might incur several expenses like advertising, insurance, interest, maintenance and repairs, property taxes, utilities, and legal and accounting costs to maintain the rental property. She can deduct these expenses from her gross rental income if she has proper receipts to back these expenses. 

Asha has to file a Section 216 return by June end to claim these expense deductions and reduce her taxable income. She can claim a refund if her final tax liability is lesser than the withheld tax. 

For instance, John paid $42,000 gross income, of which $10,500 was tax withheld. Now Asha claims expenses which reduces her tax liability to $10,000. She can claim a $500 refund by filing the Section 216 return. 

Asha has another option to withhold 25% tax on net rent (after deducting expenses). For this, she has to file a Form NR6 before December and get it approved by the CRA to apply net rent for withholding tax for the following year.  

To prepare Form NR6, Asha has to hire an agent who is a resident of Canada and acts on her behalf and files the Section 216 tax return before June. (If the agent misses the deadline, the tax will return to gross rent.) If Asha opts for Form NR6, she has to file Form T1159 before June, even if she has no tax payable or no refund to claim. 

Note: If you earn rent from more than one property in Canada, you should report the consolidated income and expenses of all the properties in one Section 216 return. 

Moreover, if you want to claim a refund, you have to file the Section 216 return within two years from the end of the year you received the rent. For tax withheld on 2023 rent, you can claim a refund up to 2025. Sometimes, the deadline is only six months, after which the tax paid is considered final payment and is not eligible for refunds. 

As a landlord, you cannot sell the property before clearing all your past tax dues if you don’t pay withholding tax. 

How to Avoid Withholding Tax On Rent

This whole concept of withholding tax on rent could be quite cumbersome for the tenant and landlord. You can avoid this by setting up a Canadian corporation and making it the legal and beneficial owner of the leased properties.

Contact Glenn Graydon Wright LLP in Oakville to Help You With Taxes 

There are many granular details on tax eligibility and deduction. If you are a tenant, it is better to take the help of a professional accountant and discuss the withholding tax eligibility and process to avoid penalties and a huge tax bill at the end of the year. At Glenn Graydon Wright LLP, our accountants can provide services such as filing the withholding tax and any other tax. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting expertise, call us at 905-845-6633, or connect with us online, to set up an initial consultation.