If your parents are non-residents and own rental property in Canada, then all gross rental income they earn is subject to a 25% withholding tax. The tax is required to be withheld from the rental payments and remitted to the Canada Revenue Agency by the property manager (who is collecting rent) or by the tenants. The 25% tax is required, even if your parents incur significant expenses on the rental property that would impede available cash flow for the tax. Failure to withhold and remit these taxes may result in interest (i.e., daily compounded interest on amounts not withheld/remitted) and penalties.
Section 216 election
The only way your parents can get a potential refund on all or part of the withholding tax would be to file a separate Canadian tax return and elect under Section 216. The purpose of this election is to allow you to report and pay tax on the net rental income (rents less expenses) instead of the gross amount. The difference between the taxes payable calculated on the return and the withholding tax would be refunded if the withholding tax were higher. If your parents choose to file a Section 216 return, both your parents and the property manager must complete and file Form NR6 prior to January 1 of each year or before the first rent payment is due. Your parents must file a Section 216 return regardless of if there is an expected refund or no taxes payable. They have two years after the end of the calendar year to file the Section 216 return.
Rental expenses that are deductible for tax purposes commonly include, but are not limited to:
- Insurance
- Interest and bank charges
- Legal and accounting fees,
- Management and administration fees
- Repairs and maintenance
- Property taxes, utilities
- Capital cost allowance (CCA)
- A CCA limit applies to prevent you from creating a loss through CCA deductions in a particular year
There are also Canadian withholding tax and filing requirements when your parents sell the rental property. For this purpose, it is advised that the legal documents pertaining to the acquisition of the rental property be kept readily available.
Your parents should contact a Canadian tax advisor to assist with the administration of these withholding requirements.
- Jessica, Young Tax Professional