Non-resident beneficiaries holding inherited property in Canada

Recently, I have observed an interesting trend that may be the catalyst for the aforementioned queries. It seems that non-resident beneficiaries are less inclined to immediately sell their inherited Canadian real estate assets. Instead, they prefer to retain these assets for long-term investment, rental income or future capital appreciation. This trend may be influenced by factors such as a real estate market downturn, rental market issues or the weakness of the Canadian dollar.

As advisors, it is crucial to understand that holding onto inherited Canadian property by a non-resident comes with unique tax obligations and reporting requirements that must be carefully managed to avoid unexpected liabilities.

Non-residents earning rental income from Canadian property are subject to withholding tax rules under Section 212(1) of the Income Tax Act. To comply with these rules and take advantage of the Section 216 election (see below), non-residents often need a Canadian agent or property manager to assist with administration.

Engaging an agent or property manager

By default, Canada requires 25% tax to be withheld on the gross rental income received by a non-resident. If no Canadian agent or property manager is assigned, the burden falls on the tenant to remit the withholding tax, which can make renting out the property more difficult. Most tenants are not familiar with CRA rules and may not want to take on this responsibility. Thus, by engaging a Canadian agent or property manager it becomes their responsibility to withhold and remit the withholding tax to CRA by the due date.

Additionally, a Canadian agent or property manager is required for NR6 approval (see below) to reduce withholding tax. The agent or property manager ensures timely tax remittance and compliance with CRA rules. Finally, most tenants prefer renting from a landlord who has a local agent to handle maintenance and tax matters.

Filing a Section 216 election

A non-resident of Canada that is earning rental income from real or immovable property can choose to file a separate Canadian tax return to report the rental income. Choosing to send this return is called electing under Section 216 of the Income Tax Act. A Section 216 tax return is separate from any other return that the non-resident has to send to CRA for the year.

One of those returns is T1159 Income Tax Return for Electing Under Section 216. This return allows the non-resident to elect taxation on net rental income rather than gross rental income, which can significantly reduce the overall tax burden.

Here’s an example. A non-resident emigrated from Canada in 2018 and became a resident of Chile. Her Canadian resident mother died in 2023 and in her will, left her home to her non-resident daughter. In 2024, the non-resident daughter decided to rent the home and engaged a Canadian property manager to deal with the taxes and remittances to CRA. The rental property had the following income and expenses in 2024:

Gross rental income        $42,000

Allowable expenses        $10,000

Capital cost allowance    $18,000

Net rental income           $14,000

Since the daughter is a non-resident of Canada, and she has not filed a Section 216 election, the default tax rule requires the Canadian property manger to remit withholding tax of $10,500 (25% of the gross rental income of $42,000) to the CRA.

However, by choosing to file a Section 216 election she can report and pay tax on her net rental income of $14,000. Potentially, she can benefit from progressive tax rates and lower her overall tax liability.

Filing an NR6 form

To have non-resident tax withheld on net rental income, the non-resident and property manager have to complete form NR6 Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent and send it to CRA for approval before the first rental payment of the year is due.

If the NR6 is not filed or approved, the property manager must continue remitting 25% of the gross income received or earned. Once approved, the NR6 allows the non-resident to remit withholding taxes of 25% of the net rental income. In our example for 2024, it would be $3,500 (25% of $14,000).

Filing a T1159 (Section 216) return

Even though the NR6 form has been filed and approved by CRA, a Section 216 return (such as a T1159) needs to be filed on or prior to Jun. 30 of the applicable tax year. In the T1159, you include the income and expenses from the Canadian rental properties.

If CRA approved the NR6 form and a Section 216 return (like a T1159) is not filed by the due date, then the non-resident withholding tax should be based on the gross rental income.

Let’s go back to our earlier scenario, and assume the NR6 was approved and the non-resident daughter filed the T1159 tax return. If the return indicates a tax liability of $2,000 and $3,500 of withholding tax was remitted, then the non-resident taxpayer would claim a refund of $1,500 ($3,500 – $2,000) on the T1159 return.

Section 216 provides at least three benefits:

1. Lower tax liability: Instead of paying $10,500 in withholding tax on gross income, the non-resident daughter is only taxed on her net income, reducing her total tax burden.
2. Tax refund eligibility: If too much tax was withheld, the non-resident can receive a refund after filing the T1159.
3. Compliance with CRA: By filing under Section 216, the non-resident ensures her tax obligations are met while optimizing her rental income.

The importance of NR6 and T1159 filings

Investment advisors working with non-resident clients should ensure they understand the advantages of Section 216 and the importance of timely NR6 and T1159 filings.

Mismanaging these filings can lead to higher tax payments, penalties or delays in refunds, affecting the client’s overall financial strategy.

Miichael Kulbak, MBA, CPA, CMA, TEP, is principal of Kulbak Trust Solutions in Mississauga, Ont.