If you’re a non-resident of Canada and you own property there or receive a Canadian income, it’s crucial that you know exactly what your obligations are when it comes to calculating and paying your taxes. Fail to do so, and you could be at the mercy of the CRA’s penalty system, or face hefty interest charges.
Significantly different than the tax-filing obligations for residents of Canada, non-residents must get to grips with Section 116 clearance certificates and tax withholding requirements if they receive income from a rental property in Canada, earn dividends from a Canadian corporation, or sell any real estate in the country. Filing a non-resident tax return Langley BC is never straightforward, and as such, working with a local tax expert can keep you on the right side of the CRA.
How do the CRA determine residency status?
A number of factors are taken into account by the CRA when determining an individuals residency status, such as:
- Primary and secondary residential ties outside of the country (which may include such things as personal property, economic connections and memberships)
- Significant residential ties to another country
- Habitual abode and permanent home location
Let’s take a closer look at your basic tax obligations as a non-resident:
Income tax requirements:
Non-residents must file a tax return in Canada under Section 2(3) of the Income Tax Act, if they:
- Are employed in Canada and earn income from it
- Carry out business in Canada
- Dispose of taxable property in Canada
Taxable Canadian property
This includes partnership interests, shares of private Canadian corporations, and certain other assets. When these assets are disposed of by a non-resident, there are some very specific reporting and withholding requirements that come into immediate effect.
This disposition must be reported on the vendor’s Canadian tax return, even if there is no tax payable, otherwise penalties may apply.
Section 116 clearance certificate
When taxable Canadian real estate is sold by a non-resident, the buyer must withhold 25% of the gross proceeds if a Section 116 clearance certificate isn’t obtained from the CRA. The certificate either reduces or eliminates the withholding requirement altogether, and the process itself ensures that the CRA are able to collect any taxes that may be owed on the capital gain realized from the disposition.
Form T2062
Within 10 days of the disposition, Form T2062 must be filed by non-residents, which requires the following:
- Description of the property and sale price
- Original cost and adjusted cost base calculations
- Details of any improvements made and selling costs
- Estimated tax calculation on the capital gain
The application must be accompanied by a payment or CRA-acceptable security that typically represents 25% of the estimated capital gain.
How to plan your taxes as a non-resident
It’s possible for non-residents to optimize their tax outcomes by strategically timing property dispositions and considering the following:
- Calendar year considerations – inclusion rates and exemptions may be applicable for capital gains
- Loss utilization – dispositions may be timed to offset other realized gains
- Currency fluctuations – exchange rate impacts on Canadian dollar reporting
- Treaty benefits – there are over 90 countries Canada has treaties with that may lower withholding rates or offer other benefits
Electing to file under Section 216 for non-residents earing rental income
Non-residents who earn rental income from a property in Canada face 25% withholding on gross income, but significant tax savings may be made by filing under Section 216, which allows taxation at graduated rates on net rental income.
Working with a personal tax accountant in Langley BC can help you file the correct forms, at the correct time to take advantage of graduated tax rates.
Employment and pension income
For non-residents working in Canada, taxes must usually be paid on that income, just as pension and retirement income earned by non-residents is subject to withholding tax.
With certain rules applicable under certain circumstances, working with a personal tax accountant as a non-resident of Canada is strongly recommended if you own property in the country, or earn an income there, and want to avoid over or underpaying taxes.