Non residents owning rental properties in Canada –Common mistakes to avoid
Investing in Real Estate has long been a preserver of wealth. Finding a roof over our heads is one of the necessities of life. Buying rental properties and becoming a landlord can be a good way to build up a passive income stream over time and have the value of the home appreciate at the same time. With low interest rates and depreciation of the Canadian dollars many foreign investors have been buying up rental properties in Canada. What are the tax implications that a non resident aware of? This blog will outline some of the common mistakes that non residents make.
Not reporting their income – non residents must report any Canadian source income during the year.Failure to do so will result in penalties and interest levied on the taxes owed.When completing a Canadian tax return non residents must report the gross rents received less any deductible expenses such as mortgage interest, maintenance fees, insurance and property taxes.
Failure to remit a 25% withholding tax each month on their gross rents.This requirement does not apply to Canadian residents.Special planning can be done in this area to have the 25% withholding tax be based on net rental income as opposed to gross rents.
Claiming major renovations against rental income in the current year.Major renovations to improve the home are what CRA considers capital expenses and should be added to the adjusted cost base of the property and claimed at the time of the sale of the property and not against rental income
Not being aware of the withholding tax and special filing requirements when the property is sold.This is very important as the financial implications can be significant. For example the non resident seller needs to remit 25% of the gain from the sale of real estate.If you wait until after the closing date the lawyer will need to withhold 25% of the “selling price” which is a lot more than taking care of this prior to the closing date.There is also a special form that the non resident seller must send to the Canada Revenue within 10 days from date of closing otherwise there is a penalty of $25 per day to a maximum of $2,500.(There is a minimum penalty of $100)After all of this is done the non resident can file a tax return to calculate the actual taxes owing.Often times they can get a partial refund as they can reduce their taxable gain through outlays such as realtor fees and existing capital losses.
It is important to seek independent advice and plan in advance before you buy or sell a property.
