Non-Resident Rental Income in Canada: Tax Obligations From Purchase to Sale

If you own Canadian rental property but live outside Canada, the CRA requires your tenant or property manager to withhold 25% of your gross rental income and remit it monthly. You can reduce this to a withholding on estimated net income by filing an NR6 form before the start of the year, and then file a Section 216 return by June 30 to calculate your actual tax. The difference between these two approaches can be tens of thousands of dollars per year.

At Tohme Accounting, non-resident rental tax is one of our core practice areas. We handle the Canadian side (NR6 approvals, Section 216 returns, and disposition clearance certificates) and coordinate with US returns for clients who are also filing with the IRS. Most non-residents we work with are former Canadian residents who moved abroad, US citizens who purchased Canadian investment properties, or Canadians who moved to the US and kept their rental properties.

This guide covers the full lifecycle: buying Canadian property as a non-resident, the annual tax obligations while you hold it, and the disposition requirements when you sell.

The Default: 25% Withholding on Gross Rent

Under Part XIII of the Income Tax Act, any person paying rent to a non-resident of Canada must withhold 25% of the gross rental payment and remit it to the CRA by the 15th of the following month. This withholding applies regardless of your expenses. If your monthly rent is $3,000, the withholding is $750 per month, or $9,000 per year.

The 25% rate applies to the gross amount. It does not account for mortgage interest, property taxes, insurance, repairs, property management fees, or any other expense. For a property that collects $36,000 in annual rent but has $24,000 in expenses (leaving only $12,000 in net income), the default withholding still takes $9,000. Your effective tax rate on the actual profit would be 75%.

This default is punitive by design. The CRA assumes non-residents will not file returns, so the withholding is set high enough to collect what is likely owed and then some. The system gives you two paths to a better outcome: the NR6 form (to reduce the withholding) and the Section 216 return (to get a refund based on net income).

The person responsible for the withholding is not the non-resident owner. It is the person paying the rent: the tenant, or more commonly, the property manager or agent. If the agent fails to withhold and remit, they are personally liable for the 25% plus penalties and interest under ITA subsection 215(6). We advise every client with a Canadian property manager to confirm in writing that the manager is handling the withholding correctly.

Filing an NR6 to Reduce the Withholding

Form NR6 (Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property or Receiving a Timber Royalty) allows a non-resident to request that the 25% withholding be calculated on estimated net rental income instead of gross rent. If the CRA approves the NR6, the withholding drops to 25% of net income, which is dramatically lower.

Using the same example: $36,000 gross rent, $24,000 in expenses, $12,000 net income. With an approved NR6, the annual withholding drops from $9,000 (25% of gross) to $3,000 (25% of net). That is $6,000 more in your pocket each month while you wait for your Section 216 return to be assessed.

The NR6 must be filed before the first rental payment of the year, or before the first rental payment after you acquire the property. The CRA typically takes 4-8 weeks to process the approval. The form requires an estimate of gross income and expenses for the year, and it must be signed by both the non-resident owner and the agent (the person who will be remitting the withholding).

If the CRA approves the NR6, the agent withholds 25% of the estimated net income (divided into monthly installments) instead of 25% of gross. The NR6 must be filed fresh each year. An NR6 approved for 2025 does not carry over to 2026.

At Tohme Accounting, we file NR6 forms for non-resident clients as part of our annual cross-border tax package. Getting the expense estimates right matters: if the CRA thinks the estimates are unreasonable, they reject the NR6, and you are back to the 25% gross withholding. Our team prepares the NR6 with supporting documentation drawn from the prior year’s actual expenses, which gives the CRA confidence in the estimate.

The Section 216 Return: Getting Your Refund

Every non-resident who earns Canadian rental income should file a Section 216 return (ITA section 216 election) by June 30 of the year following the tax year. This return calculates your actual net rental income and applies the standard graduated tax rates instead of the flat 25% withholding rate.

The Section 216 return works like a regular T1 return but only for the rental income. You report gross rental income, deduct all eligible expenses (mortgage interest, property tax, insurance, management fees, repairs, CCA if applicable), and pay tax on the net amount at the graduated personal rates. The lowest combined federal rate on the first $57,375 of income is 15% (federal only, no provincial surtax applies to Section 216 filers for most provinces).

Here is a worked example for a US resident who owns a rental condo in Toronto:

Without the Section 216 return, you would have paid $9,000 on $10,000 of net income. With it, you pay roughly $1,500 and get a $7,500 refund. Filing the Section 216 return is not optional if you want a reasonable tax outcome.

The June 30 deadline is firm. If you miss it, the CRA can deny the Section 216 election entirely, and the 25% Part XIII withholding becomes your final tax. Extensions are rare and hard to get. At our firm, we diarize the June 30 deadline for every non-resident rental client and begin preparing the Section 216 return in March.

Non-residents also receive an NR4 slip from their agent by March 31, summarizing the gross income paid and the tax withheld during the year. This slip is the equivalent of a T4 for non-resident withholding and is needed to complete the Section 216 return.

CCA for Non-Resident Rental Property

Non-residents can claim capital cost allowance (CCA) on the depreciable portion of their Canadian rental property, just like resident landlords. The building (not the land) falls under Class 1, with a 4% declining-balance CCA rate.

CCA reduces your net rental income and your Section 216 tax bill. On a property with a building value of $300,000, the first-year CCA (after the half-year rule) is $6,000. At a 15% tax rate, that saves $900 in tax.

The catch is the same one that applies to residents: CCA claimed on a property is recaptured when you sell. The CRA adds the total CCA you claimed back to your income in the year of sale, taxed at your full marginal rate. For a non-resident, this recapture is subject to the Part I withholding and clearance certificate process we cover below.

Whether to claim CCA depends on your holding period and exit plan. If you plan to hold the property for 15-20 years, deferring $900 per year in tax for that long has real value. If you plan to sell in 3-5 years, the recapture wipes out the benefit. We model both scenarios for clients before making the CCA decision.

For a deeper look at rental property tax deductions, including the distinction between direct and indirect expenses, those posts cover the full set of eligible deductions.

Selling the Property: Section 116 Clearance Certificate

When a non-resident sells Canadian real property, the buyer (or the buyer’s lawyer) is required to withhold a portion of the sale price and hold it in trust until the CRA issues a clearance certificate under ITA section 116. Without the certificate, the buyer can be held personally liable for the non-resident’s capital gains tax.

The withholding amount depends on the type of property. For non-depreciable capital property (land), the withholding is 25% of the sale price or the estimated gain, depending on the CRA’s assessment. For depreciable property (the building), the withholding is 50% of the excess of the sale price over the undepreciated capital cost (UCC).

The process works like this:

1. You (or your CPA) notify the CRA of the pending sale by filing Form T2062 (Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property) within 10 days of the sale.
2. The CRA reviews the filing and issues a certificate of compliance, specifying the amount of tax to be remitted.
3. The buyer’s lawyer remits the required tax to the CRA and releases the remaining proceeds to you.
4. You file a Canadian T1 return for the year of sale, reporting the capital gain. Any excess withholding is refunded through the return.

Processing times for the T2062 vary. The CRA targets 4-8 weeks for straightforward cases, but complex situations can take 3-6 months. During this time, the withheld funds sit in the lawyer’s trust account. Plan for this delay if you need the sale proceeds quickly.

CCA recapture (if you claimed CCA during the holding period) is also reported on the return for the year of sale and is taxable at your full marginal rate. The capital gains tax on rental property post covers the gain calculation in detail, including the 2024 inclusion rate change.

At Tohme Accounting, we coordinate the entire disposition process: filing the T2062, liaising with the buyer’s lawyer, preparing the final T1, and coordinating the US-side reporting for dual filers.

US-Side Coordination for American Owners

US citizens and residents who own Canadian rental property have reporting obligations on both sides of the border. The rental income must be reported on the Canadian Section 216 return and on the US Form 1040, Schedule E.

The Canada-US Tax Treaty prevents double taxation through foreign tax credits. The Canadian tax paid on the rental income (net of refunds from the Section 216 return) generates a foreign tax credit on your US return (Form 1116, passive category income). This credit offsets the US tax on the same income, so you do not pay full tax to both countries.

The coordination gets complicated when the two countries calculate expenses differently. Canada allows CCA (declining-balance method). The US allows MACRS depreciation (straight-line over 27.5 years for residential). The depreciation amounts rarely match, which means the net income reported on each return is different. The foreign tax credit calculation has to account for these differences.

When you sell the property, the US side requires reporting the capital gain on Schedule D and Form 4797 (for the recapture of depreciation). The Canadian clearance certificate process and the US sale reporting must be coordinated so the foreign tax credits are claimed correctly. Errors here either leave money unclaimed or create inconsistencies between the two returns that can trigger questions from both the CRA and the IRS.

If you also have Canadian financial accounts with aggregate balances exceeding US$10,000, the FBAR filing requirement applies. And if you hold the property through a Canadian corporation, the US foreign corporation reporting rules (Form 5471) add another layer.

Our firm handles both the Canadian and US returns simultaneously for cross-border clients. The two returns are interdependent, and filing one without considering the other creates mismatches that are expensive to fix after the fact.

Provincial Considerations

Non-residents pay federal tax on their Canadian rental income through the Section 216 return, but provincial tax applies only if the property is located in a province that levies it. Most provinces impose a surtax on non-resident rental income. In Ontario, the provincial rate adds approximately 5-10% on top of the federal rate depending on income level.

Ontario’s Non-Resident Speculation Tax (NRST) applies at the time of purchase, not annually. The NRST rate is 25% of the purchase price and applies to residential property in the Greater Golden Horseshoe region purchased by non-residents, foreign corporations, or taxable trustees. Exemptions exist for protected persons under IRPA, nominees for permanent residence, and certain work-permit holders.

British Columbia has its own Speculation and Vacancy Tax and the Additional Property Transfer Tax for foreign buyers (20% on residential property in certain areas). These are purchase and ownership taxes, separate from the income tax obligations on rental income.

The provincial taxes do not affect the NR6 or Section 216 process directly, but they change the overall return calculation for the property. A non-resident buying a $700,000 condo in Toronto pays $175,000 in NRST alone, which fundamentally changes the investment math. Understanding these costs before purchasing is the kind of planning conversation our team at Tohme Accounting has with prospective non-resident investors.