Own a Canadian Rental Property While Living Abroad? Understanding NR6 and Section 216 Returns

If you live outside Canada and own a Canadian rental property, an NR6 application may allow you to reduce the amount of tax withheld from your rent during the year. For many non-resident landlords, filing an NR6 makes sense. However, it is optional and comes with filing obligations that should be understood before applying.

Renting Out Your Home After Leaving Canada

You may not have intended to become a landlord. Perhaps you moved abroad for work and decided to rent out your Canadian home in case you returned.

What can be overlooked is that becoming a non-resident changes how your Canadian rental income is taxed. Reporting the rent on an annual tax return may no longer be enough to meet your obligations.

Why Tax Is Calculated Before Expenses

Non-residents are generally subject to a 25% withholding tax on gross Canadian rental income. That means the tax is calculated before expenses are deducted.

For example, a property generating $3,000 per month of rent would generally require $750 per month to be remitted to Canada Revenue Agency (CRA), regardless of the property's expenses. An approved NR6 can change that calculation.

This can create cash flow challenges, particularly if you have a large mortgage. A rental property may have little or no profit after mortgage payments, property taxes, insurance, condo fees, maintenance, and management costs, yet tax is still based on the gross rent collected.

These rules depend on whether you are a non-resident for Canadian tax purposes. Simply living outside Canada does not automatically make you a non-resident, so residency status should be reviewed if there is uncertainty.

What an NR6 Changes

Form NR6 is an annual application filed with CRA by a non-resident landlord and a Canadian-resident agent. It includes estimates of rental income and expenses and a commitment to file a Section 216 return. Once CRA approves it in writing, the agent can generally withhold 25% of net rental income after allowable expenses rather than 25% of gross rent.

The Canadian-resident agent is often a property manager, but it may also be another Canadian resident willing to assume the associated responsibilities. The agent is responsible for the tax remittances and related reporting, so the role involves more than acting as a contact person.

Consider a property that earns $36,000 in annual rent and has $24,000 of deductible expenses. Assuming NR6 approval covers the full year and the income and expenses occur as expected, the comparison would be:

	Without NR6 approval	With NR6 approval
Gross rent	$36,000	$36,000
Deductible expenses	$24,000	$24,000
Income subject to withholding	$36,000	$12,000
Annual withholding	$9,000	$3,000

 

The landlord in this example has an additional $6,000 available during the year. The final tax is calculated separately on the Section 216 return, so the $6,000 represents reduced withholding rather than tax savings.

Own a Canadian Rental Property While Living Abroad?

Book a call with our team to determine whether an NR6 makes sense for your situation. We can review your rental income and expenses, prepare the NR6 filing, complete your Section 216 return, and identify any outstanding non-resident tax compliance issues.

We also provide expat financial planning and retirement planning advice through our affiliated advice-only financial planning firm, Objective Financial Partners.

Mortgage Payments Create Confusion

Mortgage interest on money borrowed to purchase or improve a rental property is generally deductible when calculating rental income. Mortgage principal repayments are not.

As a result, a landlord may feel as though the property is barely breaking even because of mortgage payments, while still reporting taxable rental income for Canadian tax purposes. The NR6 expense estimate should therefore exclude the principal portion of the mortgage payments.

How the Section 216 Return Fits In

An NR6 affects withholding during the year. A Section 216 return calculates the Canadian tax on your actual net rental income, with credit for tax already remitted.

Even landlords who do not file an NR6 can generally file a Section 216 return to recover excess withholding tax. If you own multiple Canadian rental properties, all of your Canadian rental income and expenses must be reported on the same Section 216 return.

Section 216 of the Income Tax Act includes the special election for non-residents who earn Canadian rental income (or timber royalties) to file a Canadian return and be taxed on net rental income instead of being taxed solely through the default 25% withholding on gross rent. Technically, the return filed is Form T1159, Income Tax Return for Electing Under Section 216. CRA itself describes the filing as "electing under section 216 of the Income Tax Act."

Filing Deadlines Matter

When an NR6 is approved, filing the Section 216 return is mandatory. For individual landlords with an approved NR6, the filing deadline is generally June 30 of the following year, even if there is no tax owing or the property generated a loss. Any balance owing is generally due by April 30 of that following year.

Without an approved NR6, the usual Section 216 filing deadline is two years after the end of the rental income year. An earlier deadline can apply if you sell a property and must report recaptured depreciation, so a sale should be reviewed separately.

Missing the applicable filing deadline can result in CRA assessing tax based on gross rent rather than net income. Interest and penalties may also apply, and the Canadian-resident agent may be assessed for withholding shortfalls.

When Should You Apply?

CRA says to submit an NR6 on or before January 1 of the relevant year or before the first rental payment is due. For an ongoing rental property, the practical approach is to review the filing before year-end.

CRA also accepts applications during the year, with net income withholding generally effective from the first day of the month it receives the form. However, the agent must continue withholding on gross rent until CRA provides written approval.

Approval does not end the regular reporting requirements. Tax remittances are generally due by the 15th of the following month, and the agent must complete annual NR4 reporting.

What If No Tax Has Been Remitted?

If you became a non-resident and have been renting out Canadian property without remitting tax, it is worthwhile to address the issue sooner rather than later. Filing an annual tax return does not automatically resolve missed remittances during the year.

An NR6 filed today does not, by itself, correct earlier missed remittances. The appropriate next steps depend on when you became a non-resident and how the rental income has been handled since then. That includes reviewing the returns already filed and the tax paid.

Is an NR6 Worthwhile?

For many non-resident landlords, the answer is yes. If your property has significant deductible expenses and you have a Canadian-resident agent available, the improvement in cash flow can be substantial.

If expenses are relatively low or the cost of administering an NR6 outweighs the cash flow benefit, continuing with tax remittances on gross rent and filing a Section 216 return afterward may be reasonable. Compare the amount of withholding you would avoid during the year with the cost of the additional work.

Book a call with Objective Tax & Accounting if you would like us to review whether an NR6 makes sense for your Canadian rental property. We can help with the NR6 application and Section 216 return, or review your situation if you are concerned that earlier tax obligations have been missed.