Income Tax And Non-Residents - Part 1
Leading Tax Advice
Call Nicholas Kilpatrick
Sections 115 and 116 of the Income Tax Act (ITA) deal with Canadian sourced income and capital gains generated on taxable Canadian property by individuals not residing in Canada. Sections 212 to 219 deal with tax provisions that apply to non-resident corporations, but which also provide additional insight regarding Canada’s approach to international tax policy as it relates to individuals.
Taxation in Canada is determined by residency, and while it can appear a simple task to determine whether one is a resident of Canada or not, fact patterns existent can complicate this determination to the point that sitting judges of Canada’s Tax Court have in many cases had to deliberate on the question of whether or not one is a resident before proceeding to adjudicate on other matters before them. Non resident tax return Canada policies are different and one needs to determine their residency before learning about them.
If a non-resident, the taxpayer is taxed on Canadian sourced income (such as Canadian pensions, investment income, and dividends of corporations resident in Canada), and the sale of taxable Canadian property in accordance with the Tax Treaty or Information Exchange Agreement (IAE) between Canada and the jurisdiction that the taxpayer resides in. Absent a tax treaty or IAE, non-resident tax on Canadian sourced income and the sale of taxable Canadian Property is generally taxed at a rate of 25% on proceeds received.
Such an onerous tax rate can place non-resident individuals at a severe disadvantage compared to resident individuals. Canadian residents enjoy access to tax credits, tax on only 50% of the gain on the sale of taxable Canadian property, and reduced administrative filing requirements. While providing a positive contribution to the Canadian economy is the traditional logic behind access to tax credits for residents but not non-residents, in some cases such a high tax rate exposure imposed on the non-resident contravenes the existing fact pattern and can be inconsistent with the spirit of fairness and equity that the Income Tax Act purports to facilitate.
For this and other reasons, the ITA provides various remedies to reduce the tax exposure on non-residents down to a rate more closely resembling that which a Canadian resident would experience. Such an attempt for tax parity via those remedies is symptomatic of the underlying intent of the tax treaties and ITA’s that Canada enters into, which is simply to recognize at the transaction level the country of residency of the taxpayer and the tax liability to which s/he would be exposed had the income been generated in that resident country.
Administrative guidelines in the ITA provide for a definitive process of applying Canadian non-resident tax rates on income generated on Canadian property by a non-resident taxpayer (“Canadian income”), and then providing for a foreign tax credit on the taxpayer’s resident personal income tax return equal (in theory, not necessarily in practice) to the Canadian tax paid on that income. Here you will learn about different solutions offered to the non residents for tax purposes Canada which will help lessen their tax liabilities. Furthermore, in this article describes various provisions within the ITA to reduce the tax exposure to non-residents on Canadian sourced income; provisions dealing with non-resident tax on the sale of taxable Canadian property and dividends from resident corporations will be dealt with in Part II of this article series on non-resident tax.
The NR5-Application by a non-resident of Canada for a Reduction in the Amount of Non-Resident Tax form allows for the reduction of tax on qualifying Canadian income earned by non-residents. Such qualifying income includes Canada Pension Plan and Old Age Security benefits, superannuation benefits, RRSP and RRIF payments.
Approval of this form is for a period of 5 years, and renewal form will be sent to the non-resident before the due date, which as of the time of this writing was October 31 of the year prior to first year of the 5-year application period.
The approval of this form necessitates the filing of a section 217 world income election tax return by the non-resident each year of the NR5 approval period. Filing this form is of benefit to Canadian non-resident taxpayers receiving qualifying Canadian income in order to reduce unnecessary withholding tax on that income. We at Burgess Kilpatrick can assist you with the filing of this form and other non resident tax return Canada services as well.
The NR6 – Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property reduces the amount of tax installments that must be remitted by non-resident owners of Canadian rental property on income received from that property. If an NR6 form is not approved, the non-resident owner would have to remit monthly tax installments to the CRA equal to 25% (absent a reduction allowed by a tax treaty or IEA) of the gross rental income received, with no regard to rental expenses incurred.
Submission of the NR6 for is done each year for approval of the following application year, and involves providing an estimate of rental income and expenses for that year. Tax equal to 25% of the net income amount (“yearly tax amount”) is calculated and remitted to the CRA for approval, If approved the non-resident taxpayer will now be required to remit monthly installments equal to 1/12 of the calculated yearly tax amount. As of the time of this writing, the due date of the NR6 form is October 31 of the year prior to the beginning of the application year, and includes the following requirements:
- Creation of a Non-Resident Tax Number (NRF or NRH) number. This number is used by the CRA to administer monthly tax installments remitted by the non-resident taxpayer. All tax installments remitted by the non-resident will be allocated to this tax number.
- Canadian payer agent. Non-resident taxpayers are required to appoint a Canadian agent who bears the legal obligation to withhold and remit tax on Canadian rental income generated by the non-resident to the CRA on the non-resident taxpayers behalf. Such a representative can be approved by submitting a from NR95 – Authorizing or Cancelling a Representative for a Non-Resident Tax Account.
NR4 and NR4 Summary
Where a non-resident taxpayer receives Canadian income and must remit tax on that income, the NR4 – Statement of Amounts Paid or Credited to Non-Residents of Canada form must be submitted to report the cumulative tax installments paid on the Non-Resident Tax Account for the year during which the installments were received. This NR4 Summary form is a total of all individual amounts reported on the NR4 forms submitted for that tax number and is identical in purpose for the non-resident taxpayer as the form NR4 Summary is for a Canadian employer. That is, to reconcile the total tax installments allocated to a particular tax remittance number for the year to the calculated tax owing in that year. As of the date of this writing, the due date for the NR4 and NR4 summary is March 31 of the year following the reporting year.
Section 216 tax return
The section 216 tax return must be submitted by April 30 of the year following the reporting year and reports the rental income collected and expenses incurred by the non-resident taxpayer on that property for the reporting year. The tax installments reported on the NR4 Summary form should also be reported as installments paid on the section 216 tax return.
Section 217 world income tax return
Generally, Canadian payers of Canadian income to non-resident taxpayers must withhold and remit tax on that income. Such tax represents the final tax obligation to the non-resident taxpayer on that income and does not necessitate the filing of an additional tax return.
However, it may be advantageous for the non-resident to submit a tax return to report the Canadian income received. In such a case, the non-resident is electing under section 217 of the ITA and may receive a refund of tax paid. This tax return is normally filed in situations where the non-resident tax payer has paid Canadian tax in excess of what s/he is required to pay.
This tax return does not include the rental income reported on the section 216 tax return, although this amount, along with other, non-Canadian sourced income, must be reported in order to calculate Canadian tax credits to which the non-resident taxpayer is entitled (ie: the amount of some Canadian tax credits is based on the proportionate amount of Canadian income to total world income received for the reporting year).
The preceding is just a summary of some of the reporting obligations non-resident Canadian taxpayers must adhere to. This is not an exhaustive summary of all obligations, and our office is available to answer your questions regarding your particular situation.
A comparison of Canada’s international tax policy to that of other countries is an interesting exercise in determining not only Canada’s approach to attracting international investment, but also the components of international investment that Canada deems important to its’ continued economic prosperity and international competitive position; in many situations and policy decisions, the former drives the latter.
Here at Burgess Kilpatrick, we guide non resident for tax purposes Canada and more other services.
If you have any questions or want to speak further about your corporation, contact Nicholas Kilpatrick at email@example.com
Nicholas Kilpatrick is a partner with the accounting firm of Burgess Kilpatrick and specializes in tax structuring and business development for his small and medium business sized clients. Please visit our website at www.burgesskilpatrick.com or on Facebook at www.facebook.com/Burgess Kilpatrick for more information on our firm. This article has been paraphrased from an article by Steve Suarez of Borden Ladner Gervais, Toronto, titled “Canada’s 88(1)(d) Tax Cost Bump: A guide for Foreign Purchasers.