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What is an NR6 Undertaking for Non-Residents of Canada

March 29, 2016

Tax Question:

What is an NR6 Undertaking to file an income tax return by a non-resident receiving rent from real property?

Facts:

A non-resident that receives real property rental income from a Canadian resident is required to have withholding taxes calculated based on and deducted from the gross rental income it receives. The withholding tax can be as high as 25% of the gross rental income. A non-resident can elect to have taxes withheld based on the property’s net rental income in order to help with the non-resident’s cash flow. This election is made by filing an NR6.

Discussion:

The NR6 is to be completed by the non-resident and the Canadian paying the rental income. By electing to have withholding taxes reduced, the non-resident is agreeing to file a Canadian income tax return under section 216. The income tax return under section 216 will be required whether the net income on the property has a profit or a loss. There are several sections of the NR6. One of the sections requests the estimated gross rents, total expenses and net income on the rental property. A breakdown of total expenses is required (i.e. property taxes, utilities, etc.) so that the Canada Revenue Agency (CRA) can see if the expenses estimated are reasonable. Amortization is not allowed to be included as part of the estimated expenses. If the NR6 election is approved, the estimated net income will be the basis on which the withholding tax is calculated on. The NR6 election not only has to be signed by the non-resident but also the Canadian paying the rental income. By signing the NR6, the Canadian resident renter is accepting responsibility for any taxes owing if the non-resident fails to file its Canadian income tax return. The taxes owing would generally be calculated as 25% of the gross rent paid fewer taxes already remitted during the year, plus any applicable penalties and interest. Therefore, it is extremely important that the Canadian knows and trusts the non-resident. Each year an NR6 needs to completed and sent to the International Tax Services Office in Ottawa, Ontario. It is to be completed on or before the first day of each tax year or when the first rental payment is due. Both the non-resident and the Canadian will be advised when the NR6 is approved; however, until the NR6 is approved, the Canadian is required to withhold and remit taxes based on the gross rental income.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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