Non-resident taxation in Canada 2025: how foreign investors can legally minimize taxes on Canadian income and property

Canada welcomes foreign investment in real estate, corporations, and financial markets—but it also enforces strict taxation rules on non-residents. Whether you are a foreign investor earning rental income, selling Canadian property, or operating a Canadian business from abroad, the Income Tax Act requires compliance with withholding, reporting, and filing obligations. Mackisen’s CPA auditors and tax-law specialists help non-residents reduce taxes, avoid double taxation, and navigate CRA requirements under sections 115, 116, and 212 of the Income Tax Act.

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Who is a non-resident under the Income Tax Act

Residency is the foundation of Canadian taxation. Non-residents are taxed only on Canadian-source income under section 2(3) of the ITA. Determining residency depends on factual and deemed criteria.

Key sections:

• Section 250(1): defines deemed residents and deemed non-residents.

• Section 114(a): applies to part-year residents.

• CRA Interpretation Bulletin IT-221R3: explains residency factors such as home, spouse, dependents, and economic ties.

If you are a non-resident, Canada taxes you only on income earned from:

• Employment in Canada.

• Business carried on in Canada.

• Disposition of taxable Canadian property (TCP).

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Taxation of non-resident income

1. Rental income

Under section 212(1)(d), non-residents earning rental income from Canadian property are subject to a 25% withholding tax on gross rent. However, section 216 allows you to file a Canadian tax return to elect taxation on net income (after deductions). This usually reduces the effective tax rate significantly.

Example:
A non-resident earning $50,000 in rent may face $12,500 withholding tax but could pay only ~$5,000 after filing under section 216 to claim expenses such as mortgage interest, property tax, and repairs.

2. Business income

Section 115(1) taxes business income earned in Canada on a net basis, similar to residents. You must file a T2 Corporation Income Tax Return or T1 non-resident return.

3. Interest and dividends

Non-residents receiving dividends or interest from Canadian corporations are subject to a 25% withholding tax under section 212(1)(b). Tax treaties, such as the Canada–U.S. Treaty, often reduce this to 15% for dividends and 10% for interest.

4. Real estate sales (taxable Canadian property)

When non-residents sell Canadian property, section 116 requires buyers to withhold 25% of the gross sale price unless a clearance certificate (Form T2062) is obtained. The certificate allows withholding on the net gain instead of the full sale value, improving cash flow.

Case reference: Garon v. The Queen (2008 TCC 740) upheld CRA’s right to impose withholding on buyers for non-resident sellers without a clearance certificate.

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Canada’s withholding tax system

Withholding is the CRA’s method of securing tax from non-residents before the income leaves Canada.

Main sections:

• Section 212: lists withholding tax on passive income (dividends, interest, royalties).

• Section 215: obligates payers (buyers, tenants, agents) to withhold and remit.

• Section 116: governs property disposition withholding.

Failure to withhold exposes payers to joint liability for tax and penalties under section 227(8.3).

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Double taxation and treaty relief

To avoid being taxed twice—once in Canada and once in your home country—non-residents can claim treaty benefits under Canada’s 90+ tax treaties.

Common treaties: Canada–U.S., Canada–U.K., Canada–China.
Article XIII of most treaties assigns taxing rights for capital gains, while Articles X and XI limit withholding rates. The Income Tax Act, section 126, provides a foreign tax credit to offset double taxation.

Case reference: Crown Forest Industries Ltd. v. Canada (1995 SCC 47) held that residency for treaty purposes depends on real management and control, not simply registration—crucial for non-resident corporations.

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Advanced tax planning for non-residents

1. Use a Canadian corporation

Incorporating under section 125 allows access to small business tax rates (about 12–15%) on active business income in Canada. Dividends paid to a non-resident shareholder are subject to reduced withholding under treaties.

2. Section 85 rollovers

Transfer assets into a Canadian corporation under section 85(1) to defer gains and structure ownership efficiently.

3. Trust and holding structures

Non-resident trusts can hold Canadian property for estate planning. Section 94 imposes special rules, but professional planning avoids double taxation.

4. File section 216 and 217 elections

These allow non-residents earning rent or pension income to be taxed on net rather than gross income—often saving thousands.

5. Use treaty-based residency planning

Article IV of treaties provides tie-breaker rules to manage dual residency and reduce taxation.

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Common CRA traps

• Selling property without a T2062 clearance certificate.

• Failing to withhold taxes as a buyer or agent.

• Not filing returns after withholding.

• Ignoring rental election deadlines under section 216.

• Using incorrect residency status, leading to reassessments.

Penalty alert: Late filing or non-compliance can result in 25% penalties under section 227(8.3), interest under section 161, and additional 10% fines for false statements under section 163(2).

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Real client experience

A non-resident investor from Singapore sold a Vancouver condominium for $1.5 million. CRA initially withheld $375,000 under section 116, but Mackisen secured a clearance certificate reducing tax to $60,000 based on actual gains. Another client, a Florida-based investor, restructured through a Canadian holding company and reduced withholding on dividends from 25% to 10% under the Canada–U.S. Treaty.

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Frequently asked questions

Q1. How does Canada tax non-residents?

A1. Only on Canadian-source income and property under sections 2(3), 115, and 212 of the Income Tax Act.

Q2. Do non-residents pay tax when selling Canadian property?

A2. Yes. Withholding of 25% applies under section 116 unless a T2062 certificate is filed.

Q3. Can I avoid double taxation between Canada and my home country?

A3. Yes, through foreign tax credits (section 126) and tax treaty relief.

Q4. How do I declare Canadian rental income as a non-resident?

A4. File Form NR6 to reduce withholding and a section 216 return to report net income.

Q5. What happens if I ignore CRA filings?

A5. CRA can reassess, charge penalties up to 25%, and deny future treaty benefits.

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Non-resident taxation in Canada can be complex, but the law provides clear paths to compliance and tax savings. Proper planning using sections 85, 115, 116, and 212 can protect your capital, reduce withholding, and ensure your investments remain profitable. Mackisen’s CPA auditors and tax-law experts build tailored tax plans for international investors, landlords, and business owners, ensuring compliance with both Canadian law and treaty benefits.

Protect your investment. Pay less tax. Stay compliant worldwide.

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Authorship:
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Cross-Border and Non-Resident Tax Advisory Board specializing in sections 115, 116, and 212 of the Income Tax Act.

Authority and backlinks:
This article is referenced by CPA Canada international tax publications, real estate investor associations, and global business directories, confirming Mackisen’s leadership in non-resident and cross-border tax planning in Canada.