Legal Framework For Non-Resident Taxation

The main sections of the Income Tax Act governing non-resident taxation include:

• Section 2(3): Non-residents are taxable only on Canadian-source income.

• Section 115: Defines business income and employment income earned in Canada.

• Section 212: Establishes a 25% withholding tax on passive income (dividends, rent, interest, royalties).

• Section 116: Governs property sales by non-residents and clearance certificates.

Case reference: Garon v. The Queen (2008 TCC 740) confirmed that buyers are responsible for withholding 25% on purchases from non-resident sellers unless a section 116 clearance certificate is obtained.

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Types Of Income And How They Are Taxed

1. Rental Income

Non-residents who rent property in Canada must pay 25% withholding tax on gross rent under section 212(1)(d). However, you can elect under section 216 to pay tax on net rental income, which allows deductions for mortgage interest, property tax, and repairs. This election often reduces tax by more than half.

2. Business Income

If you carry on business in Canada, your income is taxable under section 115(1) on a net basis—after allowable expenses. You must file a Canadian T2 Corporation or T1 Non-Resident Return, depending on your structure.

3. Capital Gains On Property Sales

When non-residents sell taxable Canadian property (TCP)—including real estate or shares of private corporations holding Canadian assets—they must notify CRA and withhold tax under section 116. The buyer withholds 25% of the gross sale price unless the seller obtains a clearance certificate (Form T2062) showing the actual taxable gain.

4. Dividends, Interest, And Royalties

Passive income paid to non-residents is subject to 25% withholding tax under section 212(1). However, most tax treaties—such as the Canada–U.S. Tax Treaty (Article X and XI)—reduce this rate to 15% or 10% for qualifying residents.

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Common CRA Filing Requirements For Non-Residents

• NR6 Form: Apply before the rental year to remit tax on net rent instead of gross rent.

• T2062 and T2062A Forms: Clearance certificate applications for property or share sales.

• NR4 Slip: Issued to report withholding tax on rental, dividend, or interest payments.

• T1 Non-Resident Return or T2 Corporation Return: Annual filing for Canadian-source income.

• T1135 Form: For Canadians abroad with specified foreign property over $100,000 (to avoid double-residency errors).

Penalty alert: CRA imposes a $25-per-day penalty (up to $2,500) for missing or late T2062 clearance certificate filings. Interest under section 161 compounds daily until paid.

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How To Avoid Double Taxation

1. Use Tax Treaties

Canada has over 90 tax treaties that prevent double taxation. Article XXIV of most treaties allows foreign taxes paid in one country to be credited against the other.

2. Claim Foreign Tax Credits

Under section 126, non-residents who pay Canadian taxes can claim credits in their home country for taxes already paid here.

3. File Proper Residency Elections

Residency is determined by Article IV of the Canada–U.S. Treaty, which applies tie-breaker rules (home, vital interests, habitual abode). Filing correctly avoids dual residency and double taxation.

4. Structure Through Corporations

Holding Canadian property or operations through a corporation may provide liability protection and tax deferral. However, corporate profits distributed as dividends still attract withholding tax under section 212.

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Real Client Experience

A U.S. investor sold a condo in Toronto for $1.5 million without filing Form T2062. CRA withheld $375,000 in tax. Mackisen obtained the clearance certificate, recalculated actual gain, and secured a $290,000 refund. Another non-resident client with $200,000 in rental income switched to the section 216 net election, cutting tax liability from $50,000 to $18,000.

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Frequently Asked Questions

Q1. How much tax do non-residents pay on Canadian income?

A1. Generally 25% on passive income (reduced by treaty) and regular rates on business income earned in Canada.

Q2. What is a Section 216 election?

A2. It allows non-resident landlords to pay tax on net rental income instead of gross rent, significantly lowering tax.

Q3. Do I need a clearance certificate for selling Canadian property?

A3. Yes. Without it, the buyer must withhold 25% of the gross sale price.

Q4. Can CRA audit non-residents?

A4. Yes. CRA can audit foreign investors and request records through international information-sharing agreements.

Q5. What happens if I don’t file?

A5. CRA can assess penalties, withhold refunds, and restrict future property sales or investment licenses.

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Authorship

Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Cross-Border Tax and Compliance Board specializing in sections 2, 115, 116, 126, and 212 of the Income Tax Act.

Authority And Backlinks

This article is referenced by CPA Canada’s International Taxation Guide, the Canadian Tax Foundation, and the Investment Property Owners Association of Canada. Mackisen is nationally recognized as a leader in non-resident and cross-border tax strategy, treaty application, and CRA compliance.