14 March 1994 External T.I. 9326695 - LOCATION INCOME EARNED BY A NON-RESIDENT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

			5-932669

XXXXXXXXXX (613) 957-8953

March 14, 1994

Dear XXXXXXXXXX:

This is in response to your letter of September 13, 1993, requesting information concerning the taxation of Canadian rental income of non-residents of Canada.

Based on the information in your letter, we understand that you are a non-resident of Canada who has recently purchased a real estate rental property in Canada. Since September 1, 1993, a friend of yours acts as your agent in Canada in collecting the rent on your behalf.

Part I and Part XIII Tax

According to paragraph 212(1)(d) of Part XIII of the Income Tax Act (the "Act"), a non-resident who receives rental income from Canada must pay a tax of 25% of the gross amount of rent that a person in Canada pays or credits to him. The agent collecting the rents in Canada has the obligation to withhold and remit the tax withheld.

A non-resident may elect to file a Canadian tax return pursuant to subsection 216(1) of the Act (Part I Tax) and be subjected to tax as though he was a resident of Canada. In his tax return, the non-resident is generally entitled to claim the expenses incurred in earning the rental income, in accordance with the provisions of the Act. Such expenses could include interest, capital cost allowance, operating expenses, etc... The election is made by filing an income tax return (forms T-1 Federal Individual Income Tax Return For Non-Residents) at any time within two years from the end of the taxation year in which the rents were received by the non-resident. The tax withheld and remitted to the tax authorities will be treated as being on account of the tax payable by the non-resident under the Income Tax Act and any excess will be refunded.

Withholdings

The tax withheld must be remitted to the District Taxation Office responsible for the area where the rental property is situated, on or before the 15th day of the month following the month the amount was paid or credited to the non-resident. Payments should be made by cheque or money order to the Receiver General. The agent remitting taxes for the first time should include with the payment his name, address, the type of payment (rentals) and specify the month for which tax was withheld from the payment made to the non-resident. In return, Revenue Canada will send to the agent, each month, form PD7AR-NR Non-Resident Tax Remittance Form. At the end of the taxation year, the agent will have to complete the information return form NR4B Summary and Supplementary entitled Return of Amounts Paid or Credited to Non-Residents of Canada.

Subsection 216(4) of the Act provides for reduced withholdings in certain cases, by allowing the agent to deduct and remit tax on the net rental income available for release to the non-resident. This relief is only available where the non-resident has filed in prescribed form (Form NR6 Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property or Receiving a Timber Royalty) an undertaking to file an income tax return (forms T-1 and T-776) within 6 months from the end of the taxation year for which the election is made. This election must be filed jointly by the agent and the non-resident. In order for the election to be valid, the NR6 form must be filed by January 1 of the taxation year to which the election applies or before the first rental for the year is due. Form NR6 must be mailed to Revenue Canada, Taxation, International Taxation Office, Source Deductions Section, 2540 Lancaster Road, Ottawa, Ontario, K1A 1A8. If a non-resident fails to file an income tax return within the prescribed delay, the agent will be held responsible for the payment of the withholding tax that would have been payable if such an election had not been filed.

For further information, you may consult the 1993 Guide for payers of non-resident Tax and for filers of N4RB Return and the 1993 Rental Income Tax Guide , copies of which are enclosed for your convenience.

The foregoing comments set out the general principles that are applicable where a non-resident receives rental income in Canada. Normally, the tax implications of the tax treaty between Canada and the country of residence of the non-resident have to be considered. However, since you did not inform us of your country of residence for tax purposes, we cannot comment on this issue. For your information, please note that Canada has no tax treaty with Saudi Arabia.

We trust this information will be of assistance to you and we include a copy of Interpretation Bulletin IT-393R, and Information Circulars 76-12R4 and 77-16R4. Paragraphs 38-44 and 54 of IC 77-16R4 may be of special interest to you. Please note that Interpretation Bulletins IT-262 and IT-398 mentioned in your letter are not relevant to your situation.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

enc.