What it means
When a non-resident of Canada owns rental property in Canada, the person paying the rent, such as a tenant or property manager, is normally required to withhold tax on the gross rent and send it to the Canada Revenue Agency. The withholding rate is set by law and applies before any expenses are taken into account.
This can be a heavy burden if the property has large mortgage interest, repairs or other costs. The NR6 form lets the landlord apply to have the withholding calculated on an estimate of net rent, which is rent minus expected expenses.
In return, the landlord promises to file a Canadian tax return for the year, within the deadline set by the tax authority. If the agency accepts the application, the agent withholds the percentage on the lower net figure.
The form needs to be filed in advance, before the first rent payment for the year, along with an estimate of rental income and expenses. The agency then confirms in writing whether it has accepted the undertaking.
Until that confirmation arrives, the agent should keep withholding on gross rent. Even with an NR6, the final tax liability is worked out on the tax return.
If the landlord underestimated profit, extra tax may be owed with interest, and if the estimate was too high, a refund may be due. The NR6 only changes the timing of cash payments during the year, not the underlying tax.
Anyone in this position should also consider tax treaty rules and the role of the agent or property manager, who has responsibility for correct withholding. Professional advice is sensible because a mistake can leave the agent liable for tax that should have been withheld.
Record keeping makes the process far smoother. The landlord should keep the agency's acceptance letter, a record of rent received and receipts for expenses, since the tax return will need to reconcile to the estimates used for withholding.
In practice
Real-world examples.
Example
A landlord living in the United Kingdom owns a Toronto apartment that earns $36,000 a year in rent. She files an NR6 with her property manager's help so that tax is withheld on rent minus expenses instead of on the full rent.
Example
A Dubai-based investor owns a small Vancouver commercial property with high mortgage interest. He files an NR6 each year, and his accountant prepares the Canadian return to settle the final tax.
Example
A property manager looks after several rental homes for overseas owners. It asks each owner to file an NR6 in advance and keeps the confirmation letters on file, so it can show it withheld the right amounts.
Formula
Calculation
Withholding without NR6 = Gross rent x Withholding rate
Withholding with NR6 = (Gross rent - Estimated expenses) x Withholding rate
Suppose a non-resident landlord receives $60,000 of rent in a year, expects $22,000 of expenses and the illustrative withholding rate is 25%. Without an NR6: $60,000 x 0.25 = $15,000. With an accepted NR6: ($60,000 - $22,000) x 0.25 = $38,000 x 0.25 = $9,500. The landlord keeps $15,000 - $9,500 = $5,500 more cash during the year.Case study
Seen in the real world.
Maple Terrace Holdings is a fictional company based abroad that owns a rental building in a Canadian city. Its rental income is $240,000 a year, but expenses including interest, repairs and management fees are about $170,000. For the first year, the property manager withheld on the gross rent.
The company's accountant calculated that the manager had withheld $60,000 at the illustrative 25% rate, while the tax on net profit would be only $17,500. The accountant filed an NR6 for the following year and the agency accepted it.
In this illustrative story, the withholding the next year was close to the final tax, so the company kept about $42,500 more cash during the year. The finance lead then built a reminder to file the form every year before the first rent payment, because the approval does not simply carry on indefinitely.
Watch out
Common mistakes.
- Filing the form late. The undertaking needs to be in place before the rent is paid, or the agent has to withhold on the gross amount.
- Assuming the NR6 removes the tax. It only changes the withholding basis, and the landlord still has to file a return and pay any balance.
- Forgetting to file the Canadian return. The undertaking is conditional on filing, and failure can lead to penalties and loss of the benefit.
Questions
People also ask.
Who files the NR6?
The non-resident landlord, often with help from an accountant or the agent who collects the rent.
Does it apply to every type of Canadian income?
No, it applies to rent from real property and timber royalties, not to other kinds of income.
Is the NR6 needed each year?
Generally the undertaking relates to a specific year, so landlords usually file annually.
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