Late Filed Section 216 Election for Non-Residents
Non-residents of Canada are taxed on their worldwide income. For example, if a non-resident owns Canadian rental property, they are required to report the respective rental income in Canada and remit a 25% withholding tax on the gross. Net income if a section 216 election is filed.
Technically, the payer, the renter, is required to withhold and remit the amount. However, this is an unlikely arrangement so a non-resident taxpayer would usually appoint an agent, such as a property manager, to withhold and remit the tax on their behalf. Under normal circumstances, a Canadian agent has to withhold 25% of the non-resident portion of gross rental income. The agent can be financially penalized for not doing so. The tax is due within 15 days of the month it is originally expected.
If the non-resident tax is not withheld and remitted, both resident and non-resident are exposed to penalties for unreported income. This includes interest on the penalties. The penalties range from 10% of the amount not withheld for the first year and 20% for subsequent years, plus interest. If CRA suspects negligence or misrepresentation than penalties are as high as 50% of the tax owing.
Net versus Gross Rental Income
A non-resident taxpayer can choose to report tax on the net, not gross, rental income. Of course, once deductions from gross income, including expenses, are applied, the net income is lower. Therefore the tax liability is reduced. A section 216 election can be submitted, pursuant to section 216 of the Income Tax Act, RSC 1985, c 1 (5th Supp), for approval to report the income on a separate return which will be subject to regular ITA Part 1 tax the on net income, not the standard 25% withholding rate.
Late Filed Section 216 Election - Kutlu, 97 DTC 5180 (FCTD)
In general, the 216 return is due within 2 years from when the rental income was paid or credited to the taxpayer. However, a Federal Court decision (Kutlu, 97 DTC 5180 (FCTD)) ruled that CRA could not block a taxpayer’s late filed 216 election in part because it had allowed late filings in previous years (see also Wright, 2001 DTC 437). In general, CRA was required to exercise its discretion and provide taxpayers with a chance to remedy their noncompliance within section 216 election time limitations.
The CRA subsequently revised its policy to allow the one-time late filing of section 216 elections if CRA has not begun enforcement action related to the noncompliance and Form NR6 has not been submitted and approved. If accepted, tax will be on the net income, penalties will not be charged but interest still applies.
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