What Is a Section 216 Election in Canada
A Section 216 election under the Income Tax Act allows non-residents of Canada who earn rental income from Canadian real estate to be taxed on their net rental income rather than on the gross amount. Without this election, the default rule requires a 25 percent withholding tax on the gross rent collected, regardless of expenses.
For many non-resident landlords, this default withholding results in significant overpayment of tax. The Section 216 election provides a mechanism to correct that by filing a Canadian tax return and reporting the actual income after deducting expenses such as mortgage interest, property taxes, insurance, and maintenance.
This election is one of the most commonly missed opportunities for tax savings among non-residents with Canadian rental properties.
How the 25 Percent Withholding Tax Works
Under Part XIII of the Income Tax Act, tenants or property managers are required to withhold 25 percent of the gross rent paid to a non-resident landlord and remit it to the Canada Revenue Agency. This withholding is not a final tax, it is simply a prepayment.
The issue is that it applies to gross income. Even if the property generates little or no profit after expenses, the full 25 percent withholding still applies unless proactive steps are taken.
A Toronto tax lawyer will often see situations where thousands of dollars are withheld unnecessarily because no election was made.
How a Section 216 Election Reduces Tax
By filing a Section 216 return, typically using Form T1159, the non-resident reports the rental income on a net basis. This allows for the deduction of reasonable expenses incurred to earn that income.
The final tax payable is then calculated using graduated tax rates, often resulting in a significantly lower tax liability. Usually too much tax was withheld throughout the year, and the non-resident receives a refund from the CRA.
The Importance of Filing Deadlines
A Section 216 return must generally be filed within two years from the end of the tax year in which the rental income was earned. Missing this deadline can eliminate the ability to claim a refund and lock in the higher tax based on gross rent.
In some cases, relief may be available through late election policies, but this is not guaranteed and often requires careful legal submissions.
Timely filing is critical. Once the deadline passes, the cost of the mistake can be permanent.
Reducing Withholding at Source with Form NR6
Non-residents can go a step further by filing Form NR6 with the CRA before the start of the tax year. If accepted, this allows the required withholding to be based on estimated net rental income instead of gross rent, which can improve cash flow throughout the year.
However, this process also requires a Canadian resident agent. The agent and the non-resident owner submit the NR6 together and the agent takes on compliance obligations in relation to the withholding and remittances. This is not simply a form that the non-resident files alone.
If the NR6 is approved, the reduced withholding applies during the year, but strict compliance is still required, including timely remittances and the obligation to file a Section 216 return for the year by the end of June. Failure to comply can result in penalties, interest, and the loss of the benefit.
Common Mistakes with Section 216 Elections
Many non-resident landlords are unaware of the election altogether, particularly where a tenant or property manager is handling the withholding. Others assume that the withholding satisfies their tax obligations and do not file a return.
Another common issue arises when the election is filed late or incomplete, leading to denied refunds. In more complex cases, incorrect expense claims or poor documentation can trigger CRA scrutiny or audits.
These mistakes are often avoidable with proper planning and advice.
When to Speak with a Toronto Tax Lawyer
Section 216 elections become more complicated where there are multiple properties, changes in residency status, co-ownership arrangements, or prior years of non-compliance.
In these situations, it may be necessary to address missed filings, correct past reporting, or negotiate with the CRA. A Toronto tax lawyer can assess the exposure, prepare compliant filings, and ensure that the election is properly made and defended if challenged.
This is particularly important where significant refunds are at stake or where CRA enforcement action has already begun.
Kirshen Tax Law Can Help
Section 216 elections are a powerful tool for non-residents earning rental income in Canada, but they must be handled correctly. Errors, missed deadlines, or misunderstandings of the rules can lead to substantial and permanent tax costs.
Kirshen Tax Law assists non-residents with Section 216 elections, whether on time or late, and disputes with the CRA. If you are earning rental income from Canadian property or have missed prior filings, obtaining advice early can make a significant difference in the outcome. Call us today for a free consultation with a Toronto tax lawyer.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.