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November 19, 2025

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Cross-Border Tax Strategy: Section 216 Filing to Minimize Tax on Canadian Rental Income

Cross-border tax planning is the most effective strategy for non-resident property owners generating income in Canada. Leveraging the Section 216 election allows eligible foreigners to be taxed only on their net Canadian rental income, significantly reducing tax exposure and maximizing investment returns.

Understanding the Section 216 Election for Non-Residents

Section 216 is a crucial, active provision of the Canadian Income Tax Act (ITA). It applies to all non-residents of Canada who receive rental income from Canadian real estate or timber property.

Default Taxation: The 25% Part XIII Withholding Tax

Without planning, the default rule is highly tax-inefficient:

  • Tax on Gross Income: The gross rental income is subject to a flat Part XIII withholding tax of 25% (rate may be adjusted by a US-Canada Tax Treaty).
  • No Deductions: The tax is remitted to the CRA by the Canadian payer/agent, and the non-resident is not allowed to deduct any expenses (e.g., property taxes, mortgage interest, repairs). This results in tax being paid on revenue, not profit.

The Section 216 Election: Taxing Net Profit

Feature Description Benefit for Non-Resident Landlords
Tax Basis Taxed only on net rental income (Gross Income less all allowable operating expenses). Significantly lowers the taxable amount.
Tax Rates Taxed at standard Canadian marginal tax rates (for individuals). Often results in a lower effective tax rate than the 25% flat rate.
Deductible Expenses Includes property taxes, mortgage interest, insurance, repairs, property management fees, and capital cost allowance (depreciation). Maximizes deductions to preserve investment profits.

4 Pillars of Cross-Border Tax Planning with Section 216

Effective planning ensures compliance and cash flow optimization for Canadian rental income.

1. Cash Flow Optimization through Form NR6

To avoid having 25% of the gross income withheld all year, strategic planning involves filing an Undertaking to File (Form NR6):

  • Filing Date: Must be filed by January 1st of the tax year or before the first rental payment.
  • Reduced Withholding: Once the CRA approves the NR6, the Canadian payer is authorized to withhold 25% on the estimated net income instead of the gross amount.
  • Result: This dramatically improves immediate cash flow for the non-resident investor. If no NR6 is filed, overpayments are only refunded after the final T1159 return is filed and assessed

2. Avoidance of Double Taxation

US-Canada Tax Treaty expertise is vital here. By utilizing the Section 216 election to pay tax on net income in Canada, the non-resident can accurately report this profit and the Canadian taxes paid to the IRS (or their home country's tax authority). This allows for the effective use of Foreign Tax Credits (FTC), ensuring the same income is not taxed by both countries.

3. Mandatory Compliance & Filing Deadlines

Proper cross-border tax assistance ensures timely and accurate filing, preventing penalties and the loss of the net-taxation benefit:

  • NR6: Must be filed to reduce withholding.
  • Section 216 Return (T1159): Must be filed within six months of the end of the tax year (by June 30th for individuals who filed an NR6).
  • Penalty Risk: Failure to file the T1159 on time can lead to the CRA automatically applying the 25% tax rate to the gross rental income, negating all benefits.

4. Expertise in Allowable Deductions

A cross-border tax specialist ensures that all allowable rental expenses and Capital Cost Allowance (CCA) are correctly claimed, legally minimizing the Canadian tax liability to the fullest extent possible.

Partner with PPA Tax for Non-Resident Rental Tax

PPA Tax specializes in helping US non-residents and other foreign owners manage their Canadian real estate investment taxes. We ensure your filings are precise, your cash flow is optimized, and you are in full CRA and IRS compliance.

Need specialized tax planning for your Canadian rental income? We can help you leverage the Section 216 election effectively.