Alternative method
As an alternative, the non-resident can elect to file a regular T1 tax return under Part I of the Act within 2 years after the end of the year (rental year) in which the rental income was received. In such case, the net rental income for the rental year will be subject to the same graduated rates of tax as applied to resident individuals. That may save the non-resident tax compared to the 25% flat rate on the gross income.
Note that if the non-resident has more than one Canadian rental property, the election will cover all net rental income from all of those properties. In other words, one can’t make the election for one property and not for another.
Any previously withheld non-resident tax in excess of the actual Part I tax payable for the rental year will be refunded to the non-resident.
Reduction in withholding tax under alternative method
A non-resident who uses the alternative method and wishes to reduce the 25% withholding tax otherwise applicable to the rent can file Form NR6 with the CRA. Once the form is approved by the CRA, the agent who collects your rent will be required to withhold only 25% of the net rental income paid to the non-resident rather than 25% of the gross rental income from the property. (The agent must be resident in Canada.) The CRA requires the form to be filed by January 1 of the relevant year.
In such case, the non-resident must file the T1 return for the year by June 30 of the following year.
If the non-resident files the return late, a rather harsh provision in the Income Tax Act provides that the non-resident will be subject to the withholding tax on his or her gross rental income. The CRA provides the following example: