The Accounting and Tax

If you’re a non-resident earning rental income from Canadian property, you may hear two terms used frequently: passive rental income and Section 216 income. While they both refer to the same rental earnings, the way the Canada Revenue Agency (CRA) treats them — and how you’re taxed — makes a big difference.

Let’s break down what each one means, how they’re taxed, and which option might save you money.

What Is Passive Rental Income?

Passive rental income refers to the default method the CRA uses to tax non-residents who earn rental income from Canadian property. By default, the CRA requires 25% tax to be withheld on the gross rent (the full amount paid by your tenant), without allowing you to deduct any property-related expenses.

This tax is withheld by the tenant or property manager and sent directly to the CRA on your behalf. It’s simple, automatic — and often costly.

Let’s say you rent out a condo in Vancouver for $2,500/month. Over the year, that’s $30,000 in income. With passive withholding, you’ll owe $7,500 in tax — even if your expenses like mortgage interest, maintenance, and insurance totaled $20,000.

You pay on the gross, not on the profit.

What Is Section 216 Income?

Section 216 is an optional election under the Income Tax Act that allows non-residents to file a Canadian tax return based on net rental income — that is, your income after subtracting eligible expenses.

With Section 216, you can deduct:

• Property taxes
• Maintenance and repairs
• Mortgage interest
• Insurance
• Property management fees
• Utilities (if paid by the landlord)

Instead of paying a flat 25% on the full rent, you’re taxed based on actual profit, using the same graduated rates Canadian residents face.

In the earlier example, if your net income was only $10,000 after expenses, your tax might be just $1,500–$2,000 instead of $7,500.

Key Differences (Explained Simply)

Here’s how the two approaches differ:

• Tax Amount: Passive rental tax is a flat 25% on total rent. Section 216 taxes only what’s left after expenses.
• Filing Requirement: Passive income requires no tax return if you accept the full withholding. Section 216 requires you to file an NR6 form upfront and a Canadian tax return after year-end.
• Deductions: No deductions are allowed under passive rental income. Section 216 allows full expense claims.
• Financial Outcome: Passive income tax is faster but usually more expensive. Section 216 takes more effort but saves money.

Which Is Better?

If you have no expenses or just want a hands-off approach, passive rental income might suit you. But if you pay property taxes, have a mortgage, or hire a manager, Section 216 is likely your best option. It gives you credit for the costs of maintaining your property and can reduce your tax bill significantly.