Why Does the CRA Withhold 25% on Gross Rent for Non-Residents?
If you’re a non-resident earning rental income from a property in Canada, you might be surprised when your property manager — or even your tenant — is suddenly required to withhold 25% of your rent and send it directly to the Canada Revenue Agency (CRA).
This withholding can feel excessive, especially if you’re operating at a loss or covering high property expenses. But there’s a clear reason the CRA does this — and understanding it can help you reduce or avoid overpaying tax.
Here’s what you need to know.
It’s Called “Part XIII Tax” — And It’s Mandatory by Default
Under Part XIII of the Canadian Income Tax Act, non-residents earning passive income from Canadian sources (like rent, dividends, and royalties) are subject to a non-resident withholding tax. For rental income, that tax is 25% of gross rent collected.
The key word here is gross — meaning the full rental amount before any deductions. This is not based on profit. Even if your monthly rent is $2,000 and your expenses are $1,800, the CRA still requires $500 to be withheld and sent to them.
Why?
Because it ensures Canada gets its share of tax upfront. The CRA knows that chasing non-residents across international borders for unpaid tax is difficult. Withholding from the start guarantees compliance.
Who Must Withhold the Tax?
By law, either your tenant or your Canadian property manager is responsible for withholding and remitting this tax monthly. If they fail to do so, the CRA may hold them personally liable for the unpaid tax, along with penalties and interest.
This is why most professional property managers strictly follow the rule — and why tenants often won’t risk ignoring it.
It’s Not the Only Option — Enter Section 216
Here’s the good news: While the 25% withholding is the default rule, it’s not your only option. The CRA allows non-residents to file under Section 216, which gives you a chance to be taxed on net rental income instead of gross.
To use Section 216:
- You must file an NR6 form at the beginning of the year
- Your property manager may withhold tax on your estimated net income (instead of gross)
- You’ll file a Section 216 tax return at the end of the year to reconcile actual income and expenses
This often results in paying much less tax, especially if you have significant expenses like:
- Property taxes
- Maintenance
- Insurance
- Mortgage interest
- Condo fees or management costs
What Happens If You Don’t Elect Section 216?
If you don’t file the NR6 and Section 216 return:
- The CRA keeps the full 25% of your gross rental income
- You can’t deduct expenses
- You lose the right to claim a refund later
- You may face interest and penalties if withholding was not properly handled
The CRA designed this system to be efficient, not punitive. But it’s up to you to take action and choose the better path.
