Form T776 and Section 216: Rental Income for Non-Residents

Form T776, Statement of Real Estate Rentals, is the schedule on which a Canadian landlord reports gross rents, deductible expenses, capital cost allowance, and the net. A landlord living outside Canada faces 25 percent withholding on gross rent as the final tax — unless the landlord elects under section 216 to file a Canadian return on net income instead.

On this page

1. What goes on Form T776?
2. The non-resident landlord's default: 25 percent on gross
3. The section 216 election
4. Form NR6: withholding on net during the year
5. The same property on the U.S. return
6. Worked example
7. Frequently asked questions
8. Related guides
9. Official sources
10. Next step

What goes on Form T776?

Repairs (restoring the property) are deducted; improvements (betterments that add value or extend life) are capital, added to the building's cost and recovered through CCA. Taking CCA is a choice — many landlords skip it on appreciating property because CCA claimed is "recaptured" as income when the property is sold for more than its depreciated cost, on top of the capital gain.

The non-resident landlord's default: 25 percent on gross

A landlord who is a non-resident of Canada is subject to Part XIII withholding on rental income: the tenant (or the property manager or agent acting for the landlord) must withhold 25 percent of the gross rent and remit it to the CRA by the 15th of the following month, reporting it on an NR4 slip at year-end. Gross — before mortgage interest, property tax, repairs, or management fees. On a property with a C$2,400 monthly rent and C$1,900 of monthly expenses, 25 percent of gross (C$600 a month) is more than the entire net income. The withholding is the final Canadian tax and no return is filed — unless the landlord elects otherwise.

The section 216 election

A non-resident landlord may elect to file a Canadian return (the "section 216 return") reporting the rental income and expenses on Form T776 and paying tax at graduated rates on the net — with the 25 percent withheld credited and the excess refunded. The election is made by filing the return within two years after the end of the year (or by June 30 of the following year if an NR6 was filed). Filed annually, it almost always produces a lower Canadian tax than 25 percent of gross; for a property with thin margins it produces a refund of nearly all the withholding. The return reports only the rental income (not the landlord's worldwide income), and CCA may be claimed on it.

Form NR6: withholding on net during the year

To stop the cash-flow problem of 25 percent on gross, the landlord and a Canadian agent (a property manager or another Canadian resident who agrees to be responsible) file Form NR6 before the first rent payment of the year (or by January 1), undertaking to file the section 216 return by June 30. Once the CRA approves the NR6, the agent withholds 25 percent of the net rental income (gross less the expenses estimated on the NR6, excluding CCA) each month instead of the gross. The undertaking is binding: if the section 216 return is not filed by June 30, the agent becomes liable for the difference between what was withheld on net and what should have been withheld on gross — the reason property managers insist on the return.

The same property on the U.S. return

A U.S. resident landlord reports the Canadian rental income on Schedule E of Form 1040: gross rents and expenses converted to U.S. dollars, with depreciation under U.S. rules (a foreign residential rental building is depreciated over 30 years under the alternative depreciation system — not 27.5 — and depreciation is mandatory in the United States, not optional as CCA is in Canada). The Canadian tax paid under section 216 (or the 25 percent withholding, if no election) is a foreign tax credit on Form 1116 in the passive basket. The result is two rental computations — Canadian on T776 with optional CCA, American on Schedule E with mandatory 30-year depreciation — and, on eventual sale, two gain computations (the section 116 certificate process on the Canadian side; the ITN guide covers the mechanics) with recapture treated differently in each. The property also appears on the FBAR and Form 8938 only through any Canadian bank account that receives the rent — the real estate itself is not a reportable account.

Worked example

A Canadian who moved to Texas kept her Ottawa condo as a rental: C$2,600 a month gross (C$31,200 a year), with C$9,800 of mortgage interest, C$4,100 of property tax, C$5,200 of condo fees, C$1,800 of insurance, C$2,700 of management fees, and C$1,400 of repairs — C$25,000 of expenses; net C$6,200. Without action: the property manager withholds 25 percent of gross — C$7,800 a year, more than the net income — and remits it; no return; the C$7,800 is the final Canadian tax. With NR6 and section 216: the manager files NR6 in December showing estimated net of C$6,200; the CRA approves; the manager withholds 25 percent of net — C$1,550 for the year; she files the section 216 return by June 30 reporting the T776 figures, and her Canadian tax at graduated rates on C$6,200 (with no basic personal amount — a section 216 filer gets none — and the 48 percent federal surtax that replaces provincial tax) is about C$1,285, so she receives a refund of roughly C$265. On her U.S. return: Schedule E with the same figures in U.S. dollars, mandatory 30-year depreciation on the building's basis (which reduces her U.S. net below zero — a passive loss suspended under the passive activity rules), and the Canadian tax as a foreign tax credit. Her neighbour who never filed NR6 or section 216 has paid C$7,800 a year for five years on a property that netted about C$6,200 — and for the years more than two years back, the section 216 refund window has closed.

Frequently asked questions

Official sources

The CRA states: “This election allows you to pay tax on your net rental income or timber royalty income instead of the gross amount. This can reduce both the amount of non-resident tax that must be withheld during the year and the total amount of non-resident tax due for the year.” — Canada Revenue Agency, Electing under section 216, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/electing-under-section-216.html

Publication 597 states: “However, the exemption from Canadian tax does not apply to gains realized by U.S. residents on Canadian real property, and on personal property belonging to a permanent establishment in Canada.” — Internal Revenue Service, Publication 597, Information on the United States–Canada Income Tax Treaty, https://www.irs.gov/publications/p597

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle non-resident rental compliance — NR6 undertakings, section 216 returns on Form T776, NR4 reconciliation, U.S. Schedule E with ADS depreciation, foreign tax credits, and section 116 on sale. See pricing or book a call.