Professional athletes have always been a transient group with the possibility of relocation, whether through free agency or trades consistently being a realistic concern. In the past, professional athletes have frequently engaged in the real estate game, turning it into a sport of its own. However, recent tax developments have added complexity, deterring them away from what was once considered a straightforward investment. Athletes that no longer file as tax residents of Canada may be unaware of the potential tax implications that can arise when they rent out or dispose of Canadian real estate.
Canadian Withholding Taxes
For non-resident athletes who rent out their property in Canada, the tenant is required to withhold 25 per cent of the monthly gross rental payments and remit this amount to the Canada Revenue Agency (CRA). This is frequently overlooked because the tenant is unaware of the responsibility to withhold Canadian tax on these payments and in many cases, the CRA pursues the non-resident athlete for these unpaid taxes that should have been withheld, along with interest.
Appointing a Withholding Agent
It is important for non-resident athletes to appoint a withholding agent to ensure the withholdings are made and remitted to the CRA. A withholding agent could be a family member, a friend who is a resident in Canada, or a professional firm. The agent is responsible for withholding the required tax from the gross rental payments, along with remitting the tax to the CRA on a timely basis. Failure to withhold can result in penalties.
Form, Forms, Forms
Canadian Tax Return
The withholding tax remitted to the CRA and reported on Form NR4 represents a final tax in Canada. Beyond this point, non-resident athletes generally have no further Canadian tax obligations with respect to the rental income earned on their Canadian real estate.
However, non-resident athletes do have the option to file an elective Canadian tax return, which calculates taxes based on their net rental income as opposed to gross rental income. Opting for this election can be highly beneficial, especially if there are substantial expenses (such as mortgage interest or property taxes) related to generating the rental income.
Non-resident athletes can also consider filing an optional NR6 waiver to reduce the withholding taxes otherwise required based on gross rental income. If accepted by the CRA, the NR6 would reduce the withholding tax requirement from 25 per cent of the gross rent payments to 25 per cent of the net estimated rental income for the year. This has the potential to offer a substantial cash flow benefit to the non-resident athlete.
If a non-resident athlete opts to file an NR6, the obligation to file a Canadian tax return becomes mandatory and must be filed by June 30th of the following year. The The NR6 should be filed before the initial rent payment for a specific year so if the athlete is renting out Canadian real estate in 2024, it is advisable to initiate this procedure in 2023.
Selling Real Estate in Canada
When a non-resident athlete sells Canadian real estate, there is another withholding tax requirement that initially amounts to 25 per cent (or 50 per cent in certain situations) of the gross sale proceeds. The seller must file Form T2062, no later than 10 days after completion, to obtain a Certificate of Compliance from the CRA. This informs the CRA of the non-resident’s sale but, if filed in a timely manner, reduces the withholding tax to 25 per cent of the net capital gain. This amount must be remitted to the CRA on submission of Form T2062. Upon issuance of the Certificate of Compliance from the CRA, the purchaser can release the initial 25 per cent (or 50 per cent) of gross sale proceeds withheld.
The amount remitted to the CRA is not treated as a final tax and the non-resident athlete is required to submit a Canadian tax return to report the sale. The tax paid as part of the T2062 will be applied as a credit on the tax return.
Wondering if Everything is Covered?
For non-resident athletes owning real estate in Canada, there may be more questions to ask than just “how long before I get traded?” Considering the Canadian tax consequences, the diverse regulations restricting non-Canadians from acquiring specific types of real estate, and the responsibilities tied to renting or selling a property, there’s a substantial checklist of factors to assess. Consulting with a tax professional up front will let the athlete focus on their game with the peace of mind that comes from knowing that the CRA is not knocking on their door.
Disclaimer: This information is made available for educational purposes. It provides general information and is not intended as a substitute for personalized advice related to your situation.