INVESTING IN CANADIAN REAL ESTATE FOR NON-RESIDENT INVESTORS
WHY INVEST IN CANADIAN REAL ESTATE (ESPECIALLY IN THE GREATER TORONTO AREA)
Underestimated value and room for growth
The price for a square foot for residential and commercial property in the Toronto area is one of the lowest in the world among the Top cities of the world ( eg. Paris, London, New York, Shanghai ) .Experts predict that the real estate prices in Toronto will grow significantly in the near future.
Stable political, economic situation and positive immigration growth
Canada is one of the most developed western countries with stable political system, strong economics and strict adherence to laws. This is probably one of the main reasons why foreign buyers choose Canada for investment in real estate. Because they know that their savings here are safe and protected by law.
Equal ownership rights for Canadians and non-residents
Canadian law allows foreigners (non-residents of Canada) to buy, own, rent out and sell their property without any limitations. There are no differences in the ownership rights between Canadians and non-citizens. Non-Canadians are also eligible for receiving a mortgage for purchasing property in Canada. The only requirement is making downpayment in the amount of not less than 35% of the purchase price. A purchase can be made even without presence of a buyer in Canada. The deal could be done on behalf of you by your representative (for example, a real estate agent) to whom you give the power of attorney. There is another alternative that is commonly used: the purchase can be made through the use of a fax or a courier service for exchanging the signed and sealed documents between buyer and seller.
You should know that non-residents of Canada do not pay any taxes or fees on the funds that they invest into real estate in Canada (if these funds were earned outside Canada).
Any owner of the property in Canada pays the property tax, which is the same for Canadians and non-citizens.
There is one difference in paying taxes by a non-Canadian owner. When you sell your property in Canada, you will need to pay taxes for gain capital (the difference between the price when you originally purchased the property and the sale price).
And they may be subject to canadian income/ witholding tax ( 25% on gross rent) if they receive rent from Canadian Realestate. However, if by the time you decide to sell your property, you have become a resident of Canada, and this property was your primary residence, you will be exempted from paying taxes for gain capital.
In case of death of a non-Canadian owner, his property will be inherited by his successors. You should know that there is no inheritance tax in Canada, and a successor will need to pay only taxes for gain capital - when he sells the property (if a successor is not a Canadian resident). However, if a successor has a permanent resident status in Canada and the inherited property was his primary residence, he will not be paying this tax.Overall, there are great conditions for investment in property in Canada, and especially in Toronto.
FINANCING FOR NON-RESIDENT CANADIANS
Buying a property in a different country can be an intimidating process… different laws… different ways of doing business… different processes. We have helped many non-residents of Canada through the process of buying a property in Canada and we can help you to!
Financing your purchase
Foreign banks do not lend money if the security for the loan is a mortgage secured by a property located in Canada, so any mortgage financing would have to be raised from a lender in Canada. Financing is available for up to 65% of the purchase price of the property and some lenders will offer their best discounted interest rates to non-resident purchasers.
Mortgages in Canada generally have a twenty-five year amortization period and most institutions will guarantee an interest rate for terms ranging from one to ten years. The shorter the term, the lower the interest rate.
It is possible to arrange financing with less than the 35% down payment however these lenders charge a higher rate of interest which can be from 1 to 3% higher than the discounted rates. Typically lenders will require the following documentation from non-resident client:
- Bankers reference lender from your current financial institution.
- Confirmation via a three month history of bank statements / brokerage statements that show the 35% down payment is from non-borrowed sources.
- A personal net worth statement.
- A completed application that we will assist you with.
- Copy of 2 pieces of picture ID and real estate appraisal
- A Canadian bank account from which to withdraw the mortgage payments. There is no problem with a non-resident having a Canadian bank account but they must be opened in person.
In addition to the 35% down payment the lender will want to know that the buyer has approximately 1.5% of the purchase price available to cover the costs of closing the transaction. The mortgage approval may take approximately 24-48 hours after application and documentation has been submitted to the lender.
Tax Implications for a Non-resident Purchasing property in Canada. The issues that arise from a non-resident purchase are not really from the purchase of the property, but rather from holding the property over the years. There are no restrictions for a non-resident purchase, nor are there any income tax implications or extra fees payable. Tax issues may arise on the holding of property by non-residents.
Non-residents of Canada are subject to tax on various kinds of income paid to them, including rental income and capital gains on the sale of a property.
If you are a non-resident of Canada purchasing Canadian revenue producing properties, you will be required to pay tax in Canada on this income. Specifically, a 25 percent non-resident tax must be paid on the gross rent a tenant pays; however, when you use a professional property manager, you are afforded some valuable options:
- The property manager will, by law, withhold 25 percent of the gross rental revenue at source to be remitted to the Canadian Revenue Agency. Then on or before March 31 of the following year, the property manager issues an NR4 form and you then have the right to file a Canadian Tax Return. The tax return is due June 30 and enables you to claim expenses against that income and potentially request a refund.
- You may elect to sign and submit an NR6 form in conjunction with the property manager before December 31 of each year; and once accepted the amount of non-resident tax withheld decreases to 25 percent of the gross rental revenue less any allowable expenses.
- By signing an NR6 form, you are undertaking to file an annual Canadian Tax Return and a T776 Statement of Real Estate Rentals form.
- For the first year of ownership, the property manager is required to withhold 25 percent of the gross rental revenue until such time as the NR6 form can be filed with the Canadian Revenue Service at the end of the year.
- The tax year corresponds to the calendar year for individuals, while the tax year for corporations, estates and trusts is the fiscal year end.
- Both of the above options require an NR4 Summary and NR4 Supplementary to be filed by the property manager on or before March 31, even if no tax was required to be withheld.
While there are no issues when a non-resident acquires property, this is certainly not the case when a non-resident disposes of property. In general, non-residents of Canada are subject to Canadian tax on capital gains from the disposition of "taxable Canadian property". As is the case with Canadian residents only 50% of capital gains are taxable ("taxable capital gains") and this amount is included in income and taxable under Part I of the Act. Canada has a graduated tax system, which means that as your income reaches a certain level the rate at which you pay tax increases for the additional dollars earned.
The Income Tax Act of Canada provides that whenever a non-resident disposes of property, the non-resident is required to pay the appropriate amount of taxes on any gain. In order to satisfy the purchaser that the appropriate amount of taxes are being paid, the vendor must provide to the purchaser, on or before closing, a clearance certificate from Revenue Canada. This certificate is issued by the federal government and certifies that a certain amount of money is payable for the taxes. The amount owing is deducted from the sale proceeds and sent directly to the federal government by the vendor's lawyer.
The clearance certificate is issued pursuant to section 116 of the Income Tax Act and is usually required on the closing date. It may be applied for in advance of the closing by the vendor, but not until there has been a contract of purchase and sale entered into by the vendor, with all subjects being removed. The wait for the clearance certificate is usually around 6-8 weeks, so in a perfect world, there would be a 6-8 week lead-time between when the subjects are removed and the completion date.
Complications can arise if the certificate is not obtained prior to the closing date. In such a case, the purchaser is required to hold-back from the sale proceeds a percentage of the selling price. This percentage is either 25% or 50%, depending on whether the property is non-depreciable property (a residence of the vendor) or depreciable property (the property has been rented). The transaction closes with the money remaining in a lawyer's trust account until the certificate is obtained. Once the certificate is obtained, the taxes are paid from the holdback and the vendor receives any amount left over.
Please note that the holdback is based on the selling price, not the equity in the property.
In Canada we have a graduated tax system, which means that as your income reaches a certain level the rate at which you pay tax increases for the additional dollars earned. There are some strategies that can help to minimize your tax which your Best Toronto mortgage specialist will be happy to share with you. Many countries, such as the U.S., have tax treaties with Canada that prevent you from being taxed in both Canada and your home country. It is advisable to contact a tax accountant in your country for more information.
Other Related Costs Buying Real Estate in Canada..
Between $250 and $450, depending on your home’s location.
Property transfer tax: Payable when an application is made to register a change of title and based on the property’s fair-market value:
• if the fair-market value is $200,000 or less, the tax is 1% of fair-market value
• if the fair-market value is greater than $200,000 the tax is 1% of the value up to $200,000 and 2% on the fair-market value over $200,000
These include your lawyer’s fees plus miscellaneous costs to transfer the property. These vary according to the legal firm used.
Required to ensure the house is situated on the lot within legal limits. You may ask the seller to provide this as a condition of your offer.
An optional but advisable step to take. Have an independent professional inspect your house and make a satisfactory inspection a condition of your offer. The cost will vary according to the home and inspector. Expect to pay $ 200 to $350 for a $300,000 home.
The Income Tax Act frequently changes, and there are often new cases dealing with the issues set out above. While we try to keep our website as current as possible, please talk to professional lawyers, tax consultants for current income tax related advice.Should you require a referral to an accountant, we would be more than happy to provide such a referral.