If you’re thinking of investing in real estate in Canada, it would be a good idea to know more about their laws and regulations on real estate investment. It would also be helpful to know about their laws on the sale of property and the various kinds of taxes imposed on real estate investments. After all, knowing how taxes are levied and imposed in Canada’s real estate market will enable you to develop a sound investment approach and save some of your money.
Since the start of the current year, home prices in Canada have been skyrocketing. Even commercial properties have been yielding very high rental incomes. In Vancouver alone, there are a lot of attractive and promising real estate investment opportunities. You can check out some local sites if you’re looking for a realtor in the area. Moreover, here are a few things you should know about Canada’s real estate market.
No Residency And Citizenship Requirement
One of the reasons Canada is considered a new frontier for real estate investors is that you don’t have to be a citizen or a resident to buy and own property there. You can stay in any Canadian residential property as a temporary resident. However, you’ll have to comply with the requirements on immigrants if you plan to extend your residence or apply for permanent resident status. Buyers and investors don’t even have to be residents in Canada to buy up and own rental property. But the Canada Revenue Agency (CRA) will require them to file annual tax returns.
Reverse Mortgage Financing And Equity Loans
Qualified homebuyers who’ve already put in a specified portion of their home’s total loan mortgage or purchase price are considered to own equity in their residential property in Canada. They can use their equity to get either a reverse mortgage or a home equity line of credit (HELOC).
To qualify for a reverse mortgage, a homeowner should be at least 55 years. They can take out up to 55% of the total regular payments they’ve already made on their mortgage. This rate will be based on the home’s current appraised value. The proceeds of the reverse mortgage are tax-free. Moreover, they don’t have to pay back what they took out. Instead, they can invest this money.
If they invest the money taken out from the mortgage in an asset that yields income, they can write off the interest expense on the reverse mortgage. They can live in the home they originally bought for as long as they want. You should also know that the first loan mortgage is terminated upon the death of the owner or when they decide to sell their home. The balance on the first loan will be deducted from the proceeds of selling the house.
A HELOC, on the other hand, allows the homeowner to get a loan or a credit line on their home as a second mortgage. They’re allowed to do this because they’ve already paid a portion of the value of their home. They’re usually given very flexible terms compared to a first mortgage. For one, they’ll be allowed to pay just a portion of the principal and won’t be charged any penalty. If they’re availing of a credit line, they’ll be given interest rates that are much lower than those of unsecured debt.
Real Estate Taxes
A provincial transfer tax is imposed on all purchases of real estate property. The rates of transfer tax are different from one province to another. Typically, a 1% transfer tax is imposed on the first USD$200,000 of the property value. Another 2% transfer tax rate is charged on the excess amount above that, if any. However, if it’s the buyer’s first time to buy property in Canada, there are provinces that exempt the purchase from transfer taxes.
At the municipality level, municipal governments are also going to levy annual property taxes. The basis for computing the municipal property tax is the assess value of the real estate property. This assessed value is, in turn, based on the market value. The annual municipal property tax already includes other taxes, including taxes for the public school system being run in that municipality. If you want to learn more, there are a number of public sources where you can look up the rates of annual property taxes being levied in the different municipalities.
If you’re making a new home purchase, it will also be subjected to the goods and services tax (GST), which is a federal tax. Real estate property buyers who plan to reside in the houses they bought may receive partial rebates, as long as the residential properties are newly built or renovated by a builder. Homes that have been resold aren’t covered by the GST.
Taxes On Rental Property
First-time investors might be taken aback by Canadian income taxes on rental property. If your plan is to come in as an investor and earn rental income from your real estate property investments, you should know that a 25% tax is levied on the gross property rental income. The Canadian Income Tax Act requires this to be remitted every year. Investors who aren’t Canadian residents have the option to pay 25% of the net rental income instead. This is the net amount after deducting the expenses. They’ll have to do this by completing an NR6 form.
On the other hand, if you incur losses on your rental property, such as when it doesn’t attract renters or tenants but you still pay for utilities, maintenance, repair, and other expenses, you can reclaim the rental income taxes that you’ve previously paid, if there are any. Canadian tax law treats the rental income in different ways depending on your stake in the ownership and whether it should be treated as business income or rental income.
There are two types of expenses that can be deducted from the earned rental income that you’ll be reporting: capital expenses and current operating expenses. Between the two, capital expenses will give you more long-term benefits.
Your expenses in buying equipment or furniture are treated separately because they’re bought once and the costs aren’t incurred every year. You’re allowed to deduct the cost of these depreciable items over a period of several years. The annual deduction for items that depreciate is called the capital cost allowance (CCA). If you bought an investment property, there are other tax-deductible expenses such as interest expenses on bank loans and lines of credit. Moreover, property taxes and interest on a mortgage are also tax-deductible.
Capital Gains Tax When You Sell
So you won’t be surprised, you need to keep in mind that one of the daunting aspects of real estate property investment in Canada is the tax imposed when you plan to cash in on your property. If you’re not a resident of Canada and you sell Canadian real estate property, the Canadian government will take half (50%) of whatever you make out of the sale. They consider it a withholding tax.
Americans are required to report capital gains to the Internal Revenue Service (IRS). But you can claim it as a foreign tax credit if you’ve already remitted the capital gains tax in Canada. If the Canadian property is sold by a seller who doesn’t live in Canada, the seller is required to provide a clearance certificate from the CRA. This clearance basically proves that the capital gains tax has already been paid by the seller.
Investing In Canada
Investing in Canada’s real estate market can be very profitable if you have a good understanding of the country’s laws and regulations on real estate investments, the sale of real estate properties, and the applicable tax laws on real estate properties. This article discussed some of these essential things that can impact your real estate investments.