As a real estate investor, one of your main long-term goals is likely to expand your investing efforts to foreign real estate markets. One real estate market that often proves to be very profitable for investors is the Canadian real estate market. In fact, many experts consider Canada to be a new frontier when it comes to real estate investments. As long as you take the time to learn the basics of investing in the Canadian real estate market, you can reasonably expect to make a considerable profit over time. This brief guide should help you achieve success in your transition to investing in the Canadian real estate market.
What are the requirements of buying and owning property in Canada?
Before you can start investing in the real estate markets of foreign countries, you will need to meet at least a few requirements in most cases. It is important to realize that different countries require real estate investors, especially non-residents, to meet different prerequisites. In many cases, these requirements will be vastly different from those of the United States.
Unlike in many countries, investors don’t have to be a resident or citizen of Canada in order to buy or own property. However, non-residents who buy rental properties in Canada will need to file a tax return every year with the CRA (Canada Revenue Agency).
How much will you pay in property taxes for your real estate investments?
Taxes for Owned Property
If you invest in real estate in Canada, you can expect to pay a sum of money every year in property taxes. In Canada, these property taxes are referred to as provincial transfer taxes. The amount investors will pay in provincial transfer taxes will vary from province to province. The average amount paid in property taxes hovers at around 1% for the first $200,000 and 2% for the entirety of the balance. Besides the property tax, you can expect to pay a municipal tax, which is based on the assessed value of the property.
There are certain exemptions that exist for investors who have not purchased property in Canada before. If this is your first time investing in real estate in Canada, you should take care to fully take advantage of these exemptions. These exemptions will limit the amount of money you spend on property taxes.
Taxes for Rental Property
Canada handles property taxes for rental properties in a slightly different manner. According to the Canadian Income Tax, an investor will need to pay about 25% of the gross income of the rental property.
Foreign investors who are not residents of Canada can use an NR6 form to meet this requirement. An advantage of using this form is that they will be able to pay 25% of the net rental income rather than of the gross property rental income. This means that they will only have to pay from the profit after expenses are covered. Both capital expenses and current operating expenses are considered to qualify as expenses that can be deducted from the gross property rental income.
What is the process of selling Canadian property as a non-resident?
Investors who purchase property in Canada almost always intend to sell the property at some point. Therefore, all foreign investors should learn the basics of the process of selling Canadian property as a non-resident. The Canadian government requires that non-residents pay 50% of all sales of property. This is referred to as a withholding tax. You will also need to report the sale of the Canadian property to the IRS if you are investing from the United States. However, you will likely be able to claim the gain as a foreign tax credit, so you won’t have to pay the tax twice.
As a non-resident of Canada, it is vital that you have a clearance certificate prepared for the buyer. The clearance certificate must be prepared officially by the Canada Revenue Agency (CRA). If you don’t provide the certificate, the buyer might be able to keep a certain percentage of the home’s purchase price. Most buyers will refuse to purchase a home before receiving the clearance certificate. This is because a buyer without a clearance certificate could be held liable for any of your unpaid taxes by the CRA.
What are some alternative real estate investment options in Canada?
As a non-resident, you may not want to purchase property in Canada just yet. Fortunately, there are other real estate investment options in Canada that will give you the opportunity to make a substantial profit. There are relatively few restrictions that non-residents face when it comes to taking advantage of these alternative real estate investment options.
REITs, or real estate investment trusts, are one popular alternative. REITs refer to publicly traded companies that make investments in an entire portfolio of assets rather than just one real estate property. Most REITs based on Canada use the Toronto Stock Exchange benchmark to trade. Since REITs are trusts, the vast majority of their taxable income is distributed to the shareholders.
Recently, the federal government made it a requirement for all REITs to obtain at least 95% of income from revenue sources that are passive in nature. Some examples of such sources include dividends and royalties and rent from real properties. The trust rules also require that 75% of the income of an REIT come from rent and capital gains. As long as these regulations are followed, an REIT will be exempt from the new legislation that was created by the federal government in 2007.
Overall, investors who want to expand to foreign real estate markets will be happy to know that Canadian laws pertaining to owning real estate are very liberal. Not only is it not necessary for an investor to be a citizen of Canada, but they don’t even need to permanently or temporarily live in the country. Many real estate investors are taking advantage of these liberal real estate laws to make a substantial profit. If you want to ensure that you invest profitably, the information discussed above about investing in Canada’s real estate market should come in handy.