In 2018, the Canadian economy expanded by 2.1%, a decrease since last year’s growth rate which was 3%. House prices rose by a modest 2.51% during 2018, but it fell towards the end of the year against the backdrop of rising interest rates and a slowing economy. But then again, the housing market is still lucrative which is why investors are building up equity via real estate.
When you buy a property, you have to pay a provincial transfer tax that varies depending upon the province you reside in. But it could be around 1% on the first $200,000 and 2% on the balance. If this is the very first property purchase in Canada, you are exempted from certain costs. Municipalities also levy annual property taxes, based on the assessed property value, which reflects the market value. Federal Goods & Services Tax (GST) is levied on new home purchases, but a partial rebate is applicable for new or builder-renovated homes, which is being fully explored by investors. Yet another aspect that works in their favor is that GST doesn’t apply to resale homes.
No Residency or Citizenship Requirements
There are absolutely no residency or citizenship requirements in Canada when it comes to buying and owning property. Even if you are occupying a temporary residence, you can still purchase more property here – a lot of foreign investments are being made. Non-residents can also hold rental properties as long as they file annual tax returns with the Canadian Revenue Agency.
Taxes on Rental Property
According to the Canadian Income Tax Act, 25% of the gross property rental income is remitted every year. But non-residents can choose to shell out 25% of the net rental income, post expenses, by filling out an NR6 form. If the rental property incurs net losses, then you may reclaim previously paid taxes. The income is treated differently depending on whether you are co-owner or partner, and if the property is considered rental or business income. There are two kinds of incurred expenses for earning rental income – operating expenses and capital expenses. If you consider the latter, it is better for long-term benefit. The cost of furniture or equipment for a rental property can’t be deducted against your rental income for that year. However, the cost can be deducted over a period of years, as these items depreciate in value, which is known as capital cost allowance.
Selling off Property in Canada
If a non-resident is selling off a Canadian property, the government takes 50% of the sale as a withholding tax. For American residents, any capital gain needs to be reported to the Internal Revenue Service, but if the gain is taxed in Canada, it can be claimed as a foreign tax credit. When a non-resident sells a Canadian property, the seller must provide the buyer with a clearance certificate prepared by the Canada Revenue Agency (CRA). Without this certificate, the buyer can keep a portion of the purchase price, as the buyer could be personally liable to the CRA for any of the non-resident’s unpaid taxes.
In case you are resident, and the property is your principal place of residence, you won’t be taxed on capital gains while selling off property. Any property can be listed as a principal residence – all you have to do is ordinarily inhabit it. The designation can apply to seasonal dwellings such as a cottage or mobile home. For a family unit, only one principal residence is allowable each year. If you wish to sell off a property that isn’t a principal residence, the capital gain for the years in which you didn’t designate the property as your principal residence, should be prorated.
Real Estate Market Trends in Canada
Regulations in Canada differ from city to city, so investors are choosing carefully. For instance, Vancouver has a foreign buyer’s tax of 15%, whereas Toronto has no such tax. You should also take a peek at annual property tax rates and whether the market is growing or contracting to ensure you are getting high returns on investment. For your convenience, there are various legal structures available when it comes to investing in real estate such as general partnership, limited partnership, co-ownership, corporation, trust, personal ownership or a combination of these. Foreign investors can also get loans from Canadian banks, and in certain cases, they are eligible to use loans from foreign banks as well. Interest rates are low, which helps foreign investors save hundreds of thousands of dollars.
Real Estate Experts at SKYHUB Canada suggest it would be smart to understand the Canadian tax laws and how they apply to real estate investment. The problem is there are no hard and fast rules when it comes to foreign investment, so consult with your attorney to learn about any legal ramifications.
Equities Contributor: Nicholas Kitonyi
Source: Equities News