If you understand the Canadian tax regulations that relate to real estate investments, owning property in Canada can be rewarding.
In Canada, there are no residence or citizenship requirements for purchasing or holding property. You can live in Canada temporarily, but if you want to stay longer or become a permanent resident, you must meet immigration standards. Non-residents are permitted to own rental properties in Canada but must file annual tax filings with the Canada Revenue Agency (CRA).
Property Taxes
When you buy a property, you pay a provincial transfer tax that varies from province to province but can be around 1% on the first $200,000 and 2% on the balance. If this is your first time buying a home in Canada, you may be eligible for exemptions.
Municipalities also impose annual property taxes based on the assessed property value, which is the market value. This municipal tax covers both school and other taxes. The current municipal tax on a particular property is usually easily accessible.
The federal Goods and Services Tax (GST) applies to new house purchases, however, if you expect to reside in the home, you can get a partial rebate if you buy new or builder-renovated. Resale houses are exempt from the GST.
Taxes on Rental Property
The Canadian Income Tax Act mandates the remittance of 25% of gross property rental income each year. Non-residents, on the other hand, can fill out an NR6 form and pay 25% of their net rental income (after expenses). You may be able to reclaim previously paid taxes if the rental property has a net loss. Depending on whether you’re a co-owner or a partner, and if your income is deemed rental or business income, you’ll be taxed differently.
To gain rental income, you can deduct two categories of incurred expenses: current running expenses and capital expenses. The latter has a longer-term advantage. You cannot deduct the cost of furniture or equipment for a rental property from your rental income for that year. However, because these things decline in value, the cost can be deducted over time. The capital cost allowance is the name of the deduction (CCA).
If the property is an investment property, property taxes, and mortgage, bank loan, or line of credit interest is tax-deductible in Canada.
Selling Canadian Property
When a non-resident sells a property in Canada, the Canadian government deducts 50% of the transaction price as a withholding tax.
The capital gain must also be reported to the Internal Revenue Service (IRS) by American citizens. The gain, on the other hand, can be claimed as a foreign tax credit if it was taxed in Canada. When a non-resident sells a property in Canada, the seller must give the buyer a CRA clearance certificate. Without this certificate, the buyer may be personally responsible to the CRA for any unpaid taxes owed by the non-resident.
If you are a Canadian resident and the Canadian property is your primary residence, you will not be taxed on the capital gains when you sell it. Any residence can be designated as a primary residence if you “ordinarily inhabit” it.
Seasonal homes, such as a cottage or a mobile home, may be eligible for the designation. Each year, a family unit can only have one principal residence. This requirement has major implications. If you own multiple properties, for example, you must choose one to identify as your primary residence based on the capital gains for that year.
If you live in the area but the property was not your primary residence for the whole time you owned it, you must prorate the capital gain for the years you didn’t use it as your primary residence. A change of use, such as from rental to primary residence, may result in a “deemed disposition,” triggering capital gains taxes. You can, however, choose to wait to recognize this gain until you sell the house.
There is a “deemed disposition” of a capital property when you leave Canada.
To put it another way, if you own Canadian assets that have risen in value, you will have to pay tax on those gains if and when you leave the country. Even though no money is exchanged, this “deemed disposition” may occur when a non-resident property owner dies or when a property is transferred from an individual to an individual’s company or relative.
Home Equity Loans
With a reverse mortgage or a home equity line of credit (HELOC), you can tap into the equity in your Canadian house.
A reverse mortgage isn’t for everyone, but it allows homeowners aged 55 and up to take up to 55 percent of their home’s current appraised value in regular payments. There is no requirement for repayment, and the proceeds are tax-free. The funds can be invested, the interest expenditure can be deducted (if the funds are put in an income-producing asset), and the homeowner can stay in the property for as long as he or she wants. The debt is paid off when the homeowner dies or sells the house, at which point the proceeds of the sale are used to repay the loan.
A home equity line of credit (HELOC) is a second mortgage on your property used to secure a loan or credit line. It gives you more payment flexibility than a conventional mortgage because you can pay off any portion of the principal at any moment without incurring any penalties. A line of credit has a higher interest rate than a mortgage, but it is usually less expensive than unsecured debt.
Alternative Real Estate Investments
REITs (real estate investment trusts) are publicly traded businesses that invest in a real estate portfolio. The majority of REITs b44ased in Canada trade on the Toronto Stock Exchange (S&P/TSX).
They must transfer the majority of their taxable revenue to shareholders since they are trusts. The federal government of Canada passed legislation in 2007 requiring income trusts to convert to regular tax-paying corporations by January 1, 2011, although many REITs were exempt. The new trust requirements require a REIT to earn 95% of its income from passive revenue streams (rent from real estate, interest, capital gains from real estate, dividends, and royalties), and only 75% from the prior rules rent and capital gains part. If the REIT keeps its current form, it will continue to be subject to the prior trust tax legislation.
If you want to know more about Canada Real estate taxes, feel free to book a consultation with us.
