Many real estate investors are always looking for the next opportunity for economic growth. For some, that means expanding from domestic real estate to buying internationally. With that in mind, here's your guide to real estate investing in Canada. Armed with this knowledge, you should have a better idea of whether investing in Canadian real estate is right for you.
Is real estate investing in Canada allowed if you're a nonresident?
Before we get started talking about the greater implications of buying Canadian property, it's important to answer the question of whether foreign buyers are even allowed to invest in Canadian real estate.
The good news is that there are no laws against foreign investment in Canada. Additionally, there are no residency or citizenship requirements for buying or owning a property in Canada. If you want to become a permanent resident, you will still have to go through their immigration process. However, if you're content being a foreign investor, the only requirement is that you file an annual tax return with the Canada Revenue Agency (CRA).
What are your options for Canadian real estate investment?
Similar to real estate investment in the United States, there are several ways you can get involved in the Canadian real estate market. We've laid them out below for your consideration so you can decide which method of investing is right for you.
Investing in a real estate investment trust (REIT)
If you're just getting started in the Canadian housing market, investing in a real estate investment trust (REIT) can be a smart option. At their core, REITs are publicly traded companies that invest in real estate assets. The vast majority of Canadian-based REITs trade on the Toronto Stock Exchange (S&P/TSX)
Like U.S.-based REITs, Canadian REITs enjoy a tax-advantaged status, which makes them a good investment for investors looking for a reliable source of passive income. In 2007, the Canadian government mandated that all income trusts must convert to ordinary, tax-paying corporations by 2011. However, most REITs were able to circumvent this ruling by agreeing to maintain 95% of their income from passive revenue sources, such as rent from rental properties or capital gains.
Buying an investment property
Your next option is to buy an investment property. You can invest in Canadian residential real estate or commercial real estate and then follow a traditional investment strategy. For example, you could buy a property, find a tenant, and rent it out, or you could buy a property that needs to be fixed up, renovate it, and flip it for a profit.
However, in either case, there are special taxes and fees you may be subject to as a foreign buyer. We'll get into more detail about those below. However, it's important to note that these costs could ultimately have an impact on your bottom line.
What taxes and fees do foreign investors need to consider?
Next, since the main requirement to invest in Canadian real estate is that you need to file an annual tax return, it's important to discuss the tax implications of being a foreign investor. However, keep in mind that this is just an overview, and if you have specific questions, you should talk to a Canadian tax professional for more clarification.
Withholding tax on recurring rental income
As a nonresident of Canada, any rental income you earn will be subject to a 25% withholding tax. The payer of rental payments in Canada -- either your tenant or a third party known as a withholding agent -- must withhold these payments, and the money must be submitted to the CRA no later than the 15th day of the following month. Otherwise, you could face steep penalties.
That said, there are ways to save money on the withholding tax. According to the letter of the law, this tax must be paid on your gross rental income. However, if you submit the correct forms, you can pay on your net rental income instead, which means you can deduct expenses to reduce your overall tax bill.
Withholding tax on the sale of rental property
Unfortunately, even if you're following a fix-and-flip strategy, you'll still face the withholding tax as a nonresident. Typically, the withholding tax on the sale of real property is 25% of its sale price. However, if you are selling a depreciable property, that percentage rises to a staggering 50%.
Luckily, though, there are strategies you can use to reduce your tax burden. In this case, you can file a Section 116 Clearance Certificate no later than 10 days after the completed sale. In this case, doing so will reduce your tax burden from 25% of the sale price to 25% of any capital gains.
Foreign buyers may also be subject to additional taxes in the form of a speculation tax. While the exact name of the tax and its amount will vary by province, a speculation tax is essentially a tax levied on any nonresident individual or corporation who buys residential property in Canada. For example, in the Greater Golden Horseshoe region (Ontario), this tax is known as the Non-Resident Speculation Tax (NRST), and it amounts to 15% of the land value.
Other considerations before getting involved in the Canadian real estate market
You'll need to decide on your tax structure
Obviously, your tax bill will be treated differently, depending on whether the income listed is personal income or business income. So take some time to decide on your desired tax structure. As a general rule of thumb, Canadian corporations tend to face lower withholding taxes. However, if the income is personal income, any income tax paid in Canada can be used to offset your U.S. tax burden.
As with any financial decision, in this case, there are pros and cons to choosing each route. It's best to talk to a Canadian tax professional before getting started. They can help you clarify which tax structure will likely be of most benefit to you.
You should be prepared to make a larger-than-normal down payment
Taxes aside, you may face additional financial hurdles as a foreign real estate investor. In particular, if you need to get a mortgage to purchase the property, you may need to make a larger-than-normal down payment. It's not uncommon for a mortgage broker to ask an investor to make a 35% down payment on their purchase. While that number is not impossible to meet, it can have an effect on your cash flow.
Your best bet is to hire a team of local experts
Lastly, navigating the Canadian real estate market as an investor can be tricky, so it's absolutely crucial to go through this process with a team of local experts by your side. In particular, look for a Canadian real estate agent, a Canadian mortgage broker, and a Canadian tax professional. Additionally, since you'll likely face hurdles a Canadian real estate investor would not, it's also a good idea to look for professionals with experience working with foreign buyers and sellers.
The bottom line
Investing in real estate in Canada from the United States may be a bit more difficult than investing domestically, but it can be done. That said, it should not be done without doing a good amount of research first. Use this guide to help you get started understanding the Canadian real estate market. You should then have a better idea of whether investing in Canada is right for you.