Understanding Mortgage Investment Property Requirements in Canada

Canadian Mortgage Investment Property Requirements:

Are you interested in buying property in Canada? You can turn a big profit so long as you are aware of the Canadian tax laws that kick in when you own real estate for investment purposes. Have you been stuck renting apartments ever since you left home? If you want to buy and own property in Canada, you don’t have to be a citizen – and you don’t even have to live in the country. It’s fine if you want to occupy your Canadian dwelling on a short-term basis, but you still have to follow the requirements for immigration if you want to become a permanent resident or even just stay for an extended period of time. People who don’t live in Canada are allowed to own rental property, but they still have to file yearly tax returns according to the rules of the Canada Revenue Agency, or CRA.

So what are the mortgage investing property requirements that new property owners run into? When you purchase a Real Estate Investment property, you owe a provincial tax for recording for the transfer. Each province in Canada seems to have a different effective rate, but a typical rate would be about 1 percent for the initial $200,000 on the property and 2 percent on the rest, but you’ll want to talk to your realtor to find out the particulars for your province. Some cities also charge yearly property taxes which take their basis from a home’s assessed value (which comes from the market value). A variety of taxes, including funding for the schools, come from this tax.

If you buy a new home, you have to pay the Canadian Goods and Services Tax (GST), but if it’s builder-renovated and you plan to occupy the home, you don’t have to pay the entire tax. If you’re buying a property through the resale market, you don’t pay the GST.

What about taxes due on rental properties?

According to the Canadian Income Tax, you have to pay 25 percent of the gross property rental income each year. If you don’t live in Canada, you can pay 25 percent of the net rental income after expenses; you just have to submit an NR6 form. If it turns out that your rental property results in a net loss for the year, then you are actually allowed to ask for a refund on taxes you’ve paid in prior years. If you’re a partner or a co-owner, taxes can vary, and whether you treat the money as business or rental income makes a difference as well.

There are two types of expenses that you can deduct when it comes to rental income: capital expenses and current operating expenses. Capital costs give you a benefit over the longer term; if you buy equipment or furniture for a rental property, you can’t deduct it against that year’s rental income, but you can deduct it over several years using a depreciation schedule. This is the capital cost allowance, or the CCA. If you pay interest on a line of credit, a bank loan or a mortgage, that would be tax deductible, as are property taxes.

If you’re not a resident of Canada, when you sell a property in the country, the government withholds 50 percent of the proceeds as a tax. If you live in the United States, you also have to report any capital gain to the Internal Revenue Service, or IRS. If you pay taxes on the gains in Canada, you can claim a foreign tax credit. If you do sell a Canadian property as a non-resident, you have to give the buyer a CRA-prepared clearance certificate. This means that you have a certificate indicating that you owe no taxes on the property.

If you live in Canada and this Canadian property is where you have declared primary residence, you owe nothing for capital gains when you sell the property. Any residence can be your primary residence as long as you claim that you “ordinarily inhabit the dwelling.” This could apply to a regular house or to a seasonal structure such as a mobile home or a beach house. Each family unit gets one principal dwelling per year. If you own multiple properties, you have to decide which one you want to indicate as your primary residence for that tax year.

If you live in Canada and then leave, your capital property goes through a “deemed disposition.” If you have Canadian assets that have a higher value, you have to pay a tax on that increased value upon leaving the country. This could also apply if a non-resident property owner passes or when a property transfers from one person to his or her relative or company without any money changing hands.

Do you have questions about your own upcoming transaction? Call HOS Financial for the latest trends in the mortgage investment property market.

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