Buying Property in Canada: The process
Choosing a Realtor
Many people choose realtors based on recommendations from their friends or family members. But if you do not have this option, there are other methods to determine which real estate agent is the best one for you.
Google the top real estate companies in your area and see who is operating there. Most agents select a specific town or city to specialize in. The more experienced ones may have a larger network of clients, but the newer ones may have more time to spend with you.
By attending open houses, you can meet real estate agents in a working environment and interact with them. If you’re thinking about selling your home, this gives you the opportunity to see how the agent shows a home and how (s)he interacts with potential buyers.
Track For Sale signs in your neighborhood. See when they go up and when the Sold sign appears. The agent who sells properties the fastest may be better for you than the agent with the largest number of For Sale signs.
Whichever way you find real estate agents, it’s always prudent to conduct face-to-face interviews. Narrow your selection down to three, and meet with them to determine their strategy for working with you. As with anything, if you have a good rapport with one, this will be the one to go with.
Most realtors are self-employed and are on negotiable rather than fixed commission (payable by the seller). A purchaser can buy property using any realtor, regardless of whether that realtor originally listed the property. There are usually 2 realtors involved in a sale – the seller’s agent and the buyer’s agent. The commission received upon the sale of the property is divided between the 2 realtors. Some agents can also be dual agents but must declare this to buyers and sellers alike.
As a Canadian resident, financing is typically available at 75% of the purchase price for a primary residence over a 25-year term. For a non-resident, the ratio is generally 65% mortgage and 35% as a down payment. Qualifying for the mortgage financing is probably the same as in other countries – interviews via phone, fax, e-mail to gather personal information which includes assets/liabilities, employment and/or income information. Each borrower’s application will be considered on a case-by-case basis. Your realtor will be able to advise you on suitable mortgage brokers.
The mortgage approval may take approximately 24-48 hours after application and documentation has been submitted to the lender. The documentation generally required is income verification, tax returns, credit bureau or bank’s report (letter from borrower’s own bank stating that all accounts are in good standing to date), down payment confirmation via bank statements, copy of 2 pieces of ID and real estate appraisal. Foreign banks cannot register mortgages in Canada, so any mortgage would have to be raised via a Canadian mortgage broker. (Please see ‘Transferring Funds‘ for more information).
The borrower will require the services of a Canadian lawyer or notary public to prepare the mortgage documents and registration at the Land Titles office. Documents can be couriered outside Canada for signing – this will need to be arranged with the lawyer and lender well in advance of the completion date.
Making an Offer to Purchase
Once you have chosen a real estate agent, you need to give the vendor an Agreement of Purchase and Sale (also called an Offer to Purchase).
This Agreement states the legal names of both buyers and sellers, the civic address of the property, the price that is being offered for the home, any items in and around the property that are being included in the sale – itemized under ‘chattels included’, the amount of the deposit, the closing day (the date that you take possession of the home – in Canada this is usually 30 – 60 days after the Agreement of Purchase and Sale has been signed), request for a land survey to be carried out (if applicable), the date the offer expires, other conditions (such as a home inspection, property appraisal, lender approval of mortgage financing).
Once the offer is made and accepted, a deposit is payable. Once the buyer has signed the document, it becomes legally binding. If the buyer withdraws from the offer, the deposit may be lost and the buyer could be sued.
Once the Agreement has been signed by the buyer, it is presented to the seller who is at liberty to make changes to the price, completion date and chattels. The changes are initialed by the seller and returned to the buyer for review. Once both sides are in agreement, the resulting Agreement of Purchase and Sale will state the purchase price and the deposit. The deposit is placed in a trust account and is credited towards the purchase price once the offer has been accepted by both the seller and the buyer and the transaction is complete.
Selling Property in Canada
When a non-resident sells Canadian real estate, he/she is required to pay the appropriate amount of taxes on any capital gain. The normal Canadian tax rates will be applied to 50% of the gain. However, a non-resident is required to pay an estimate of the tax before the sale, an amount equal to 25% of the gain. This amount is to be retained by the seller’s lawyer until such time as a clearance certificate is received from the Canada Revenue Agency (CRA) in connection with the sale of the property. Upon payment, the CRA will issue a clearance certificate to the seller, but not until there has been a contract of purchase and sale with all subjects (conditions) removed. The wait for the certificate is usually 6-8 weeks. If the certificate is not obtained, the purchaser is required to withhold from the sale proceeds, a percentage of the selling price (usually 25-50%).
On or before the closing date, the mortgage money is transferred to the seller’s lawyer and then to the seller and the title is transferred to the buyer’s name.
The non-resident seller should file a Canadian income tax return for the year in which the sale occurs and should expect to receive a refund of a portion of the taxes paid. The taxation of Canadian real estate depends on whether the use of the property is for a principal residence, an active business or as a rental property. If it is used as a rental property, a 25% non-resident tax must be paid on the gross rent a tenant pays. However, if you use a professional property manager, the manager will, by law, withhold 25% of the gross rental revenue at source to be remitted to the Canada Revenue Agency. Then on or before March 31 of the following year, the property manager issues an NR4 form and you then have the right to file a Canadian tax return. The tax return is due before June 30 and enables you to claim expenses against that income and potentially request a refund.
Many countries, such as the U.S., have tax treaties with Canada that prevent you from being taxed in both Canada and your home country. It is advisable to contact a tax accountant in your country for more information.
Additional Costs and Fees when Buying and Selling Property
The following represents many of the additional costs and fees incorporated when buying property. Your realtor will be able to let you know which are applicable in your Province.
Non-residents of Canada pay tax on income received from sources in Canada. The type of tax paid, and the requirement to file income tax returns, depends on the type of income received.
Canada has tax treaties with many countries, including the United States and the UK. A tax treaty is designed to avoid double taxation for people who would otherwise pay tax on the same income in two countries.
Property Transfer (or Purchase) Tax / Land Transfer Fees are calculated between 0.5-2% of the property’s total value (not applicable in Alberta, rural Nova Scotia or Saskatchewan). They are generally 1% of the first $200,000 of the value and 2% of the remainder.
Since the 2005 Provincial Budget, Property Transfer Tax (PTT) is now exempt for individuals buying their first home as long as they meet certain criteria, namely that they are a Canadian citizen or Permanent Resident and have never owned a home anywhere in the world; that they have lived in the province for at least one year prior to purchase; that they have filed two Canadian tax returns within the last six years; and that they must occupy the property as their principal residence for the first year of ownership. There are also proportional exemptions to PTT for first-time home buyers which vary by region based on the fair market value of the property.
As of December 2007, the Ontario Provincial Land Transfer Tax exemption for first time buyers (up to $2,000) now applies to resale as well as newly constructed homes. Similarly, from February 2008, Toronto (and this may spread to other provincial cities) has its own Land Transfer Tax which allows first time home buyers of both new and resale homes to qualify for a rebate.
If the property is vacant land, the house must be constructed within one year of closing and the buyer must live in the house for the balance of the year.
There are other criteria needed as well to qualify for the PTT exemption, so it is best to consult a lawyer or notary.
Home Owner Grant
The Home Owner Grant is one of three property tax assistance programs offered by British Columbia. The program began in 1957 to help homeowners reduce the amount of taxes they pay on their home.
The purpose of the Home Owner Grant is to help reduce the amount of residential property tax British Columbians pay. The home owner grant applies to taxes paid by British Columbians to their municipality or to the Surveyor of Taxes for rural areas. The grant is available to Canadian citizens or holder of permanent residency status in Canada, who live in British Columbia, and he or she must occupy the home as his/her principal residence.
For 2012, the home owner grant will be reduced on higher-valued properties by $5 for each $1,000 of assessed value over $1,285,000. The basic grant is eliminated on homes assessed at $1,399,000 or more, and the additional grant is eliminated on homes of $1,454,000 or more.
The grant must be applied for each year.
Clearance Certificate The typical fees associated with preparing and filing a clearance certificate, paid by the seller; range from $300-$1000, depending on the complexity of the transaction.
Capital Gains Tax is not applicable on your principal residence.
Goods and Services Tax (GST) of 5% is only payable on newly constructed homes and is often included in the quoted sales price. New home buyers of residences costing $350,000 or less can apply for a partial rebate of the 5% GST applicable on the purchase price as long as the home is going to be the purchaser’s primary place of residence.
For new homes priced between $350,000 and $450,000 before GST, the GST rebate reduces proportionately. New homes priced $450,000 before GST or higher do not receive a rebate. There is no GST on resale housing unless the home has been substantially renovated, and then the tax is applied as if it were a new home.
GST questions are best answered at source ie: the Revenue Canada website, or by an accountant who is familiar with real estate revenue taxation.
Provincial Sales Tax (PST) in BC is 7% and again, is normally included in the quoted sale price.
Harmonized Sales Tax (HST) is 12% – a combination of GST and PST – and is used in British Columbia (see note below), Ontario, and the Atlantic provinces of New Brunswick, Newfoundland and Labrador, and Nova Scotia. The implementation of the BC Harmonized Sales Tax took place on July 1, 2010 and is applicable on most goods, services and consumer products including new homes.
Please note, a referendum was held in B.C. in the summer of 2011 which resulted in a repeal of the HST tax which will result in a return to the former 7% PST tax system on April 1st, 2013. In the meantime, on Friday, February 17th, B.C. Finance Minister Kevin Falcon unveiled a series of HST relief measures which will give B.C. home buyers and builders a more solid foundation to transition out of the controversial HST tax. Starting April 1st, 2012, the government will raise the HST rebate threshold for new home buyers to $850,000, up from the current $525,000, meaning more than 90% of newly-built homes will now be eligible for a provincial HST rebate of up to $42,500. After the HST end date, those who buy a home built before April 1, 2013, will pay a 2% transition tax on the full house price.
Property Tax is an annual fee levied within local communities, which means there are many different rates within each province. The difference between Property Tax and Property Transfer Tax is that PTT is a one-time provincial tax which comes into effect upon transfer of property and Property Tax is paid annually to the local taxation authorities. It is determined by applying the value of the property as assessed by the provincial assessment authority to the current tax rates as stated by the local tax authority. The amount can differ each year but generally Property Tax falls between 0.5-2.5% of the home’s market value.
Realtor’s Fees are paid by the vendor and are negotiable between 3 and 7% of the home’s market value. As a rule of thumb, Realtors often charge 7% on the first $100,000 of the sale price and 3% on the remainder. GST of 5% is also applied to the Realtor’s commission and is payable by the vendor.
Appraisal Fee Your lender may require a property appraisal at your expense. The cost is between $150-$250.
Survey Fee Your lender will require an up-to-date survey. If the Seller does not have one, you will have to pay to have one done. This can be approximately $150-$350.
Lawyer’s Fees Lawyers review the Offer to Purchase, search the title, draw up mortgage documents and tend to the closing details. The fee will be approximately $500-$800. This amount varies between Provinces depending on the complexity of the sale and the type of property.
Home Inspection Fee is usually around $450. This is the equivalent of a survey in the UK and other countries and is carried out at the purchaser’s request.
Property Insurance which covers the replacement value of the structure of your home and its contents.
Service Charges can be in the region of $35-$50 to hook up new services and utilities.
Condominium (Strata) Fees are charged monthly and cover building insurance and maintenance. The building’s property manager will provide you with the fee. For a newly built condo worth $250,000, expect to pay approximately $200 per month (this varies from building to building).
How to Buy Real Estate Property In Canada
Foreign investors who are purchasing solely for investment purposes and have no plans to live in their Canadian property, but hope to sell it in future for a large capital gain, would be wise to speak to an experienced accountant about all the implications.
One thing’s for certain: non-residents are required to have 25% of the gross rental income of the property withheld and remitted monthly to the Canada Revenue Agency within fifteen days of each month-end, either by the tenant, or by a Canadian representative appointed by the foreign investor. Failure to withhold this tax and to file a tax return can result in stiff penalties.
Buying your piece of Canadian real estate may have been easy and unrestricted, but there are a few things to take note of – besides the profits – when the time comes to sell your property. It’s essential to have a trusted real estate agent guide you through the process. Even after signing on the dotted line, much must be done to ensure a smooth closing.
Non-resident sellers should be aware of the following tax obligations:
- Non-residents are subject to the same Land Transfer Tax on their sale transactions as paid by Ontario residents (the former 20% non-resident tax has been repealed)
- There are deductions to the Land Transfer Tax that may apply for non-resident first time home buyers who plan to use the property as their principal residence within nine months of completing the purchase
- Non-residents must notify the Canadian government via a sale notice within ten days of the completion of the sale transaction, to obtain a certificate of compliance showing that the CRA has received either a prepayment of the taxes owing or appropriate security for the prepayment. If the sale notice isn’t filed, stiff penalties apply.
- In the next year following completion of the sale, non-resident property sellers can file a tax return and hopefully obtain a refund for a portion of their provable improvement expenses, legal fees, Realtor commissions, survey fees, etc., with respect to the property; consult an Ontario Accountant for assistance in preparation of this return
- Read more about the tax obligations for non-resident vendors disposing of real property in Canada on the CRA site.
Where an advocate comes into all this, is to help the non-resident property buyer with such things as obtaining fire insurance (a must for mortgage lenders, and something that can be more difficult to obtain for non-residents); providing Power of Attorney services if you will not be in the country for the closing; referring legal and financial representation you can trust; and helping you navigate the ever-changing immigration and tax laws.
Owning property in Canada can be profitable if you understand the Canadian tax laws that apply to real estate investments.
There is no residency or citizenship requirement for buying and owning property in Canada. You can occupy a Canadian residence on a temporary basis, but you will need to comply with immigration requirements if you wish to have an extended stay or become a permanent resident. Non-residents can also own rental property in Canada, but need to file annual tax returns with the Canada Revenue Agency (CRA).
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. Some exemptions apply if this is your first property purchase in Canada. Municipalities also levy annual property taxes, based on the assessed property value, which reflects the market value. School and other taxes are included in this municipal tax. Information on the current municipal tax on a specific property is generally readily available.
New home purchases are subject to the federal Goods and Services Tax (GST), but a partial rebate can be obtained for new or builder-renovated homes, if you plan to live in the home. The GST doesn’t apply to resale homes.
Canadians have a lot of advantages when it comes to family tax perks, read more about them in Tax Breaks for Canadian Families.
Taxes on Rental Property
The Canadian Income Tax Act requires that 25% of the gross property rental income is remitted each year. However, non-residents can elect to pay 25% of the net rental income (after expenses) by completing an NR6 form. If the rental property incurs net losses, then you may reclaim previously paid taxes. Your income will be treated differently depending on whether you’re a co-owner or a partner and whether it’s considered rental or business income.
You can deduct two types of incurred expenses to earn rental income: current operating expenses and capital expenses. The latter provides longer-term benefit. The cost of furniture or equipment for a rental property cannot 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. The deduction is called the capital cost allowance (CCA).
Property taxes and mortgage, bank loan or line of credit interest are tax deductible in Canada if the property is an investment property. To learn more about using your mortgage for investment purposes, be sure to read Creating A Tax-Deductible Canadian Mortgage.
Selling Canadian Property
When a non-resident sells a Canadian property, the Canadian government takes 50% of any sale as a withholding tax. American residents must also report the capital gain to the Internal Revenue Service (IRS). However, if the gain has been 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 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.