The Meat and Potatoes of Investing in Canadian Real Estate
If you have been looking to invest in overseas property and are considering purchasing in Canada’s stable market, this article may assist you in being prepared for what is in store for you as a prospective purchaser and soon to be investment property owner.
In understanding your rights and your obligations as a purchaser, you can feel safe knowing that your money is in good hands and that you are working with a developer that builds quality product.
In2ition Realty is one of Canada’s leading first-hand sales and marketing companies, working with Canadian developers to promote their residential communities for sale. Having been established in the Toronto area for over a decade, our sales figures indicated that a growing number of purchasers were emerging from overseas, with the majority of those purchasers coming from the Hong Kong area and Mainland China.
In an effort to better provide knowledgeable and experienced service to these buyers, In2ition Realty has recently opened a new permanent office in Sheung Wan, Hong Kong. We would be happy to discuss property options with you after you have had the opportunity to read through this article and pick up some pointers.
In this article, we have attempted to piece together years of experience in pre-construction development, sales and marketing to provide you with a few key points that should help you out in your property search.
In buying overseas, we highly recommend purchasing directly from the Developer or using the Developer’s Representative when considering a project to invest in. They will be the most knowledgeable source for you as a buyer and will help you understand the location of the development, market trends in the area and what you can expect over the next 2 – 3 years while the homes in the development are being sold and constructed.
Point 1: Know your rights: Rescission Period (Cooling-off Period)
Although the rules do vary between provinces with respect to the number of days that a purchaser has to commit to their purchase, all purchasers of new home are entitled to a cooling off period. This Rescission Period, as it is typically referred, allows the purchaser to cancel their agreement within a set number of days without condition, should they not be happy with the terms of their agreement or with the decision to buy.
In Ontario, purchasers have 10 days to review their purchase agreement, in British Columbia, purchasers are given 7 days.
Point 2: Ask for an Assignment Clause
An Assignment Clause is often added by amendment to your agreement to purchase and in some cases will allow you to sell off the rights to your agreement prior to the building being completed and you taking ownership of the home. Most developers require that a certain percentage of the development be sold and that no remaining suite of the same type that you have purchased be available for sale.
Point 3: Ask for Capped Development Charges
In an effort to bring down your closings costs, (which are mentioned later in this article), you can often request from the Developer that a cap be placed on the maximum amount they can charge you for certain items in the closing costs.
Put simply, your deposits are safe and are not at risk of being lost under any circumstance. Purchase deposits for pre-construction developments in Canada are held with a lawyer in a Trust Account. These deposits are insured and in some provinces, a portion of your deposits may also be protected by a new home warranty program. Developers are able to borrow against these deposits at prescribed intervals throughout the development process, but they cannot touch the deposits until project is close to completion.
Note: Deposits that are paid for upgrades to your suite finishes are not treated in the same fashion, and therefore are at risk should the developer or the project go bankrupt. This is typically a very unlikely scenario since most upgraded finish deposits are taken closer to project completion.
In Canada, taxation on the ownership of foreign property by a non-resident is quite simple. Generally speaking, there are two taxes you will need to be concerned with, Capital Gains Tax and Taxation on Rental Income, if you choose to lease your space out to someone.
Taxation on Income Generated Through Rental Properties
Canadian non-residents who rent out a property must withhold and remit 25% of their monthly revenue to the Canada Revenue Agency in accordance with the filing of a Canadian Income Tax Return for their rental ‘business’. The filing of this income tax must be completed by the end of the next tax year.
Savvy investors will complete a NR6 form through the Canada Revenue Agency (CRA) before the first of January each year in order to be granted permission from the (CRA) to withhold only 25% of your net rental income, instead of the full 25% of the Gross Income. If you as the property owner intend to engage a Property Manager to oversee the leasing of your investment property, the Property Manager should be well accustomed to filing the NR6 Form on behalf of his or her clients.
Capital Gains Tax on the Sale of Real Property
Non-residents must notify the Government of Canada 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, penalties will apply.
When a non-resident owner sells Canadian property, Canadian law requires a 25% holdback of the proceeds of the sale pending filing of a Canadian Income Tax return by the end of the next tax year calculating Canadian tax owed on any Capital Gain.
Wise non-resident owners will obtain a ‘Clearance Certificate’ that may be applied for in advance of the sale. This Certificate may reduce the holdback to a percentage of the capital gain instead.
The Mortgage Approval
Canadian Non-Resident buyers are required to provide 35% in deposits as they will only be able to qualify for a mortgage of 65% percent of the purchase price. Most Canadian developers will require that the mortgage pre-approvals are provided through a Tier 1 Financial Institution with a preference towards larger established banks.
We are frequently asked why developers require that their purchasers obtain a mortgage pre-approval when they purchase a new condominium. In many cases, these buyers are purchasing from a marketing plan and the home they have agreed to purchase won’t be ready for two years and possibly longer from the date they sign. The mortgage pre-approval has a few purposes in the eyes of the developer.
The first and most important is that it acts as a vetting procedure to ensure that the person that is buying the new home can afford the home. Of course the mortgage approval is obtained at the time you agree to purchase and the approval is based on your current condition and your financial situation. This may change for the better or worse in the years prior to your new home being completed, but the initial check by the mortgage specialist will at the very least provide the developer with some comfort knowing that if the development was completed today you as the purchaser can afford to purchase carry the unit.
The second reason is that many developers will require construction financing through the bank in order to get their development out of the ground. In order obtain this construction financing, the developer will need to have sold a total number of suites that account for between 65-70% of the total projects total expected sales revenue. With signed contracts committing to these sales, the purchaser’s deposits that are held in a Trust Account with the project Solicitor and the Mortgage Pre-Approvals, the bank or other lending institution then has confidence to lend to the developer.
Closing Costs consist of municipal and provincial land transfer taxes, legal disbursements, pre-paid utility fees, mortgage application fees, any pre-delivery inspection fees, municipal adjustments, an enrollment fee for a new home buyer warranty program in some provinces and development charges imposed by the city on the developer.
Typically Required Closing Costs Broken Down:
(Items and costs mentioned below are for reference only are in all cases only estimates. Speak to the Sales Representative at the time of signing your agreement to get a clearer understanding of what the specific fees will be).
City Land Transfer Tax: Approximately 0.90% of the Purchase Price
Provincial Land Transfer Tax: Approximately 1% of the Purchase Price
Mortgage Application Fee: $ 200 – $ 300 (not always applicable)
Pre-Paid Utility Fees: $ 500 – $ 1,000
TARION Warranty Enrollment: $ 1,200 (In Ontario)
Municipal Adjustments: $ 1,500 – $ 3,000 – Vary depending on development and developer.
Legal Fees: $ 1,000 – $ 1,600
General Administrative Fees: $ 500
TARION New Home Buyer Warranty
The Tarion New Home Buyer Warranty program is a mandatory requirement for all new pre-construction development projects built in the province of Ontario. Developers are required to enroll their projects in this warranty program as a protection for their purchasers. The warranty program provides protection in circumstances that relate to deposit protection, suite finish and construction. More can be referenced through accessing the TARION website at www.tarion.com.
The Rundown: A Summary of Purchase Advice.
- Buy direct from the Developer or their Exclusive Sales and Marketing Team to avoid paying increased pricing.
- 2. Know your rights as a purchaser.
Purchasers of pre-construction condominiums are entitled to a cooling off period once having signed to review the paper work and consult with their lawyer. Toronto, Ontario – 10 days, Vancouver, British Columbia – 7 days.
- Do not get caught up in the hype of a sales event. Ask questions and do not sign if you are not comfortable.
- Ask for an Assignment Clause (This may allow you to sell the rights to your agreement before you have taken ownership of the suite).
- Request Capped Development Charges (the may help in lowering your closing costs).
- If you are not familiar with the city or area you are planning to purchase in it would be wise to speak with someone that is to avoid
- Capital Gains Tax – Avoid overpaying by applying for a Clearance Certificate through the Canada Revenue Agency before you sell your home.
- Rental Income Taxation – Apply before January 1st of each year to pay taxes on your net rental income by filing a NR6 for through the Canada Revenue Agency.
Ready to look at investment options and ask some more questions? Give us a call or email me at firstname.lastname@example.org and we can provide you with detailed project information and pricing for some great investment opportunities in terrific locations.
Director, International Sales
In2ition Realty Hong Kong Limited
5B, EIB Centre
40 Bonham Strand
Sheung Wan, Hong Kong
T: +852 9458 4672