How to Buy Real Estate in Canada
In the recent weeks, there has been a lot of chatter about US Citizens wanting to move to Canada as a result of their presidential elections. I am quite certain that the expressed interest shown online is much greater than a number of people who are actually going to follow through.
Setting all the hype aside, and for those who are actually very serious about finding out what it is like to buy real estate in Canada - below, you will find a general overview of the Canadian real estate system.
Please note that the following information is for information purposes only and it is not intended to serve as legal or tax advice.
Can Foreigners Buy Real Estate in Canada?
Buying real estate in Canada is fairly straightforward, however, a lot of questions arise when non-residents plan on buying property in Canada.
Much of the confusion comes from individuals who wonder whether they are already residents or plan on becoming a resident of Canada. In order to be considered a resident, you must legally live in Canada for over 6 months of the year. Don’t spend this much time in Canada? If you are in the country for fewer than 6 months, then you are simply a non-resident. However, you can still purchase a home, open a bank account, or establish yourself in other ways.
Luckily for those who are not residents of the country, most of the provinces in Canada do not restrict foreign buyers from owning real estate. Though it’s important to note that some of these provinces do set limits on how much land or property a non-resident is allowed to purchase. Fortunately, if you’re just looking to own a primary home, you shouldn’t have any issues no matter which province you’ve set your eyes on.
Home Buying Process for Foreigners in Canada
The process of buying a home in Canada is very similar to our neighbours south of the border. Most home buying process should begin with securing a mortgage approval that will give you an idea of how much money a homebuyer can spend. After this, the next step is to select a REALTOR® who is experienced and ready to help you to find a property. Once that home is found, they’ll help you make an offer that will hopefully be accepted.
Canadadian law requires the offer is made in writing and that it clearly lists all of the terms and conditions of the transaction. For instance, if the carpets, appliances, hardware, or other interior additions are included, then they should be included in the offer as chattels included.
There are two very common conditions that buyers should include when making an offer on a property, both of which must be satisfied in order for the continuance of the offer.
- The first should state the requirement of a property inspection.
- While the second should note your ability to meet your financial obligations.
After the offer has been completed and you’ve signed on the dotted line, you’ll be legally bound to complete the details set forth in the contract and you cannot change your mind without facing legal consequences.
If you choose to do so, then you could be sued for damages and most likely completely forfeit your deposit. After your agent presents the offer to the seller, it’s then a waiting game to find out whether or not they’ll accept.
In most situations, there will be at least a few negotiations going back and forth between the buyer and seller once the initial offer has been submitted. While all negotiations are unique, most are based on items that the seller is willing to leave behind, the price of the property, possible repairs needed, and the completion date when the keys will be handed over is usually up for discussion.
After the dust settles around negotiating the details of the purchase agreement, every change must be documented and signed off by both parties. At this point is when you’ll need to provide a deposit as agreed upon in the offer to purchase agreement.
Rather than going to the seller, the funds are customarily placed in the selling REALTOR®’s trust account or outlined in the agreement. The deposit is part of the total purchase price and it is only released to the seller on the closing day.
While it might sound intimidating doing all of this back and forth work to buy a home, it is usually a very smooth process when working with a real estate agent. As the buyer, you’re not tied to using the agent that was responsible for listing the property. In fact, to avoid any conflict of interest, it is recommended to have your own REALTOR® to represent your best interest during the buying process.
In most scenarios, the buyer’s real estate agent is being compensated by the listing agent’s brokerage and you shouldn’t have to pay any extra fees for having an expert to represent you unless it’s otherwise agreed in writing.
Every province in Canada has their own rules and regulations that govern real estate transactions. Be sure to ask your real estate agent to explain the home buying process to make sure that you are ready.
Mortgages for Non-residents in Canada
When it comes to financing the property, whether or not you are a resident is a detail that will come into play. Canadian residents are typically able to finance over a 25-year term for 80%-95% of the purchase price. Non-residents will face a different lending process by having to pay a minimum of 35% down, leaving them with 65% to finance.
The mortgage qualification process is generally the same for both. The qualification process usually starts with a phone conversation to gather information such as income, tax information, and so on. E-mails, faxes, and regular mail will be used to get any additional copies and documents that are needed. Only after all pertinent information is ready will the application be sent to a lender for approval.
In most situations, the approval will be ready one to two days after the application is submitted. However, the process can be stalled if tax returns, a bank report, confirmation of down payment, credit report, copies of personal identifications, real estate appraisal, or bank statements are not adequate.
Another bump in the road can be experienced if you go to the wrong bank. Not every bank in Canada is willing to approve a mortgage application for foreigners. For this reason, it’s crucial to work with a Canadian mortgage broker from the very start. If you’re not sure who to go to, then ask your real estate agent to refer you to someone they’ve worked with in the past.
As the borrower, you’re also going to require the services of a Canadian lawyer to help you wrap up the legal documents, such as the registration at the Land Titles Office. If you’re not in the country when these need to be signed, then you can always request your lawyer to courier you the documents that require signing.
The only drawback is that this takes more time, you’ll need to hire a Notary Public to witness your signatures and it is going to add extra cost to the total legal bill. So it does require some careful planning on your part.
Keep in Mind When Selling Property in Canada
When it comes to selling a property in Canada as a non-resident, things are a bit different than they are for residents. This is because non-residents are required to pay a certain amount of taxes on capital gain. To put this in perspective, Canadian residents are not required to pay any taxes on capital gains as a result of their primary residents going up in value over time. However a non-resident is required to pay around 25% of the gain, and this will have to be paid before the sale is completed and the proceeds of the sale are disbursed. The funds for this will go to the seller’s lawyer and will only be cleared when Canada Revenue Agency forwards a clearance certificate.
In order for the clearance certificate to be sent, a few requirements must be met, such as a contract of purchase that has all conditions of the sale removed. Once satisfied, the CRA will submit the certificate to the seller, which normally takes 6-8 weeks to receive. If the requirements are not met and the certificate is not obtained, then the seller’s lawyer must withhold 25-50 percent of the selling price from the sale proceeds.
While the work of purchasing the home is done, the matter of taxes is still at bay. A non-resident seller will have to file a Canadian income tax return for the year that the sale went through. A refund may be expected for the taxes that were paid, although this depends on the transaction details. The way Canadian real estate is taxed depends on what the property is being used for. For example, a rental property will require 25% of the gross rent a tenant pays to be paid by the non-resident owner.
If you live in the United States and are worried about being taxed in the states as well as in Canada, you can put your mind at ease. The U.S., as well as many other countries, have tax treaties that prevent you from being taxed in both countries. If you don’t live in the U.S., then it’s recommended to speak with a tax accountant to learn more about the specifics.
Additional Fees When Buying and Selling Property in Canada
Just like with any major purchase, it’s always important to keep in mind that there may be additional costs and fees when buying real estate. This varies by Province, so make sure your REALTOR® takes time to explain this before you get the ball rolling. Some common additional costs include:
1. Land Transfer Taxes
Property Transfer or Land Transfer Fees: These are determined based on 0.5-2% of the total value of the property. In most situations, they will be 1% of the first $200,000 and 2% for the rest. This is not applicable in Saskatchewan, rural Nova Scotia, and Alberta.
If you’re looking to avoid this tax, you may be able to do so under a special circumstance. In 2005 the Provincial Budget made exemptions from the Property Transfer Tax for individuals who were buying their first home. However, they must meet the following criteria:
- Be a Canadian citizen
- Must be a resident of Canada
- Do not own a home anywhere in the world
- In the past 6 years have filed at least 2 Canadian tax returns
- Lived in the province for one year (or longer) before the purchase
- Residence must be principal residence for the first year it’s owned
- For vacant land, a home must be constructed within a year after the closing date. The buyer must live in the home for the following year.
Other exemptions do apply, although these vary based on region as well as the value of the property being purchased. This applies to both resale and newly constructed homes as of 2007, so many buyers can now take advantage of it. If you’re thinking about buying in Toronto, they have their own Land Transfer Tax, which offers a rebate for first-time buyers as well.
2. Cost of Clearance Certificate
Paid by the seller, the normal fees related to preparing and filing for a clearance certificate can range anywhere from $300 to $1000. If the transaction is complex, it’s likely the amount will be at the higher end.
3. Property Tax
Property tax is paid every year to the municipal government or in rural areas to the county. Rates vary in each province and city, as the fee is levied within local communities. The amount paid will also depend on current tax rates as well as the value of the property.
4. Goods and Services Tax (GST)
A 5% tax is required on newly constructed homes, although this amount is normally included in the sales price so it doesn’t surprise you later. It may also be eligible for homes that have been substantially renovated from the purchase condition. However, if you are purchasing a newly constructed home for less than $350,000, you can apply for a partial rebate of that 5%. Just keep in mind this rebate is only applicable for those who will make this property their principal residence.
If you’re buying a home over the threshold of $350,000 but below $450,000, the rebate of the goods and services tax will reduce proportionately. If you’re purchasing one over $450,000, then you will not be qualified to receive a GST rebate. For questions relating to this, one of the best sources is an experienced accountant or Revenue Canada’s website.
5. Provincial Sales Tax (PST)
Although normally factored into the sales price of a home, the PST is an expense that can range from 0-10% from province to province. Currently, Alberta is the only province in Canada that does not have a provincial sales tax.
6. Harmonized Sales Tax (HST)
Used in Newfoundland, Labrador, Nova Scotia, British Columbia, and Ontario, this is the combination of Provincial Sales Tax and Goods and Services Tax. Most services, consumer products, homes, and goods are subject to this tax. Additionally, this tax applies to costs as well as fees that are related to the purchase of a property, such as cable, commisions, legal fees, painting, etc. It’s collected by the Canada Revenue Agency before being sent to participating provinces. Almost every province has a provincial sales tax or the HST, except for Alberta.
Final Thoughts on Buying Real Estate in Canada
Although there are many steps that need to be carefully considered when buying real estate in Canada as a non-resident. The overall process of buying a home in Canada is fairly straightforward when you have a professional by your side. Every province and territory in Canada will have different advantages and some disadvantages. Be sure to find a real estate agent who can answer all your questions about the local real estate market and ease any concerns that you may have about becoming a homeowner in Canada.