U.S.A. and CANADA differences?

Question

We are getting many investors north of the border of the U.S. and I'm clueless of the differences between the two countries as to regulatory issues and laws.

It is important to know or have a basic understanding as many issues, such as tenant/management, financing or flipping advice given is often anchored in the underlying regulatory environment. As an example, I might suggest a lease-option in some deal out of concerns for the due on sale issues of an installment contract over some period of time, but I don't know if there are any due on sale issues up there in the frozen tundra :)

So, what are the issues or differences that play on real estate transactions up north?

Steve L. · Answer

Real estate is extremely expensive in most parts of Canada. Mortgage Interest is not tax deductible. They have no such thing as 30 year fixed mortgages... typically 5 year max. Canadian banks typically loan money on the cheap. Owning US property makes them have to do a US tax return.

Roy N. · Answer

May I chime in here? I'll try to add some value and correct a few misconceptions:) Bill Gulley The fundamentals are the same here as they are in the U.S. - that's why I'm always pestering you to pick your brain :) That said, though lease options, short sales and foreclosures can happen here, they are not as common (lease options and short sales), nor are they a screaming deal (foreclosures) ... most REOs here are sold pretty much at market value - this is mainly a matter of market size and inventory. The due-on-sale clause looms large here and most conventional lenders use it as a means to control the property: squelch second liens, prevent lease-options, etc. @Steve L. - You are absolutely correct that real estate is expensive in most {urban} parts of Canada. You can still purchase lots of farmland in Manitoba for $500 and acre ;) Mortgage interest is not tax deductible on your primary residence. On the plus side, mortgage interest on fixed residential mortgages is compounded semi-annually, not in advance. Mortgage interest on an investment property is a business expense and is deductible (to one degree or another). Mortgage amortizations here are similar - up to 30yr ... but the 30yr amortization is rare on a residential property ... and since most folks are only purchasing a primary residence where the interest is not tax deductible, a longer amortization is not in their best interest. To obtain a residential mortgage in Canada, you must qualify at the 5-year fixed term posted rate (currently 5.34%) with a 25-yr amortization regardless of the note you choose to use. Mortgage terms of 6mths to 10-years are readily available {there were some longer terms offered by some lenders, but the interest rates were high enough they didn't take}. The most common mortgage term is 5-yr (either fixed or variable). "Canadian banks typically loan money on the cheap" - that's because our real estate market was not paying attention to what happened south of the 49th back in 2008. There are still too many here that believe the myth of a soft landing. In the interim, when I can find a deal - and it is becoming more and more rare - I do not mind paying 2.6% on a 5-yr variable rate mortgage. "Owning US property makes them have to do a US tax return." - the inverse would be true for a U.S. resident/citizen owning Canadian property. @Marc Ramsay - "For the price of a small house here outside of Vancouver, I can buy a 40+ unit apartment in Cleveland." You certainly have that right! However, for that same price, you could still purchase a 16-20 unit apartment building in the Maritimes. :-) On the landlord rights issue - In my experience BC, Ontario, PQ, and NS are very tenant friendly. Here in NB, things are more balanced ... but we have the dubious honour of paying the highest property tax rate on residential rental property.

Roy N. · Answer

We have legal systems descended from both Napoleonic (Québec) and English (ROC - Rest of Canada). Contract law, estate settlements, etc in most of Canada are very similar to those in the U.S.A. - coming from a common ancestor and all. It's been a long time since I lived in la belle province and I was younger and not terrible interested in real estate at that time, but there are some differences in Québec. As you alluded, cash transaction and money laundering rules are pretty much internationally driven now. In the case of the HUD-1 form, this is one of those rare occurrences where our "free enterprise and small government" southern neighbour has "out governmented" us ;) In Canada the closing attorney would prepare a Letter of Arrangement which serves {more or less} the same purpose. And, while there is regulation addressing what is to be contained in the Letter, there is no standardised government form - at least not that we've encountered yet.

Marc Ramsay · Answer

Landlords tend to have fewer rights in Canada as well, especially in BC. Evictions can take many months, and professional tenants are a real problem. Although rents are generally higher, the outrageous purchase prices make cash-flow returns dismal. The one saving grace is if you base your ROI on appreciation and mortgage pay-down as opposed to cash-flow (not much of that happening), or manage to do lease to own, then you can get some nice returns if you know your markets. For the price of a small house here outside of Vancouver, I can buy a 40+ unit apartment in Cleveland.

Roy N. · Answer

Bill Gulley Now you are starting to wander out of my yard :) My limited experience with security regulations has all been with non-real estate ventures. Security regulations are similar to the U.S.A, though there are some variations across the provinces. Enforcement is where you notice the fragmentation of each province having its own regulator. I am not intimate with pooling money for real estate investment {yet}, but from what I have learned, it appears little different than how you would be governed when raising equity for any other business venture {which I have been through}: if you are making a small pool, you can use accredited investors; if you need/want to go larger or include Joe & Jane Public, its syndication and requires a prospectus to be filed in each jurisdiction. Like I said, really not that different ... though I'm no expert in that end of things ... I'm sure you would find more variations at the detail level.

Bill Gulley · Answer

Well, that's expected in a civilized society (LOL). Hopefully others will chime in on the topic, I'm out of questions for the moment. :)

Bill Gulley · Answer

Thanks Roy, that paints a picture. Your settlement must be like our commercial requirements for a closing. The HUD-1 isn't required for commercial but may be used, but a complete accounting of of the related transactions. Do you have the security issues with private funding up there, issues with pooling money or any qualifications for investors? @Roy N. :)

Bill Gulley · Answer

Well, another question, are you under Napoleonic Law or English Law or a blending of both? Estate settlements and heirs , equitable interest, contract law and title? I'm guessing you have similar cash transaction rules, money laundering issues, pretty universal. We use a HUD-1 for settlement accounting, I suppose you have something similar. :)

Roy N. · Answer

Marc: That dangerous practice is why I said above that our real estate market paid little attention to what happened in the U.S.A. in 2008. When purchasing, we model all our properties based on cache flow only. Appreciation is meaningless until you plan to sell - or, to a lesser degree, refinance. Increasingly we are modelling properties with depreciation as property prices on our side of the country could stand a 10-15% correction. On your side, a 30% correction would still leave things expensive.

Roy N. · Answer

Not to the same degree {yet}, but you can smell them just over the horizon.