What are the tax implications of buying property in Canada?

Question

Hi BP,

2 months, I traveled to Vancouver, Canada and I noticed a lot of real estate activities going on. I been wondering as an invest from the US, what are the legal and tax implications of owning properties up there?

Robert Gunther · Answer

Bryan,

I have some experience with this.  As a non-resident (Canadian or American, same rules) with property in Canada that you are renting out there are a few rules.

* You are not allowed to collect the rent yourself, a resident of Canada must do it.  It could be a property manager or friend etc.  They must register with the Canadian government (federal, not provincial) and setup with an account number.

* Every month they collect the rent for you.  They have 15 days following the end of the month to remit 25% of the gross rent to the tax office (using the account number they are assigned).  They can then pay you the remaining 75% of the rent.

* Failure to pay the 25% on time, the penalty a fine and interest accumulates at 1% PER DAY to a maximum of 12% per year.

At the end of the year the person collecting your rent and withholding your tax payment issues you a tax form (NR4).

The government wants you to just stop there, they don't care if you file a return or not - they have already got your 25% tax.

You can elect to file a NR6 tax return on your rental income (that is a special return, just for rental income).  You can do all your deductions (interest, property management, repairs, capital cost deductions, utilities, city tax etc.).  Then you get some of the 25% that was withheld back.

It is also possible to file an NR6 undertaking on or before the first day of each tax year, you basically estimate your deductions for the year to reduce the monthly tax withholding from 25% down to some lower number.  This request must be approved before your agent can start withholding an amount lower than 25%.

They have something called a capital cost allowance (CCA), which allows you to deduct a portion of your property every year, the amount depends on the age of the property and when you bought it but since you would just be buying now it is probably 4%.  So you can deduct 4% of the property value every year on your NR6 tax return to reduce the amount paid.

But don't worry.... they are not really letting you deduct that.

When you go to sell the property, they have something called the capital cost allowance recapture.  So any amount you deducted over the years, they take back at the time of the sale.

Oh, while we are talking about capital cost... let's talk about repair/improvement of a property.  They have rules on that as well.    Let's say you want to redo the kitchen counters, it had trashed laminate counter when you purchase the property.

You can replace it with the same - 100% deductible.   If you upgrade to say granite that is considered an improvement, 0% deductible.  The cost is considered a capital cost, it goes to the value of the property and you can deduct it at 4% per year.

Hopefully, that sheds some light on the subject of taxes.

Robert Gunther · Answer

@Jay Hinrichs that insurance rule still exists.  Any place that is empty for longer than 1 week (like going on a 2-week vacation) there is no insurance coverage.

My insurance provider also automatically suspends coverage during any construction.  Redoing your kitchen?  Your insurance is null when the renovation is happening.  Crazy stuff.

Insurance providers have so many loopholes.  Got a slow leak under the sink you did not notice?  Maybe mold starts growing under the cabinets that you don't see...  No insurance against a slow leak.

Robert Gunther · Answer

Since we are talking about taxes, let me share some more with you.  I may not be 100% correct on this but from what I have read and seen when filing my personal taxes this is what it looks like.

When during the year you purchase the property can have a big impact on your deductions.

When you purchase a property, you pay a transfer tax (http://www2.gov.bc.ca/gov/content/taxes/property-t...).

The last property I purchased, I paid something like $7,000 in transfer tax.

That tax is deductible against your rental income, in the year you purchase the property.  Assuming you have income.

If you purchase a property in January, pay your transfer tax and then collect rent for the rest of the year.  You have rental income to deduct it against - great.

However, if you purchased in December you will have little or no income.  You paid the transfer tax and now have nothing to deduct it against.

If you already have other property you have income to deduct it against, but if this is your first purchase watch out when in the year you buy.

You might think the tax payment you could not fully deduct could be used in future years.  I'm not 100% certain, but I believe for rental income for a non-resident your losses do not carry forward.

I had a building with a flood and lost a lot of money one year, I was not able to carry forward the loss to use against future income.

Robert Gunther · Answer

Grrrr....  Taxes.  Another follow-up to my previous post.  It appears I was correct, you can't carry forward a tax loss from rental property as a non-resident.  This may or may not apply if you are a resident, I have no idea.  But as a non-resident if you lose money, too bad - you essentially lose the loss as a deduction in future years.

Here is a snippet from their instructions for the 'Electing-Under Section 216' tax document, the tax form a non-resident files to remit tax.  Here are the important bits regarding losses.

Rental losses

You cannot use a loss you report on your section 216 return to reduce income on another Canadian return for 2016 or

any prior or future tax year. As well, you cannot apply this loss to a section 216 return for any prior or future year.

The part I underlined is important since as a non-resident filing a return for rental income you only file the section 216 return.  It clearly states if you lose money in any year you can't carry it forward or back.

So if you are buying your first property you are going to get hit with a big transfer tax, which if you can't deduct if you have no income in the year you purchased the property :-(

Knowing the tax rules are so important in trying to make money in Canada... Purchase your property early enough in the year that you can generate income to deduct against.

Jay Hinrichs · Answer

Now lending money was a breeze no tax withholding for that I did some HML there .. and with the currency arbitrage and rates it was a killer deal.. although again I learned you just don't foreclose in CA for non payment.. its not like the US..

Jay Hinrichs · Answer

well pretty easy to buy.. its when you sell... REV CA will withhold 25% of your proceeds until you file a tax return to determine if you owe tax.. cap gain is or was 25% ... and there is no 1031.

Of course I did not know that I bought a home up in Kelowna for cash back in 2001.. and when I decided I wanted to sell it little over a year later... it was a shocker when they kept 25% of my proceeds until I filed the tax return.. I made very little on that one.. but it cost money for the return and if I recall 60 to 90 days to get my funds..

other than that pretty easy deal buying in CA or at least BC were I was at.  Awsome place by the way.

Jay Hinrichs · Answer

@Robert Gunther  Oh well but then you get to live in Gods country  take the good with the bad !!!  it could be worse place to live and own rentals. I can think of many LOL

Jay Hinrichs · Answer

@Robert Gunther  my place was out at the Okanogan golf club.. I should have bought some of those Borgata units when they were 30k LOL  Any way the other tid bit I remember as a snow bird you have to have weekly inpsections of your property during the winter other wise insurance wont cover a loss.

I never had rentals. just a home that I lived in..  I was just there In May boy has it grown.. communter lanes running down town and everything.. and the Collage just blew up... and an ILS into the airport so when you get those pesky inversion layers the planes can still land.... Going back up to Douglas Ranch to fish in Oct.

What are the tax implications of buying property in Canada?

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