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Property Investment for Expats in Canada

Submitted: September 2013

Canada has a long tradition of welcoming foreign capital. There are no foreign investment restrictions on property investment unless you intend to buy farmland.

As property rights are strongly protected, Canadian property investment may be a very attractive option for many expatriates. In addition, round-trip property transaction costs are moderately low by international standards (around 7%).

Don’t underestimate the potential for natural disasters though, and check the possible risks in your local area. It might be necessary to have a separate insurance policy if you live in a high risk area. See Insurance for Expats in Canada.

Canadian housing market generally

Canada’s housing market is commonly monitored through the Teranet House Price Index (HPI). Canadian property prices are very high and they have more than doubled over the past 15 years. The most expensive cities are Vancouver ($7,500 per sqm) and Toronto ($6,000 per sqm).

There is little evidence that Canada has encouraged a house price bubble. In fact, Canadian policymakers repeatedly take measures in order to cool down the market, although they’re not radical. Canadian property prices are strongly supported by high/rising rents as well as low interest rates, and – in the case of Vancouver – low property taxes.

Strong demographics and better housing standards have justified persistently rising rents in real terms since World War II. For so long as these fundamentals don’t really change, rents are supposed to keep going up over the long-term, along with home prices.

An assessment of the Canadian housing market must include many other macroeconomic factors, including:

  • Mortgage availability
  • Interest rate variations
  • Housing supply developments
  • Homeownership rates
  • Demographic trends (e.g. immigration flows into large cities)
  • Tax policy, and
  • Psychological factors

Mortgaging

Get your documentation right before applying for a mortgage, and do it early to avoid disappointment.

From a financial point of view, remember that:

  • your net borrowing costs include not only interest but also additional mortgage-related fees and taxes
  • interest rates may go up in the future, but they have some room to shrink further as well
  • homeownership costs are not solely about financing costs (you may to plan for other costs, such as property taxes or maintenance).

For more information on Canadian mortgages, see ACCOMMODATION – Mortgages for Expats in Canada.

Property taxes

Land value taxes may be levied by municipalities. They are roughly assessed on the property’s rental value. Tax rates can range from 0.6% to 2.5%.

Higher property taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much property taxes you can expect to pay.

Letting your property

Canadian property prices are sometimes crazily expensive, but they’re not overpriced. This is because rents are also sky-high while interest rates are low. Consequently, rental yields are still fair.

In a high-tax town, such as Winnipeg, gross rental yields may exceed 6%. In a low-tax town, such as Vancouver, don’t expect your gross rental yield to be over 4.5%.

Rents may rise further in the future, not only because of inflation but also because of a supply of higher quality homes.

Do check the applicable landlord and tenant law prior to leasing property. The rules may be different from one province to another. Do not attempt to evict a tenant illegally, as illegal eviction may be a criminal offence.

Financial returns

From a financial point of view, the return on property investment comprises of:

  • net rental yields (or rent that you don’t pay), and
  • net capital gains

If rents are to rise (e.g. because of inflation), you are more likely to make capital gains over the long run, i.e. without taking into account medium-term fluctuations, such as mortgage availability.

Taxation

Rental income received by an individual is generally taxed at the progressive rates of income tax. Capital gains are taxed only on 50% of your net gains.

Mortgage interest is not tax-deductible, unless it is part of a buy-to-let arrangement. This is compensated by an exemption for capital gains on the sale of your principal residence.

For more information on tax in Canada, see TAXATION – Investment Taxation for Expats in Canada.

 

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