Understanding the Rules of Engagement for Non-Residents in the Canadian Property Market

Unlike many other countries, Canada allows people from all over the world to buy property in their country. They apply no restrictions to the type or the amount of property that that non-residents can buy. However, the rules for borrowing money to buy that property are somewhat different between residents and non-residents.

Who Is a Non-Resident?

In Canada a person is defined as a non-resident when they do not earn money in Canada and do not pay Canadian taxes. Canadians who reside in another country for more than half of the year are also considered non-residents by the banks. The government does not however classify them as non-residents so they are not subjected to speculation tax.

Mortgage Requirements for Non-Residents

Down Payments and Deposits

It is possible to for non-resident to get a property mortgage. Banks will, however, ask for a bigger down payment with 35% being the norm. The down payment cannot be gifted to you. You must pay it yourself. You will have to make the down payment at least thirty days before closing the deal.

When you make an offer for a house you will have to pay a deposit. This is typically 5% to 10% of the price of the house. You must pay it within 24 hours of making the offer. The payment takes the form of a bank draft, a certified cheque or a money order from a Canadian Bank. If you withdraw from the deal you will lose your deposit.

If you are planning to pay cash for the property you should send the funds well ahead of time as the international transfer of large sums of money can take a long time to process. Before the bank will approve your application for a mortgage, you’ll have to prove your income. You will also have to bring evidence that you are creditworthy. You will have to prove that you have the wherewithal to cover the repayments. The interest rates may be higher for non-residents than the rates charged to Canadians.

Documentary Requirements

The documents that you will require to apply for a mortgage in Canada include:

• Proof of income like pay stubs and tax returns
• Proof of down payment. Bring along your bank statements for the past three months
• International credit bureau report or six months bank statements
• A reference letter from a bank outside of Canada.

Travel to Canada

Non-residents must open an account at a Canadian bank to do this you will have to travel to Canada. You will also have to travel to Canada to close the deal.

You will need a real estate attorney to assist you. Canadian lawyers must verify the identity of non-residents before they can act for them or accept funds on their behalf. This is typically done in a face to face meeting where the lawyer will confirm the identity of the client who will bring along a passport or id document.

It is best to arrange a meeting with a real estate attorney when you first go to Canada to open your Canadian Bank account. The attorney can then act on your behalf when you are ready to do the deal.

The term of the mortgage for a non-resident may not exceed twenty-five years. Non-residents cannot refinance their mortgages and they are also not eligible for Home Equity Lines of Credit HELOCS.

Additional Costs

Closing Costs

When you sit down to work out the finances don’t forget to budget for the closing costs. These will include:

• Appraisal costs
• Inspection fees
• Insurance
• Property tax
• Legal fees.

As a rule of thumb, they typically come to about 1.5% of the mortgage. A mortgage broker can help you to work out how much you’ll need.

Taxes for Non-Residents

Non-residents must pay the same land transfer costs as Canadian citizens. If you are a first time home owner and plan to use the residence as your primary residence you may be eligible for a land tax rebate. For non-residents buying property in the Toronto area there is an additional speculation tax payable. It amounts to 15% of the price of the property. You will also have to pay property tax and income tax. It is best to get the advice of a tax expert before you embark on the venture.

A non-resident selling property will be subject to 25% non-resident withholding tax. It is calculated on the selling price of the property. The sale of property in Canada is also subject to capital gains tax.

Insurance

Some non-residents find it difficult and more expensive to get household insurance on the property. Without it you will not get a mortgage so it is important to shop around for insurance before you make an offer for a property.

Find Help

It will serve you well to find a realtor that knows what is involved in Canadian property purchases by non-residents. Make sure that he or she has experience with such transactions. Be warned the process can be complex and involves finance, insurance, tax and home inspection.

An experienced and reputable mortgage broker can help you to navigate many of the pitfalls of buying property in Canada. Mortgage brokers have a large number of lenders of various types on their books. They are therefore able to get you the best deal when it comes to terms and conditions.

They can also arrange a pre-approved mortgage, so that you know exactly how much you qualify for. This will save you time and effort when it comes to looking for the most suitable property at the right price. It could also give you some negotiating leverage as the seller will know that you have pre-approved finances for the deal.

It is vital that you insist on home inspection. This way you are assured of getting what you are paying for. Make this one of the conditions of purchase. A professional inspector will examine the building and surrounding property for defects or potential problems. He will supply you with a comprehensive report, so you won’t be faced with any nasty surprises.

If you are planning to rent out your property in Canada, you’ll need an agent. You will have to pay 25% of the rental income to the Canadian Revenue Services every month. The agent can do this for you. You can save on this tax by deducting any maintenance costs that you may have incurred.

Careful planning with the right team will ensure that your foray into the Canadian property market is plain sailing. The team can help you to avoid any regrets or additional costs in an arena that is complex, and where mistakes can be costly.