Tips for U.S. residents buying Canadian real estate

While Canada’s mortgage rates are enticing, you really need to concentrate on the tax and insurance implications

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Q: I need help buying Canadian real estate. I’m a Canadian citizen but live almost exclusively in Southern California. I own a home, free and clear, that’s worth almost USD$1.8 million. I’d like to buy a vacation property near Muskoka, Ont. that my son could use when he starts to attend university in southern Ontario. What do I need to know?

— Kerry, San Bernardino, Cali., USA


Romana King, senior editor and real estate specialist at MoneySense:

Over the last decade, as the U.S. housing sector struggled to regain momentum after the 2008 credit crisis, a large number of Canadians have crossed the border to buy a U.S. property. As a result, a ton has been written on the pros and cons of owning an American home. Now, with the impending U.S. election, there’s been chatter, lots of chatter, on whether or not the roles will be reversed: Americans flooding the Canadian housing market (looking for a safe retreat from potential Trump-mania).

If you’re an American or an expat Canadian with an eye for owning real estate in the Great White North, here’s what you need to know.

Use a mortgage to buy a Canadian home

Just because you’re not a Canadian taxpayer doesn’t mean you can’t qualify for a Canadian mortgage. As Kerry explains, “the mortgage rates in Canada are so low, it makes sense to take out a loan rather than tie up all my money.”

Keep in mind, though, that the low rates a lender advertises aren’t necessarily the rates you’ll get. A lender should scrutinize the assets and earning potential of a non-resident buyer just as much as a Canadian buyer and will also expect a much larger down payment. Most Canadian mortgage lenders will require a minimum of 35% down to even qualify for a mortgage loan on a Canadian property, sometimes more.

Keep in mind, though, that even if you can verify your earnings and can show a sizeable portfolio of assets that doesn’t mean you’ll get the lender’s preferred mortgage rates. Most Canadian banks and mono-lenders don’t recognize a U.S. credit history, and this can mean major rate hikes for non-resident borrowers.

Just go to a U.S. bank

While mortgages may appear to be the same in the U.S. as in Canada, they aren’t, explains Alain Forget, RBC’s vice-president of cross-border strategy. In Canada, a bank posts a competitive rate, but it can be a ceiling—a starting point that that can actually drop should a borrower prove their credit-worthiness.

In the U.S. it’s the other way around: the posted rates are the rock-bottom deal and go up based on the lender’s assessment of your income, work stability, size of assets, length of loan term and credit history.

What’s key is that both U.S. and Canadian lenders rely on credit history reports to help determine your mortgage rates. If you don’t have credit history in Canada—a credit card, utility bills or other ongoing debt obligations—then you won’t get the best mortgage rates in Canada, as you won’t have a credit history to prove what a responsible consumer you are.

Instead, consider getting a loan against your U.S. property and using that money to purchase the Canadian property outright—just remember to add in the costs to exchange your funds as part of the overall cost to buy the property.

Remember home insurance

Whether you get a U.S. loan to buy the property or a Canadian mortgage, you’ll probably be required to purchase home insurance on the Muskoka cottage. In Canada, mortgage lenders make it mandatory for borrowers to purchase home insurance—oftentimes requiring a Letter of Proof from your insurance company before funds are forwarded for use. To prevent a mad scramble, make sure you contact insurance companies that are familiar with cross-border purchases. If possible, get an insurance quote before you put in an offer. That way, you know you’ll have all the required paperwork and documentation so nothing will hinder your offer. 

Watch out for the taxman

The Internal Revenue Service and the Canada Revenue Agency are friends. Good friends. Good enough to play together and, after recent changes to legislation, share information with one another. This has some big implications for property owners, particularly property owners who generate income from real estate.

If you currently rent out your U.S. property or intend to rent out your soon-to-be Canadian property, you’ll need to file Canadian income tax, including Form T1135: Foreign Income Verification Statement. This form is only required if your U.S. property is worth more than CDN$100,000 and if the property isn’t solely used for personal use. Neglect to file this form each year and you could face fines, interest and penalties, starting at $25 per day.

Now, if your U.S. and Canadian properties are only used for personal reasons, you won’t have to file income tax returns in Canada until you dispose of one or both of the properties. This means if you sell, gift or change the use of even one property (this includes renting it out, even for a small portion of the year) then you’ll have to start filing Canadian income tax forms.

The IRS is worse—requiring you to submit income tax returns on all property held both within the U.S. borders and anywhere in the world, regardless of how you use that property.

The reason for all the paperwork is that any income earned from real estate, as well as any appreciation in value will be taxed in both Canada and the U.S. But, being good friends, the IRS and the CRA have worked out a deal and this allows you to claim a foreign tax credit that can be used to either reduce your Canadian tax or the U.S. tax owing.

RomanaKingRomana King is the senior editor and real estate specialist at MoneySense. She is also a licensed real estate sales agent. Follow her on Twitter (@RKHomeowner) or on Facebook. If you have real estate concerns or questions, please email Romana directly at romana.king@moneysense.rogers.com or call her on her direct line at 647-436-7123 or at 604-366-9868. 

 

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One comment on “Tips for U.S. residents buying Canadian real estate

  1. Romana,

    I work in an area that has a lot of non resident buyers. In fact, I would say that I process an application, an inquiry or a mortgage closing almost daily for a Non Resident and I do not agree with your article. If the buyer is from the US we always get a US Credit Bureau and submit it to the lender. The lender does not expect the applicant to have already established any Canadian credit or have an existing relationships with the lender ( or any lender in Canada for that matter) If the client is from the UK or Australia, I often use their credit bureaus from there too. In almost all cases I am not charged higher rates because the client is a Non Resident. Non Residents and Canadians alike are either approved and offered the best discounting rates or they are not approved. It is important to note as well that a US buyer can borrow in Canada for as little as 20% down whereas all other Non Residents require 35% down.

    Eventually the client will need to have a Canadian bank account to process their mortgage payments from. it is always a good idea when the applicant is here to open up the account as this can’t be done without the client being present. On that note, most lenders require the borrower to be present in Canada to sign the mortgage documents. Allowing a client to sign out of Country is becoming more and more challenging. A buyer should know this upfront and time their purchase accordingly.

    With respect to your home insurance comment- this is only required if the property is not a stratified property. If the property is already under a strata management, then additional insurance is not required.

    Another point is if a client has an existing mortgage or has a clear title home in Canada and wishes to refinance that home down the road, the lenders are making this transaction more and more difficult to do and in some cases lender who will lend to Non Residents will not allow them to refinance if their existing mortgage is not already with this institution. This means that if a client decides to buy their home with cash and then refinance their home later when it is convenient, more and more lenders are not allowing this transaction to happen.

    Lastly, your article did not advise clients to look into the taxes they should expect to pay when they sell that Canadian property down the road or touch on the increased property transfer tax (for certain parts of the Lower Mainland – not Squamish or Whistler ) that they should expect to pay as a Non Resident purchasing a property.

    Karen Garrett
    DLC Sea To Sky Mortgages – Whistler BC

    Reply

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