Tax Issues in Buying and Selling Properties

The last time I discussed the capital gain exemption on the principal residence. As long as you are a Canadian tax residence, this property is your own residence, and you have not applied for this exemption in the same year for other properties, you are eligible for this.

If this is not a property that you live in, the relevant capital gains will need to be taxed. Generally speaking, all the gain from sale of the property is consider as capital gain, and half of the total gain will be added to your income. But in recent years, many people, especially in Toronto or Vancouver, people like to buy some properties and then modify them, and immediately sell them. If this is done for a multiple times, CRA will regard it as a business, and all the gains are consider to be business profit. All gain will be added to your income. So if there is anyone interested in investing in this area should first discuss with your accountant.

Ok, let me talk about some tax issues relating to buying a property.

RRSP

You can withdraw cash from your own RRSP to pay the down payment when purchase a property. Generally, if you withdraw money from your own RRSP, the money will immediately become your income and you will be taxed, but if you are paying for the down payment, you can repay this amount in 15 years, you don't need to pay any taxes. For example, if you withdraw 50,000 from your account, this 50,000 will become your income this year, but if you are using it as a down payment, 50,000 can be repaid to this account in 15 years, without having to pay any taxes.

Home Buyer Tax Credit

In the year you buy the property, the federal government will give you an additional tax credit of 5,000. When you file your tax return, you need to state that you bought a property in Canada that year. This tax credit can only be used in every four years. So when you buy a property, you must tell your accountant.

HST Rebate

All new build property has HST included. If you are buying a new build property for your own residences use, you can apply for this sales tax rebate. So this tax refund is only applicable to the self-occupation. If you are investing or renting this property out, you cannot apply for this tax refund. If you want to get this tax refund, you have to be prepared. For example, if you buy a property, don't rent it out immediately, apply for this tax refund first. These things can be helped by a real estate agent, or an accountant.

Land Transfer Tax

In Ontario, when you buy a property, you need to pay this tax. The tax calculation method is based on the value of the property. If you are buying a property for the first time, this tax can be exempted from all or most of this tax. Discuss with your accountant or lawyer.

Foreign Buyer Tax

This is new in Ontario and is used to target foreign buyers. This tax will only be applied to foreign people. If you are applying for immigration, a politically protected person or a family, such as a wife in Canada, you are exempted. If you want to carefully determine the details, please discuss with some professionals in detail.

Non-Residences, or Foreign Investors

I just discussed with you some of the more common tax issues that you have to pay attention to when buying a property. Now I want to talk about foreign buyers or non-residences who want to invest in a Canadian property. There are several things to be careful.

Capital Gain Exemption

Starting from two years ago, if you are a non-residence in Canada, you will no longer have the right to the Capital Gain Exemption. Since 2015, the federal government has asked us to declare the record of buying and selling properties. If you forget to declare, the highest fine can be 8,000. This is to eliminate the abuse of this Capital Gain Exemption. Because when we declare, we will declare the purchase year, purchase price, and address of the house. So if we want to become a non-residence, it will not be able to claim the Capital Gain Exemption. 

Rental Income Report

If the foreign buyer invests in the property, the rental income is subject to the tax return. Generally speaking, there are two ways to choose to report the tax.

Method one, paying one quarter, ¼, of his total rental income to the tax, 25%. This method does not require any tax return filing. 

Method two, apply to the CRA to declare his rental income tax return every year. If you choose this plan, you must prepare your own rental tax return every year, and then pay the tax according to the Canadian tax rate. Because you are a non-residence, you only need to pay the federal tax and do not need to pay the provincial tax. Your tax federal tax rate is about 1.5 times comparing to the rate of regular Canadian. The difference for this method is that you can have expenses to offset the rental income, for example, you can use the property tax, loan interest to offset the income.

Both methods vary from person to person, depending on the individual's overall Canadian income and expenses on the rental. If you have a similar situation, please consult with an accountant to find out which method is more beneficial to you.

Then people might ask, what if I don't declare the rental income?? This question is very good, unless you are never selling this property. When you sell it, the government will come to recover the taxes and interest owed by you. I will discuss further the taxation of the sale and purchase of the property and I will tell you how they can recover the tax from you.

Gain from the Sale of Properties

As I have already said before, if it is a non-resident, there will be no exemption for property to the capital gain tax. When selling a property, if the real estate agent from buyer knows that the seller is a non-resident, they will inform the buyer, because for non-residences, CRA requested that one-fourth of the selling price to be submitted to the CRA. That is to say, if the price of selling a property is one million, 250,000 needs to be sent to the CRA by the buyer. This is the request of the CRA to the buyer and buyer needs to be fined if not completed. The 250,000 is not the actual tax. The CRA asks for this amount because they are concern that the owners of the property have other debts in Canada. During this period, CRA will check to make sure if the property owner had any balance payable to the CRA or if there is any income not declared in the previous year. When property owner file the personal tax return the year after the sale and CRA confirm no previous payable, the overpaid balance will be refunded. If the non-residences sells the property, the tax rate is 25% for capital gain.

Although the remitted amount is refundable but it is a large amount of money. So we usually recommend another method. We will prepare a Certificate of Compliance for the client. This certificate will be sent to the CRA and CRA will check back over the past years to make sure seller does not owe any tax to the CRA. I have already mentioned that if the owners have rent income every year in the past, but no income was declared, the government will notice during this process. For this reason, the government asks for such large number is to make sure any balance payable in arrears were co. If there is no debt, the CRA will accept this verification certificate. In this case, we can propose reduction this remittance to 25% of our estimated gain portion. We will submit all the estimated sales and purchase expenses of the property in this certificate, the value of the property itself. If CRA approves, we can reduce the remit amount. For example, if a one million property is sold, cost 800,000, gain will be $200,000 and ¼ is 50,000. Then after the completion of the sale, seller will file the tax return, and pay the difference between our estimated and actual. If we estimate more, we will get the refund. The deadline of filing the return is before April 30 the year after the year of sale.

Next time I can discuss with you what tax benefits and disadvantages would be if you used a company to buy a property.