Tax issues when buying Canadian real estate

U.S. residents often shocked by fees, red tape

It was a tweet that caught my eye.

Although I don’t know Robert Crowe, a Realtor with Re/Max Real Estate Services in Vancouver, he and I for some reason are Twitter buddies. Recently, he tweeted this: “Got an email from a U.S. client to sell a condo. Remember it takes up to 3 months for nonresidents to get a clearance certificate.”

I travel to Canada about two or three times a year and I always had this fantasy that I would buy a second-home condominium in a lovely mountain setting, in Canmore outside of Banff, or in Whistler, home to the 2010 Winter Olympics ski events.

I don’t suppose it will ever be more than a fantasy, but I keep an eye open just in case. That’s why Crowe’s tweet interested me. Was it more complicated for an American to buy real estate in Canada than it would be for an American to buy in the U.S.?

In a sense it is, because of tax issues. Any gain on the disposition of personal property in Canada is subject to taxation, which is levied in two parts: a withholding tax at the time of disposition and then a final calculation of tax as reported on the personal tax return.

The tax that trips everyone up, and the one Crowe cautioned readers about, is the withholding tax on the sale of property, which is a minimum 25 percent of the interim gain on the sale (based on selling price), and it’s paid by filing a form (T2062).

However, the folks at the Canada Revenue Agency are a suspicious group, very concerned that nonresidents may sell a property, take the proceeds out of Canada, and never pay any tax. Obviously, it would be difficult for the CRA to collect this tax from a nonresident who no longer has any assets in Canada.

The way the CRA enforces the collection of this tax is to transfer the obligation to pay the tax from the nonresident vendor to the purchaser of the property.

Unless the purchaser receives a signed declaration that the vendor is a resident of Canada or received a Certificate of Compliance, the purchaser will be liable for withholding tax at the rate of 25 percent of the selling price, and the purchaser’s lawyer must remit this withholding tax to CRA.

Obviously, the purchaser doesn’t want to be on the hook for this money, so the responsibility gets transferred back to the vendor.

“Our government wants to say, ‘Hey, if you bought a property up here and it has gone up in value, we want you to leave some tax money behind on the way out,’ ” Crowe said. “So, the government is going to require that you leave some money in a trust until all your taxes are filed and you paid enough. That’s a minimum 25 percent of the sale price of the property.”

Typically, the T2062 is filed when an offer on the property is made. However, you are dealing with a government bureaucracy, which might be even more inefficient than the Internal Revenue Service, and as Crowe points out, it takes as much as three months to get one of these pieces of paper.

So if I, as an American resident, bought a property in Vancouver for $300,000 and now want to sell it for $400,000, I would turn to Crowe, who would tell me he would list the property, but I pretty much have to have $100,000 (25 percent of $400,000) to be kept in a trust until a sale closes.

“We can close straight away on a sale, but the government is going to require your lawyer to hold back 25 percent of sale proceeds until you can prove how much of a capital gain you have made,” Crowe said. “If you don’t have $100,000, then the property can’t close until you get the Certificate of Clearance.”

The problem, Crowe added, is that a lot of nonresidents don’t find this out until they are about to close. “I had a situation recently where it came around to closing and the lawyer said, ‘You need to buck up $120,000.’ They had three days to get it,” said Crowe.

Do non-Canadian residents really and truly understand the expensive closing process in Canada? To find out, I checked-in with Sally Warner at Re/Max Sea to Sky Real Estate Whistler, who bills herself as Whistler’s No. 1 Re/Max agent.

In 2010, 8 percent of buyers in Whistler were Americans (Warner said about 5 percent of her clients in 2010 were Americans).

“Most of my American clients understand the process because I give them a document that discusses nonresidents buying in Canada,” Warner said. “I give it to them when they are buying, and I give it to them when they are selling. Most understand, but whether they all do, I’m not sure.”

In any case, she said, it doesn’t deter Americans from buying.

“Rather than grappling with Canadian documentation,” she said, “it’s easier to get someone else to do that for you, so I hook up clients with an accountant.”

Which is something else that Americans should know. They will need an accountant to get that Certificate of Clearance, and they need a lawyer, because there are no escrow companies in Canada. The lawyer will also do the closing documents.

The three most important things a non-Canadian should do before attempting to sell a condo in Whistler, Warner said:

1. Contact a Canadian accountant about the process of applying for a clearance certificate (Certificate of Compliance);

2. Find out what supporting documentation will be required so that it can be prepared and readied; and

3. Understand the lawyers will withhold 25 percent of the sales proceed until this certificate is acquired.

And oh, by the way, Warner also recommends working “with a good Realtor.”

Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, “After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade,” has been ranked as a top-selling real estate investment book for the Amazon Kindle e-reader.

40% of underwater borrowers took cash out of homes

CoreLogic: Owners with home equity loans more than twice as likely to be upside down

Homeowners with home equity loans are more than twice as likely to be “underwater” as those who didn’t take cash out of their homes, according to statistics compiled by real estate and loan data aggregator CoreLogic.

CoreLogic estimates that at the end of March, 22.7 percent of homeowners with mortgages — about 10.9 million borrowers — owed more on their mortgage than their home was worth. That’s down slightly from an estimated 11.1 million underwater borrowers at the end of December.

Falling home prices can put borrowers who have little equity in their homes underwater. By allowing homeowners to convert equity they have in their homes into cash, home equity loans reduce the cushion borrowers have against price declines.

CoreLogic said that 38 percent of borrowers with home equity loans were underwater at the end of March, compared with 18 percent of homeowners who had no home equity loan. More than 40 percent of all underwater homeowners (4.5 million) have home equity loans, CoreLogic said.

As might be expected, CoreLogic found that the presence of a home equity loan also increased the amount of negative equity. Underwater homeowners who had taken out home equity loans owed $83,000 more than their home was worth, on average, compared with $52,000 for those who hadn’t taken cash out of their home.

Past studies have shown that the higher a borrower’s combined loan-to-value ratio (CLTV), the more likely they are to stop making payments on their loan. In many cases, borrowers will opt for a “strategic default” — not because they can’t afford the monthly payments, but because they don’t believe their home will regain its value anytime soon.

CoreLogic found that borrowers with home equity loans were slightly more likely to default at “moderate” levels of negative equity, up to 115 percent CLTV. Beyond that point, the relationship reverses, and default rates were slightly higher among homeowners without home equity loans.

Among all underwater borrowers nationwide, the average amount of negative equity was $65,000. In states with higher-cost housing, the average was considerably higher. In New York, underwater borrowers had an average of $129,000 in negative equity, followed by Massachusetts ($120,000), Connecticut ($111,000), Hawaii ($98,000), and California ($93,000).

At the other end of the scale, underwater borrowers in Ohio had the lowest negative equity — $31,000, on average — followed by Indiana ($34,000), and Minnesota ($38,000).

Nevada led all states in the proportion of underwater borrowers — 63 percent of Silver State homeowners with mortgages owed more than their home was worth — followed by Arizona (50 percent), Florida (46 percent), Michigan (36 percent), and California (31 percent).

At the metro level, Las Vegas led the nation, with 66 percent of mortgaged properties underwater, followed by Stockton (56 percent), Phoenix and Modesto (55 percent), and Reno (54 percent).

Metropolitan markets located outside of the five states with the highest negative equity shares include Greeley, Colo. (38 percent); Boise (36 percent); and Atlanta (35 percent)

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Dominoes lined up for economic shakeup

Commentary: Startling data on loan delinquencies, Europe

 

 

Events European and domestic have conspired to push the Almighty Indicator to its lowest level in six months: the 10-year T-note has broken to 3.05 percent.

April data still arriving shows a substantial air pocket, which the usual suspects discount as the temporary effect of gasoline prices and supply-chain disruptions after Japan’s March 11 earthquake. There’s more to it than that: the Chicago Fed’s national index dropped from +0.32 in March to -0.45 in April, and -0.7 would signal new recession. First-quarter gross domestic product was widely expected to be revised up from 1.8 percent but was not, and the consumer spending account was revised down a half-point. Last week’s new unemployment claims were supposed to unwind a quirky rise, but popped up to 424,000.

The song on the broken record here: housing. April pending home sales tanked 11 percent (versus -1 percent forecast), down 26 percent year-over-year. The Federal Housing Finance Agency reported that as of March, homes in 47 states plus D.C. had lost value in the last year, and national prices are back to 2003 levels. Housing is not waiting for jobs; this economy cannot heal when the entire nation is worried about its most important asset.

Europe. To understand this moment in Europe, watch HBO’s new “Too Big to Fail.” The presentation is better than the book — better than any of the books or news shows describing the run-in to Lehman and AIG. The splendid cast nails the characters, and conveys the visceral fear that overtook each of these immensely powerful personae.

via inman.com

Home values are down 30 percent from their peak. And they could drop another 7-9 percent this year. Yet property taxes keep going up! Take action and get yours lowered in five easy steps:

Know the process

When it comes to assessments, every town is different. First stop: your local assessor’s office. Find out how they go about assessing properties, what forms you need to file and when the deadlines are for filing that appeal. You typically have 60 days or less from the time your annual assessment was mailed to lodge your appeal.

Get a property card

While at the town hall, get a copy of your property card. This contains all the info the assessor used in determining your home’s assessed value — home’s square footage, the number of bedrooms and bathrooms, and features such as a garage or finished basement.

Know the neighborhood

Here, we’re talking comps. You need to know what comparable homes have recently sold for. Comparable in terms of size, location, amenities and more. This is where Zillow comes in handy. Find at least 3-5 properties that are comparable to yours, and if you discover that yours is valued at least 5-10 percent higher, then you likely have a case.

Make your case

If you have evidence that your home is over assessed — and the National Taxpayers Union estimates that as many as 60 percent of properties are — ask that it be re-assessed. Are there mistakes on your property card? For example, are there math errors? Is your home classified as “commercial” even though it’s “residential”? Mistakes as these are common (the inaccuracy rates on these cards is between 30-50 percent, according to the NTU). They can be corrected on the spot and you can avoid a formal hearing altogether.

File an appeal

More than a simple math mistake? Think you have a legitimate case? Then file an appeal. While the rules for appeals vary from place to place, most appeals are submitted in written form to county boards with a statement explaining why you feel the evaluation is inaccurate. Support this claim with evidence (property cards and photos can be useful if comparing the condition of your home to others), and succinctly make your case, with your eye on the prize: one in three challenges results in a tax reduction and the average tax savings is $200-$5,000 a year, according to the NTU.