Do homework before buying abroad
Many people have dreamed about buying a second home outside Canada for recreational or investment purposes, or possibly a snowbird or retirement lifestyle.Most think of buying in the United States. Others think of Mexico or other countries. Some actually turn their dreams into reality. There are many examples of Canadians who have enhanced their quality of life immensely, through sound decision-making before buying and living abroad for up to six months a year.
Here are some tips to consider:
Selecting your piece of paradise
It is important to candidly determine your needs and wants in advance. For example, do you want to rent the property full-time, periodically, or not at all? How much time do you plan to spend at the property? What geographic location do you want and why? How easy is access to the area? What about weather considerations? What about the language or political issues if you are living in Mexico or another foreign country? What are the tax, insurance and health care considerations?
Determining the type of property is another issue. Do you want a house, a condo, possibly a time-share (no ownership or equity build-up) or maybe a fractional (shared ownership and equity interest) interest property? Do you want to live in an established resort area or off the beaten path? What about resale potential?
You can see why most people prefer to try before they buy by renting in the chosen area first.
Taxes can be taxing
This issue is very important. Whether you buy a home in the U.S., Mexico or in another country, there are tax consequences. For example, the country in which you own property will have tax policies dealing with rental of the property, sale of the property and could have an estate tax should the owner die. These tax laws can be very different than what you are accustomed to in Canada. For example, in the U.S., you are taxed on the value of the property on sale, whereas in Canada, you are taxed on 50 per cent of the gain from your original date of purchase.
In addition to taxing issues in the country of ownership, you also need to keep the taxman happy in Canada. The Canada Revenue Agency (CRA) requires you to annually declare your worldwide income and capital gains and pay taxes on them. Also, if you die and own property, whether inside Canada or outside, CRA would consider that a deemed disposition of an asset, which normally triggers capital gains tax.
Although there is a U.S/Canada Tax Treaty, that could provide a mutual foreign tax credit relief so that you are not double-taxed, or other exemptions, that is not a given. You need to have planned and structured your foreign property ownership carefully and strategically. In addition, there could be state taxes that are not covered by this tax treaty.
The net negative impact of the total tax consequences can be considerable, when owning real estate outside of Canada. You need to carefully assess this financial risk before purchase.
Get professional advice
Before you buy any real estate, you need to get expert advice. For tax issues in Canada, you need to get advice from a Canadian tax professional, such as a chartered accountant or certified general accountant with tax expertise. For U.S. or Mexican tax issues, you need to speak to a similarly qualified tax professional in the country concerned.
It is prudent to seek advice from more than one professional to make sure the advice is consistent. Here’s the type of advice you are seeking: how to strategically plan your tax affairs to legally avoid, minimize or defer tax.
The same caution applies to obtaining independent legal advice from a real estate lawyer in the country in which you are planning to purchase property.
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