Welcome to this month’s installment of Dear Urbaneer where we explore the real estate questions we receive from prospective and existing clients. This time around, I’m helping a client who has been living abroad for some years, who intends on returning home to Canada. She and her partner have plans to start a business, and hope to purchase land that would allow them to live and work there.
After years of living abroad, we are keen to return back home. We have been incubating a business idea that would see us purchasing a piece of land. We would utilize the land for the business and also build a home there (possibly a tiny home because of ease and speed of construction). What do we have to know about approaching this project from overseas? Secondly, what do we need to know about financing and other considerations?
Signed, Hoping to Live off the Land
Dear 'Living Off The Land'.
How exciting! The prospect of starting a business and building a home is thrilling - but can also be daunting. Buying land, especially as a non-resident is a little more complex than a traditional house purchase, so you are wise to investigate the process and consider all of your options before you decide what your best course of action is.
Here are some essentials you need to know in advance of navigating the next steps!
What is “Non-Resident”?
Canada is happy to allow people from around the world to invest in real estate. Given our economic prosperity, our liveability and opportunity, Canada (Toronto in particular) is a major draw for property investors. In fact, Toronto is consistently ranked among the most liveable cities in the world. Click here to read, “Toronto ranked the 7th most liveable city in the world”.
However, investing in real estate as a non-resident or foreign buyer comes at an additional cost from a taxation point of view.
Quoting from the CRA’s definition of non-resident, you would be considered a non-resident, if:
· normally, customarily, or routinely live in another country and are not considered a resident of Canada
· do not have significant residential ties in Canada
· you live outside Canada throughout the tax year
· you stay in Canada for less than 183 days in the tax year”.
It is important to note that there is a different distinction from a bank’s point of view for financing. If you are a non-resident or expat living abroad for more than 183 days a year, you would be subject to the same financing criteria that a foreign buyer would be (we will get into what that criteria is below).
Non-Residents And Taxes
Real estate, of course is an investment, which will require you to pay taxes on any income/profits that you generate. For example, if you were considering property investment with the plan to rent it out, you would pay taxes on that income. You could also be subject to taxes when you sell your property.
Additionally, in Ontario (specifically in the municipalities listed here, which includes the City of Toronto) non-residents are required to pay a Non-Resident Speculation Tax of 15% upon purchase of a property.
Qualifying properties for this tax would contain at least one and not more than six single family residences. It does not apply to agricultural, industrial or commercial land. In your case, with your intention of purchasing land, it would depend on the nature and intent of your purchase. It’s best to consult with a lawyer for the accurate details around this, including possible exemptions from this tax. There are a number of exemptions for the NRST, including if one spouse is a foreign national and the other is a permanent resident and more. There are also rebates available.
The Liberals - who are the recently elected party steering the minorty-led Federal goverment - are considering implementing an additional speculation tax for non-residents, which was also a platform of the New Democrat Party whose support is necessary for The Liberal Party to implement their agenda. This was one of the Liberals’ election platform promises to win Canadians' votes, so we will wait and see if this comes to be. You should keep that on your radar as well. If you're interested in a synopsis of all the party platforms in regard to housing in our recent federal elecation, check out my post: The Federal Election And The Canadian Housing Market.
Getting Financing As A Non-Resident
From a lender’s perspective, the financial credibility of a buyer based on their net worth, the amount of their down payment, their financial well-being and the type and location of the property they're seeking to purchase, are each considered measures of risk. The greater the perceived risk, the more stringent the criteria a lender may seek in order to qualify the buyer and property, and potentially the higher the mortgage interest rate said lender might charge in order to mitigate against that risk and reduce the lender’s vulnerability.
As a result, when you are residing outside of the country there is a greater potential for risk, from the lender’s point of view.
For the purpose of financing, a lender defines a non-resident borrower as someone who doesn’t earn income in Canada (and therefore pay taxes in Canada). Whether or not you are a Canadian citizen doesn’t factor into this. Non-residents are subject to some different financing criteria when purchasing property in Canada. To provide more insight on this subject matter, we reached out to our partner in financing and mortgage broker Mortgage Jake for the details around these special circumstances.
Here is what he shared with us:
"Non-resident financing requires a minimum 35% down payment these days, and is subject to a full review of income, credit, and covenant. The buyer is essentially applying as though they are using their overseas income/debt profile, but in Canada. However, there are other options; if one were to approach a private lender, it's possible to get financing for a downpayment that's less than 35%. In fact, I could get a buyer financing for as little as 20% down, if they were living and working in the US at the time.
Conversely, if said Buyer were to move to Canada and then have full-time employment, they would have less stringent and more favourbale income requirements to qualify for financing. However, if the Buyer is self-employed (as it sounds like may be the case with this client's proposed business venture), they would be subject to providing two calendar years demonstrating proof of income. "
Buying Land Versus Buying A House
In addition to having to undergo more stringent criteria applying for financing as a non-resident, land purchases are also treated with more regulation than buying an existing dwelling or even the purchase of land for the purpose of building a house.
To purchase land, in most cases, one will require to make the purchase with at least a 50% down payment. The buyer should also anticipate paying a higher interest rate, in addition to incurring other fees.
Lenders perceive the purchase of land only as risky (and the purchase of rural land as riskier still, because the opportunity to resell in the event of borrower default is more challenging). Lenders also prefer land which has existing services to support a dwelling (i.e. a septic or sewer system, electricity, potable water, gas if available, and communication services like a phone line, etc.) which may or may not be present with the parcel of land one is considering.
What a buyer intends to do with the land purchase will also factor into the financing program. For example, if you are purchasing land with the intention of building a permanent dwelling, the lender's approach will include the future asset value of the house, not the land per se. Factors that will influence this include the size and features of the home, if it is accessible for all seasons (or how many) as well as the size of the acreage. In this case, lenders are essentially giving you a mortgage for the home (including the land) for a conventional construction. Down payment and other lending criteria could potentially be less than strictly buying vacant land, given that a house is much easier to sell than undeveloped land from the point of the view of a lender.
It’s also important to remember that the size of the land factors in here as well, if you're considering a rural property purchase be aware most conventional lenders prefer properties which have as much as 5 acres. If you are looking at an extremely large parcel of land, the entire area may not be considered for the purposes of financing, which could potentially be problematic,
Mortgage Jake shares a scenario that he recently experienced with a client: “Typically lenders finance a house plus 5 acres. That's the value. I had a deal where the land comprised a total of about 150 acres. The house and 5 surrounding acres had no water, but – way on the other side there was water and road access. And guess what? This didn't matter to the lenders, they would not take that into account at all.”
Furthermore, if you are considering a tiny home as a possible way to build a quick-and-easy place to live while you are establishing your business, there are additional considerations to take into account for that particular housing type from the point of view of a lender. A tiny home (which would likely be considered a pre-fab or mobile home) can be a challenge to receive traditional financing for as well, mostly because these types of homes can be more difficult to sell, should the borrower default.
Another challenge that you might face as a non-resident purchasing real estate may be arranging property insurance. Some insurance companies will not offer insurance to non-residents (particularly if they were to remain absent from the property). For those companies that do offer insurance to non-residents, chances are the buyer could be required to pay a higher premium.
If you are looking to purchase land only at this point in time, your lender may require you to purchase vacant land insurance. Sometimes land insurance is included with a homeowner insurance premium; sometimes it is not - and in this case one might be required to purchase it separately.
Enlist Experts For Due Diligence
As part of any buyers' due diligence, we recommend completing a property inspection. Prudent purchasing is your best bet to finding a site that suits you both today, and tomorrow. For those purchasing in an urban area, click here to read my post about What Is And Isn’t Covered In A Home Inspection.
It may seem straightforward when buying a piece of land, but there are a number of factors and influences that you should have assessed by a professional with a proper land inspection. No matter where or what you are purchasing, it's important you enlist the necessary local experts to guide you on the opportunities and constraints of any given property. A buyer should explore all of the factors that influence the highest and best use of a site, as well as those which can adversely impact its value or development potential including its topography, accessibility, proximity to Conservation Areas or noxious uses which could impact future value, in addition to what one can physically build based on zoning, permitting, and availability of services like access to a water supply, septic requirements, and the availability of utilities, etc. If any of these aren’t available, are they possible to install? What is the local authority's development designation (i.e. will this permit you to build what you want)? Are there easements or access roads? Is it on a flood plain, a fact which could influence insurance coverage?
If you miss any of these items, it could impact you significantly down the road, which is why enlisting professionals well-versed in all factors of a property is advisable.
Preparing For The Purchase
As with all property purchases, there are closing costs. I outline all the usual costs that you should prepare for when purchasing Toronto real estate in What are the Closing Costs for a Property Purchase?. Additionally, you should plan to have funds to pay the NRST if applicable.
It’s also worth mentioning that many banks and lenders require you to have your down payment on account well ahead of the closing date, so that they can do their required due diligence. It’s recommended your down payment is in a Canadian bank account at least 30 days prior to closing (all buyers are required to have a Canadian bank account). The lender/financial institution also needs to be able to trace the source of the funds for your down payment, typically for 90 days prior to deposit, but double check that with your lender/financial institution.
Here are some helpful articles about buying property as a non-resident: “Buying a Property in Canada”, “Non-residents buying & selling property” and “Ontario Imposes new 15% tax on Foreign Buyers of Residential Property”.
Good luck as you embark on your housing dream. There is certainly a lot to explore and consider when buying property as a non-resident. That’s why it is even more important when you are out of the country to surround yourself with a team of professionals who are experienced, knowledgeable and able to support you successfully towards your purchase, given the details and the potential complexities of these deals. Make sure to include a realtor, a mortgage broker and a lawyer experienced in these matters specific to the locations you are considering.
Are you consider the purchase of Toronto real estate? With an in-depth knowledge of our housing market drawn from decades of education and experience, the Urbaneer team and I are here to help!
Here are some of my past posts on Canadian Housing, some of which are embedded in links throughout the post:
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With a multi-disciplinary education in housing - and 27 years experience in the property market - I believe the search for a property requires engagement on every level, and bringing to your attention when a property is not your ideal.
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Thanks for reading!
-The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
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