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5 Tax Tips for Real Estate Investing in Canada


Violet Anette 2016-08-03 11:00:00

Unless you have been living under a rock or you haven't been reading the newspapers, Canada's real estate market is really hot right now. It's one of the hottest markets in the entire world at the moment. From Vancouver to Montreal, from Toronto to Ottawa, it's hard to find a market in Canada that isn't experiencing double-digit gains when it comes to real estate values.

Well...except perhaps the Territories.

With Vancouver imposing a 15 percent tax on foreign property owners (which you may read more at Reuters), it's likely that other markets will greatly benefit from the West Coast city's latest measure. In other words, Toronto's 16 percent year-over-year increases could go up, especially with inventory volumes quite low.

These are all ingredients for one thing: a lucrative real estate investment opportunity.

Investors who want to take advantage of the sweltering hot market have plenty of options. And you have to grab those opportunities right because no one knows just when it will cool off.

But as you park your money in real estate investments in the Great White North, you have to be wary of taxes. That's right. Canadian investors aren't immune to taxation. Therefore, you have to tread lightly, you have to be aware of the various rules and regulations and you have to speak with an account to determine what your tax obligations are and what you can do about it.

Until then, here are five tax tips for real estate investing in Canada:

Documentation is Key for Deductions

If you didn't know this before then you probably should now: documentation is imperative for every step of the game. Whether you want tax deductions or you want tax shelters, documentation is the name of the game. Files, paperwork, documents are all part of this.

For instance, Canadians are permitted to deduct interest charges when they have a second mortgage, line of credit or separate loan to cover a part of the property's deposit or an array of operating expenses in relation to the property. Simply put: repairs, property taxes or utility costs can all be covered if you use the aforementioned monetary tools.

There's just one caveat: you need to have documentation to trace these payments. If you don't then you won't be able to deduct the interest from your tax returns in whatever year you file.

Flipping Properties for Capital Gains

A lot of Canadian investors think they can flip a house or other kinds of properties and then report the profit as a capital gain. However, capital gains are usually reserved for property incomes or businesses. This is because half of the capital gains is subjected to income tax. Indeed, a property sale can be ascribed to rental income generation, but it's normally left for capital gains.

Will You Depreciate or Not Depreciate?

Here is one term to become familiar with: Capital Cost Allowance (CCA). This is known as depreciation for income tax purposes. For additional information, learn more about the CCA at Investopedia.

This allows you to shelter your income from your real estate investments from current taxes. You accomplish this by transferring your key obligations to future tax years. For instance, by enabling the CCA, you can amortize a part of your rental property income against your rental income, which is roughly three to five percent.

Of course, this is an election and it is entirely up to you to employ or not.

Refinancing a Property You Own

Did you know you could face tax implications if you decide to refinance a real estate investment property in Canada? It's true.

If you move ahead with refinancing a property you personally own then the interest you paid on the loan may or may not be deductible. It all really depends on what you utilize the funds for. If it's to make a personal purchase then the interest can't be deducted. On the other hand, if it's money for real estate investment purposes then the interest will be deducted. Moreover, the funds you generate on refinancing will not be taxable.

Incorporating Your Property Business

This is a very tricky one, indeed!

Incorporating your real estate investment business will make sense in certain situations and not make sense in others. It really depends on an array of matters. This is why it is essential you speak with accountants, insurers, mortgage brokers, tax specialists and so on.

For the most part, your highest tax rate will be 46 percent, but it can be reduced by 20 percent if you have shareholders and you go through tax-favored treatments. See? It's all a matter of circumstances.

Investing in Canada's real estate market could net you a tremendous profit. At the same time, you have to weigh the pros and cons of such an investment and conclude if the potential hassles are worth the upfront capital and resources needed. Perhaps you're better off touching a REIT. If you are considering about investing in real estate, it might be advisable to consult with a professional company before making any decisions.

With that being said, if you have the funds and you see an opportunity then you should go for it. Just be careful of the endless list of tax implications at all three levels of governments in Canada.

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