How to Buy a House in Canada as an American

Buying a home in Canada as an American involves navigating specific legal, financial, and tax considerations. While the process shares similarities with domestic property acquisition, understanding the nuances for non-residents is essential for a smooth transaction. This guide offers a comprehensive overview to assist Americans in purchasing residential property in Canada.

Understanding Eligibility and Regulatory Framework

Non-resident status in Canada refers to individuals who do not reside in the country for tax or immigration purposes. Generally, non-residents, including Americans, can own property in Canada. However, property ownership does not automatically grant Canadian residency, citizenship, or the right to live in the country permanently; separate immigration processes are required for extended stays.

A significant piece of legislation impacting foreign buyers is the “Prohibition on the Purchase of Residential Property by Non-Canadians Act.” This federal ban, effective January 1, 2023, was extended on February 4, 2024, and is now set to remain in effect until January 1, 2027. Exceptions to this ban include temporary residents meeting specific criteria, or properties located outside of census metropolitan areas (CMAs) and census agglomerations (CAs).

Beyond the federal framework, some Canadian provinces have implemented their own restrictions or taxes on foreign buyers. For instance, Ontario levies a Non-Resident Speculation Tax (NRST) of 25% on foreign nationals purchasing residential property anywhere in the province. Similarly, British Columbia imposes an additional foreign buyer property tax of 20% in specific designated regions. These provincial taxes are typically applied in addition to the general land transfer tax.

For tax purposes, non-residents may need a Canadian Individual Tax Number (ITN). This nine-digit identifier is issued by the Canada Revenue Agency (CRA) to non-residents who must file a Canadian tax return or report Canadian-sourced income, such as rental income or proceeds from selling taxable Canadian property. Applying for an ITN involves completing Form T1261 and submitting it with supporting identification documents. Apply for an ITN early, as processing can take several weeks.

Navigating Financial Requirements

Securing a mortgage in Canada as a non-resident American involves specific requirements that differ from those for Canadian citizens or permanent residents. Canadian lenders typically require a significantly higher down payment from non-residents, often 35% or more of the purchase price. This higher equity contribution helps mitigate the increased risk perceived by lenders when dealing with foreign borrowers.

Lenders will require extensive documentation to verify income and financial stability, including at least two years of U.S. tax returns, bank statements, employment letters, and credit reports. Demonstrating a stable income source, even if from the U.S., is a key factor in mortgage approval. It is also necessary to open a Canadian bank account to facilitate the transfer of funds for the down payment, closing costs, and ongoing property expenses.

The exchange rate between the U.S. dollar (USD) and the Canadian dollar (CAD) can impact the overall cost of a property, as fluctuations affect the amount of USD needed for the CAD purchase price and associated costs. Monitoring exchange rates and potentially using specialized currency exchange services can help manage these fluctuations. Having funds readily available in Canadian dollars in a Canadian bank account demonstrates financial readiness to lenders.

Obtaining mortgage pre-approval is an important step for non-residents. This process involves a lender assessing financial documents and determining the maximum mortgage amount for which a buyer qualifies. Pre-approval provides a clear understanding of purchasing power and signals to sellers that the buyer is serious and financially capable, streamlining the property search and offer process. Not all Canadian banks offer mortgages to non-residents, so it is beneficial to work with lenders specializing in this area.

The Property Acquisition Process

Once financial preparations are complete, the process of purchasing a property in Canada begins. The first step involves finding a real estate agent with experience assisting non-resident buyers. A knowledgeable agent can provide valuable guidance on local markets, property types, and specific regulations for foreign purchasers.

After identifying suitable properties, the process moves to making an offer. A typical Canadian offer to purchase includes various conditions, such as securing financing and a satisfactory home inspection. These conditions allow the buyer to withdraw from the agreement without penalty if certain criteria are not met. A deposit, usually a percentage of the purchase price, is generally required when submitting an offer.

Due diligence is an important phase, involving a thorough investigation of the property. This includes arranging for a professional home inspection to identify any structural issues or necessary repairs. A lawyer conducts a title search to ensure clear ownership and uncover any encumbrances or liens. Additionally, checking local bylaws and zoning restrictions is important to understand permissible property use.

Hiring a Canadian real estate lawyer is important for the acquisition process. The lawyer plays a central role in reviewing all legal documents, conducting necessary searches, and ensuring compliance with provincial and federal regulations. They facilitate the transfer of funds and the registration of the property title. The lawyer will also guide the buyer through the closing process, which involves finalizing all aspects of the sale.

Closing costs are an important consideration and typically include legal fees, disbursements, and land transfer taxes. Land transfer taxes vary by province and can be a significant expense, with some provinces also imposing additional foreign buyer taxes. Other adjustments may include prorated property taxes and utility charges. The closing process culminates with the signing of final documents, the transfer of funds, and the buyer receiving the keys to the new property.

Ongoing Tax Obligations

Property ownership in Canada entails various ongoing tax responsibilities for non-residents. All property owners are subject to annual municipal property taxes, which are assessed by local governments and contribute to funding public services. These taxes are typically calculated based on the property’s assessed value and vary by municipality.

If the property is rented out, non-resident owners are subject to Canadian income tax on their rental earnings. Under the Income Tax Act, a non-resident withholding tax, generally 25% of the gross rental income, must be remitted to the Canada Revenue Agency (CRA). However, non-residents can elect under Section 216 to file a Canadian income tax return, allowing them to pay tax on their net rental income after deducting eligible expenses, rather than on the gross amount. If this election is not made or approved, a Canadian agent or the tenant is required to withhold and remit the tax.

Upon the eventual sale of the property, non-residents are subject to Canadian capital gains tax on any profit realized from the sale. Capital gains are generally taxed at half the individual’s marginal tax rate. An important requirement for non-resident sellers is obtaining a Certificate of Compliance, often referred to as a Section 116 Certificate, from the CRA. This certificate confirms that the seller has paid or made arrangements to pay the applicable capital gains tax. Without this certificate, the buyer is legally obligated to withhold a significant portion (typically 25% or 50%, depending on the property type and sale price) of the gross proceeds of sale and remit it to the CRA, which can severely impact the seller’s cash flow.

The Goods and Services Tax (GST) or Harmonized Sales Tax (HST) generally applies to the purchase of newly constructed residential properties and substantially renovated homes. Resale residential properties are typically exempt from GST/HST. Non-residents may also need to file specific Canadian tax returns, such as a T1 return for the Section 216 election related to rental income, or Form T2062 for the Section 116 Certificate related to property disposition. Understanding these tax compliance requirements is important to avoid penalties and ensure adherence to Canadian tax laws.