Warning for Canadians with homes south of the border

Jamie Henry
Other

Canadians who like to spend the colder months of the year in the sunnier parts of the U.S. are being warned to watch out for the taxman. Advances in technology now make it even easier for the U.S. Internal Revenue Service to track so-called snowbirds, and if you rack up more than 182 days south of the border then they want your cash! The Financial Post reports that even an average of 120 days over a three-year period can attract the attention of the IRS. Those who fall foul of the taxman can expect a claim on their worldwide income and other penalties. Canadians are among the biggest foreign purchasers of U.S. real estate, but there may be fewer transactions this year due to the lower value of the Canadian dollar; unless of course it’s Canadians selling their property down south to cash in on the exchange rate.

NEW YORK — Canadians who normally head south of their border for warmer weather are keeping closer track of their time in the United States because if they stay too long, they could lose their Canadian health benefits and might owe U.S. income tax.

Just last year, the two countries implemented an agreement to scan passports and share the information, meaning that — unlike past years — America’s tax authorities now know exactly how long snowbirds are spending in warmer climes like Florida, California and Arizona.

And that has many worried Canadians monitoring their stay on American soil.

People like 74-year-old former TV producer Richard Simpson, who stays in Fort Myers, Florida, from the end of October through April, then heads back to Toronto.

“People have this fear in the back of their heads about playing it too loose, and spending too much time down here,” he said. “Whenever there’s a ‘Canada Night’ gathering, it’s the No.1 topic of conversation.”

The magic number is 182 days in a single year. More than that, and Canadians risk being considered a U.S. resident for tax purposes.

If Canadians overstay their welcome, they risk creating a U.S. claim on their worldwide income, getting barred from the country for five years and losing prized free healthcare, according to Dale Walters, the Phoenix-based chief executive officer of KeatsConnelly, a financial planning firm that specializes in cross-border issues.

Even less than 182 days, though, and they still might meet what the U.S. Internal Revenue Service calls its “substantial presence” test. It is a complicated formula, but if snowbirds spend more than roughly 120 days per year in the United States over a three-year period, the IRS starts getting interested in them.

“The technology has finally gotten to the point where they can track border crossings easily,” said Walters. “Snowbirds are very aware of this. Some of them have become pretty paranoid about it.”

But the lure of a warmer climate can be very powerful indeed. Canadians purchased U.S. properties worth $13.8 billion in the 12 months leading up to March 2014, according to a report from the National Association of Realtors.

That makes for 15% of all international sales. Canadians’ favourite spots, perhaps not surprisingly: Florida, Arizona and California, making for almost three-quarters of all their purchases.

More than 500,000 Canadians own real estate in Florida alone, according to BMO Financial Group, whose Annual Snowbird Outlook — issued last October — predicts continued gains for snowbird homeowners.

CURRENCY BETS

The pace of those home purchases will likely slow, thanks to a falling Canadian dollar that has seen the loonie sink to around 80 U.S. cents. For those who have already purchased in the United States, the combination of rising real-estate prices and a U.S. dollar-denominated asset has proved to be a clever hedge indeed.

“For Canadians who bought a couple of years ago, they have already gained 20% on the rising U.S. dollar alone,” says Sal Guatieri, senior economist at BMO Capital Markets. “At the same time, home prices in many areas also rose double digits. So it was an excellent time to buy.”

Compared to record-high Canadian real estate in hot markets like Toronto and Vancouver, housing in the American sunbelt is still attractively priced, the BMO report notes.

So how can snowbirds avoid running afoul of the authorities, and not jeopardize their Canadian status or attract the scrutiny of the IRS?

Many have been tweaking their calendars already, says KeatsConnelly’s Walters. While typical snowbirds used to return to Canada in April, he says, many have now shifted earlier to March.

Some, like Simpson, throw some cruising into the mix to pad their schedules. Since a March or April return to Canada can still be on the chilly side, Simpson sometimes leaves Florida to keep under the 182-day limit, but then takes an international cruise until things warm up.

Also, know the letter of the law. Even if snowbirds meet the IRS’ “substantial presence” test, for instance, they can still fill out the agency’s Form 8840. It asserts closer connections to Canada, and should stave off any potential problems.

Finally, when crossing the border, Walters advises that snowbirds come equipped with a “border kit” that proves Canadian residency in multiple ways — things like utility bills and property-tax statements.

As for Richard Simpson, he does not regret leaving his homeland behind, at least for the coldest parts of the year. “Whenever I see the Canadian weather on TV, I think, ‘Thank God I’m here in Florida — and thank God I’m wearing shorts.’”

© Thomson Reuters 2015

Jennifer Paterson
Other

Real estate investors should be prepared for the tax authorities, as the Canada Revenue Agency and Revenue Quebec may be scrutinizing GST/HST and QST compliance areas relating to the real estate sector in 2015.

KPMG issued a tax warning last week advising companies in the real estate industry that the tax authorities are expected to focus their audit reviews on the following types of entities:

1. Nominee corporations or bare trusts in joint-venture arrangements, including those that took advantage of a temporary administrative tolerance period.

The policy, which some participants in joint ventures were able to benefit from on a temporary basis, was available for the reporting period ending on or before December 31, 2014. With its expiry, KPMG expects auditors to focus on this area in 2015.

“Organizations that complied with the policy by implementing changes to their joint-venture arrangements and GST/HST and QST reporting obligations may want to review any underlying documentation and test the new processes,” said KPMG.

2. Certain other nominee corporations or bare trusts that account for GST/HST and QST.

The temporary policy did not apply to GST/HST and QST accounting in other structures involving nominee corporations or bare trusts. For example, where a single beneficial owner of a commercial property registers the title in the name of a nominee corporation or bare trust, the administrative policy is that the owner should register for purposes of the commercial activities relating to the property and account for the GST/HST and QST.

3. Partnerships, real estate investment trusts (REITs) and entities with agency agreements where the wrong entity may be accounting for tax or there is a lack of supporting documentation.

Different GST/HST and QST rules apply to various types of entities, structures and legal relationships. KPMG added: “To help protect yourself against indirect tax challenges, partnership, REITs and agencies should ensure that the proper entity is accounting for tax and that all supporting documentation is in place.

4. Real estate companies that must meet documentation requirements to support relationships, valuations, input tax credits, and transfers of rebates.

There are numerous circumstances where the CRA and Revenue Quebec will deny a real estate company’s ITCs and ITRs based on a failure to meet the documentary requirements. Because this is a significant compliance issue in the real estate industry, where purchase invoices may be in the name of an agent or buying representative, it is an area often targeted by auditors.

Copyright © 2015 Key Media Pty Ltd

Jennifer Paterson
Other

While the Bank of Canada’s interest rate cut has been praised for opening the real estate doors to a new crop of first-time buyers, many experts are actually seeing would-be buyers stay put in the rental market, which is great news for investors.

“We are seeing a trend towards first-time buyers foregoing condo purchases and saving up to buy a single-family home,” said Randy Dyck, an investor and real estate agent at Eximus in B.C.’s Fraser Valley.

Skipping over a condo purchase, that typical first rung on the property ladder, to save longer for a larger home still means that renters will eventually convert into homebuyers, but it keeps them in the rental pool just a little bit longer.

“I prefer to see clients rent and save for a house,” said Sarah Daniels, a Realtor at Bay Realty in Vancouver. “First-time buyers need to try to get more bang for their buck. I would recommend they rent longer and save.”

The rental market in the Greater Toronto Area has been very good to investors, added Erwin Szeto, a sales representative at Rock Star Real Estate. “This is largely thanks to immigration and in-migration, so demand from renters and buyers is increasing.”

But with these new Canadian families, rising house prices and rent increases, the GTA has become less affordable, so renters are moving to cities in the surrounding areas, where it is still affordable to rent.

“In Hamilton, my investor clients are reporting limited vacancy for houses and apartments and our rents have been consistently climbing,” added Szeto.

“Our typical rent-to-own starter homes commanded $1,500 to $1,600 three years ago and today we are seeing $1,750 to $1,850 in Hamilton.”

Copyright © 2015 Key Media Pty Ltd

Jennifer Paterson
Other

The number of homes being bought and sold in Alberta is forecasted to plummet in 2015, according to a report by RBC, but this decline is great news for investors in the province.

“There is fear in the marketplace and since most people only read headlines, they won’t understand that all this means is that not as many houses will move hands,” explained Tiffany Young of AlbertaOnFire Investor Team.  

The Royal Bank of Canada revised its 2015 forecast on Monday, in light of plunging oil prices, the Bank of Canada’s surprise interest rate cut and the substantial depreciation in the Canadian dollar.

It forecasted that, in Alberta, the number of homes being bought and sold will drop to 60,500 in 2015, from 71,800 in 2014, a decline of 16 per cent and the biggest since a 12 per cent drop in 2008.

The bank predicted that house prices in Alberta will fall 0.5 per cent to an average of $370,600, the most since a 6.5 per cent drop in 2009.

“If you look closer, [RBC] says they don’t know if it will result in lower prices and, if it does, [it] only expects a 0.5% drop,” added Young. “This means that the general market will be afraid, but as investors we know it won’t affect home prices very much. Homeowners looking to sell will be a little more motivated to give us terms and conditions we want.”

The revised forecast does show a slight increase, of 1.7 per cent in overall home resales in Canada, to 489,500 units in 2015, despite the notable declines expected in Alberta (16 per cent), Saskatchewan (nine per cent) and the Atlantic region (one per cent).

RBC expects gains in British Columbia (10.5 per cent), Ontario (4.7 per cent) and Quebec (3.4 per cent).

“The revision mainly reflects the lower anticipated trajectory for interest rates, which we believe will continue to stimulate homebuyer demand in net oil-consuming provinces in 2015,” senior economist Robert Hogue said in the report.

“On the other hand, the downgraded oil price assumptions for 2015 are seen to weigh more significantly on economic growth and housing demand in Alberta, Saskatchewan, and Newfoundland and Labrador.”

The report also stated that the housing outlook for 2016 remains challenging. It said it continues to anticipate a rise in interest rates, which would contribute to deterioration in housing affordability and weigh on housing demand.

“The trend for 2015 will be uncertainty,” said Wayne Weum, an investor based in Edmonton. “Investors need to do their due diligence, focus on the endgame and hunker down for the long term.”

Copyright © 2015 Key Media Pty Ltd

Micro Condos Will Face Their First Real Test In Canada This Year, Experts Say

Jamie Henry and Alexandra Posadzk
Other

This year may come to be known as “the year the micro condo really took off.” With more single people wanting homes and higher prices making some of our cities unaffordable for single income and low income households, small may prove to be a beautiful solution. Demand is being driven by investors who see an opportunity to add the small but perfectly formed homes onto the rental market, targeted at young professionals who spend most of their lives at work or socialising and are happy to come home to 500 square feet of living space. Shaun Hildebrand of Urbanation told The Huffington Post that the return on investment is often better for micro condos than the rest of the market with rents of $3 per square foot rather than around $2.60. He said that, while the potential for a micro-condo boom will be watched closely, it won’t become a reality until the units are more widely available: “Sometimes we don’t know how strong demand is until we’re shown the supply.” Mortgages are not easy to secure for small units currently which may limit the growth of the sector to cash buyers, however those with equity in other properties may be tempted into the market.

TORONTO – The appeal of so-called shoebox condos — no larger than the size of two average living rooms — will face its first real test in Canada this year, with an influx of the compact homes set to hit the country’s largest real estate market.

Investors are betting on big returns from young renters who can’t afford to buy in the red-hot real estate market and don’t mind living in a unit, about 500 square feet, where their dining table might have to fold down into a bed.

Although developers are pitching micro condos as an affordable entry point into the market, brokers say it’s mostly investors – catering to a demographic of young professionals increasingly flocking to the downtown core – that’s driving demand.

TORONTO – The appeal of so-called shoebox condos — no larger than the size of two average living rooms — will face its first real test in Canada this year, with an influx of the compact homes set to hit the country’s largest real estate market.

Investors are betting on big returns from young renters who can’t afford to buy in the red-hot real estate market and don’t mind living in a unit, about 500 square feet, where their dining table might have to fold down into a bed.

Although developers are pitching micro condos as an affordable entry point into the market, brokers say it’s mostly investors – catering to a demographic of young professionals increasingly flocking to the downtown core – that’s driving demand.

Micro suites tend to fetch higher rents per square foot than larger units, as many renters are willing to live in a slightly smaller space in order to save a bit on costs and live closer to the city core.

Shaun Hildebrand, vice president of condo research firm Urbanation, says condos under 500 square feet can bring in well over $3 per square foot, while the rest of the market averages around $2.50 or $2.60.

There are nearly 3,000 micro condo units under construction in Toronto that are slated to be completed this year, Hildebrand says. If investors snatch them up, that could spur developers to build more of the micro units to satisfy demand from investors.

“This is something that the market and developers are going to be paying very close attention to in 2015,” Hildebrand said. “Sometimes we don’t know how strong demand is until we’re shown the supply.”

The challenge comes in securing a mortgage for the micro units. Brokers say Canada’s five biggest banks are hesitant to provide financing for units below a certain minimum square footage, concerned that investors will sell off the properties if the housing market starts to slide.

“If there’s a downturn in the housing market, is the lender going to be able to sell and recover the mortgage financing they provided?” said Christopher Molder of Axess Mortgage.

“Because these units under 500 square feet are relatively new, no one’s tested the market to see how desirable they are.”

The major banks say the size of a property is only one several factors in the decision to offer financing.

“There are minimum square-footage guidelines that vary market to market, but the most important factor is the condo’s marketability,” CIBC spokeswoman Caroline Van Hasselt said in an email.

Marketability is determined by factors such as the building’s location, whether the unit has a separate bedroom and whether it comes with a parking spot.

Marcus Tzaferis, the founder of mortgage brokerage MorCan Direct, says some buyers end up turning to credit unions or private lenders who charge higher interest rates.

It’s not only the banks that are leery of micro-living. In Vancouver, city bylaws dictate that condo units can be no smaller than 398 square feet, although city council has occasionally loosened the restriction down to 320 for rental-only units.

Jon Stovell, president of Reliance Properties, would like to see the restrictions scrapped.

“Vancouver has this tremendous affordability problem and yet the city of Vancouver has just gone completely tone deaf to these needs,” the developer says. “They’re keeping a lot of young people out of the market.”

Stovell has proposed a development at Davie and Hornby Streets that would feature a number of “nanosuites” measuring under 200 square feet. But the proposal is mired in bureaucracy, as the city decides whether the units, which fetch higher rents than larger spaces do, could drive up land values, and exacerbate Vancouver’s affordability problem.

Vancouver and Toronto were identified as among the most unaffordable real estate markets in the recent international Demographia International Housing Affordability Survey. In Vancouver, the report said the median home price was $704,800 while, Toronto, it was $482,900.

Latif also wants to ensure that any communities where micro condos are built have the services needed — from parks to libraries to late-night coffee shops — to support a population of condo-dwellers who will be spending a lot of their time outside of their homes.

“It’s about making sure you’ve got a vibrant community around you that can support you living in a smaller unit,” he says.

Copyright ©2015 TheHuffingtonPost.com, Inc.

Jennifer Paterson
Other

Agents with big-budgeted investor clients are wise to make some friends south of the border, as Canadians increasingly look to the U.S. for investment opportunities – despite the declining loonie.
 
According to new research by CBRE, Canada remains the unrivaled global investor in U.S. real estate with nearly US$10 billion, or 26 per cent, in direct investments in 2014, ahead of Norway, China, Japan and Germany.
 
“Canadian investors find U.S. real estate attractive for many of the same reasons that other countries do,” said Ross Moore, CBRE’s director of research for Canada. “The U.S. offers opportunities for value creation, healthy cash flows and favorable risk-adjusted returns.”
 
And 2015 has been no different. As of mid-January, Canadian investors have already transacted a US$2.75 billion in U.S. real estate.
 
Canadian real estate investment in the U.S. was the third largest cross-border capital flows in the world in 2014, following the U.S.-to-United Kingdom and Hong Kong-to-China capital flow.
 
“The level of Canadian investment is highly correlated with the health of the American economy and exchange rates, but the overriding motivation is that Canadian institutional investors need to look beyond their borders to find product and achieve greater diversification,” added Moore.
 
For all property types combined, New York is the leading destination for Canadian real estate capital, followed by Boston and Broward County in Florida, which made the list due to a significant hotel acquisition.
 
Chris Ludeman, global president at CBRE Capital Markets, said: “While we have seen rapidly rising Chinese global investment and oil-rich countries in the Middle East or Norway increasing their allocations to global real estate, Canadian buyers continue to dominate foreign investment in the U.S. and should remain on the radar screens of American investors and owners of U.S. real estate.
 
“Canadians, other global investors and Americans share the same challenge: finding attractive opportunities with reasonable pricing that can produce a favorable risk-adjusted return. That said, we expect the investment climate to remain brisk and U.S. volumes will continue rising in 2015.”
 
Look out for the February/March issue of Canadian Real Estate Wealth magazine, which will feature a full report on investing in the U.S. residential real estate market.

Copyright © 2015 Key Media Pty Ltd

Other

On the heels of huge numbers for home sales in the Okanagan last year, the first month of 2015 seems to have cooled off, according to Castanet.net. The Okanagan Mainline Real Estate Board reported that January sales activity declined 15 per cent compared to the same month in 2014. “While demand typically slows in January, Okanagan-Shuswap home sales declined more than expected after the steady upward trend and solid end to 2014,” says Darcy Griffiths, OMREB President.

 

Realtors cleaning up on storage real estate

Self-storage is becoming a hot commercial real estate sector, with many B.C. properties seeing as much as a 90 per cent occupancy levels and per-square-foot rents that can surpass that of a condominium, according to an article on Business in Vancouver.  In Metro Vancouver, the rent for a 100-square-foot self-storage unit ranges between $1.84 and $2 per square foot, which, according to an Urban Analytics study, is equal to a typical condo rent in Burnaby or Richmond. The venture represents a simple, but effective investment tool for investors and is providing realtors with an opportunity for added growth.

 

MLS sales drag in Calgary

The Calgary Real Estate Board (CREB) reported sales in the city last month were the lowest in five years because of falling consumer confidence brought on by low oil prices and a shifting outlook in the energy sector. “Economic conditions this year are expected to be weaker than original estimates provided in December 2014,” said CREB chief economist Ann-Marie Lurie. “This change is partly connected to continued low energy prices, which impact consumer confidence. A lack of recovery in oil has many concerned about their employment status and this concern is reflected through the weaker sales activity in Calgary’s January resale figures.” Total sales in Calgary in January were down 39 per cent year over year, led by apartment sales, down 41 per cent, attached homes, down 40 per cent and single-family homes, down 38 per cent.

Copyright © 2015 Key Media Pty Ltd

Jennifer Paterson
Other

Investors who have noticed a lack of inventory in many Canadian cities will not be reassured by new figures released by the Canada Mortgage and Housing Corporation (CMHC) today.

Following its forecast last week that housing starts would fall by one per cent in 2015, CMHC’s figures for January 2015 show housing starts in Canada have dipped to 188,956 units, compared to 191,627 in December.

In its forecase for 2015, the organization said it expected housing starts to fall to a range between 154,000 and 201,000 units. In 2016, it expects housing starts to stagnate between 148,000 and 203,000 units.

“The trend in total housing starts has been moderating since September 2014, reflecting lower trends in both multiple and single-detached starts,” said Bob Dugan, CMHC’s chief economist.

“Overall, economic and demographic factors remain supportive of housing demand. The moderation in new home construction reflects inventory management by builders and is in line with CMHC’s expectations.”

CMHC also released its seasonally adjusted annual rates (SAAR), which were up slightly, from 179,637 units in December to 187,276 in January.

The increase was led by multiple urban starts, which increased to 115,008 units in January from 102,384 in December, while single-detached urban starts decreased to 57,314 units from 59,556.

Urban housing starts saw relatively large gains in Atlantic Canada and the Prairies, while urban housing starts registered a modest gain in Ontario and declines in British Columbia and Québec.

Copyright © 2015 Key Media Pty Ltd

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Russell Westcott
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