Negative ROI, is this the reality of non-resident investors?

Question

While I'm waiting for my pre-approval, I'm starting to look up fourplexes and simulating numbers on Excel, seeing which are a good deal and which are not from the MLS.

Problem is that as a Canadian citizen but non-resident, I need to have a minimum of 35% downpayment from all banks and on top of it, a 25% withholding tax.

The downpayment I can handle if the returns are good, but the 25% withholding tax is taking all profits out. Maybe it's meant to be this way to discourage out of country investors?

The way I've tested it out is that I'd need to purchase a $1,000,000 property and somehow get $10,000 per month out of it just to get 6%...

Is there something I'm missing here, or it's meant to be this way? I can't seem to get the Cash-on-Cash ROI above 1% in the best circumstances...

Ignore "Total Interest Paying", I'm just comparing side-by-side all the banks I've contacted. The below image shows the bank which would provide the highest ROI.

Roy N. · Answer

Erik:

The double taxation one hears flaunted around is predominately myth.

The principal "catch" would be to determine whether you would be considered a Canadian or foreign owner.  If your were the sole shareowner and considered to be a foreign owner, tax considerations would be different than if the company were Canadian controlled.

You might have to form the company jointly with a associate/friend/relative who still resides in Canada for it to be of any advantage.

A company whose primary source of income is from passive versus active sources, does not enjoy the small business tax deduction and would pay income tax at the full corporate rate.  Depending on your personal tax situation, you may be better off holding property directly in your name ... your situation is further complicated by the fact you are not residing in Canada at the moment.

If you did hold properties in a corporation, the retained earnings (after the company pays its taxes) are traditionally not taxed in shareowners hands until withdrawn as dividends.   The current federal government is messing with this a bit which is likely to what your accountant was referring with "Taxes might be the same".

The other thing to consider - and discuss with your accountant - is the treatment of capital gains when you dispose of property.   There will be a difference in treatment by the CRA if you hold the property directly while living external to Canada.

Jay Hinrichs · Answer

on the sale of my BC home it was a normal transaction.. RCA just with held 25% of my sales proceeds and since I paid cash for that house it was a pretty big sum.. if you have a big mortgage not as critical.. thankfully it did not hurt my next move or purchase.

Erik Pilon · Answer

@Roy N., I was told by a real estate investor friendly accountant (investor himself) that he has all his properties under a company.

But I might be looking at double taxation if I decided to do the same. Even if I never take the cashflow out and just leave it within the company, “as it doesn’t matter what you decide to do with the profits. Taxes might be the same”

It was an initial consultation so didn’t have all the answers right away, but was just something to be aware of.

So I don’t know anymore...

Erik Pilon · Answer

@Jay Hinrichs, lawyer told me that if I do decide to sell while being non-resident, I’d have to wait up to 5 months for the CRA to clear the paperwork. They’re using a very slow and old system.

“No one will want to wait 5 months after an offer before you end up giving the keys. There would be some difficult hoops to go through if you decide to not be a buy & hold anymore”

Did you have to go through something like that as well?

Jay Hinrichs · Answer

I am not sure if this is germane but on the 25% tax withholding I ran into that when I sold my properties up in BC.. and of course I did not know that going into it.. never occurred to me..  but I got the withholding back as soon as I filed a Tax return in BC.. could it be the same with rental income.. withhold the tax and get it back or a credit annually as you file your returns ???  just curious.

Roy N. · Answer

@Erik:

In your instance, it may be worth looking into holding your property in a company and not extract any of the retained earnings until/unless you return to Canada.  I would have a chat with your accountant to see what would be a better tax strategy.