Low corporate income taxes, a stable banking system, business-friendly laws, a fiscally prudent management and consistent economic growth are just a few of the advantages that, according to the government of Canada, have made Canada an attractive destination for investors. Real estate is a particularly popular option because Canada does not require real estate buyers to be citizens or even reside in Canada and provides tax incentives to investors. Not only that, investors can also claim certain tax deductions on their foreign property when filing their tax return in the United States.
One of the reasons the home mortgage interest deduction is so popular in the United States is how flexible it is. As long as you have an ownership interest in a property and appear on the mortgage, you can claim a deduction for the interest you pay on your main home and a second home, whether they are located in Tallahassee, Toronto or Timbuktu. Even if you're already claiming the interest on two home mortgages, you can still deduct the mortgage interest on foreign properties as a business expense as long as you purchased them for business purposes.
Interest Deduction in Canada
If you are investing in property in Canada, you will also need to file a tax return with the Canadian Revenue Agency. Canada doesn't have a home mortgage interest deduction. However, as a general rule, any interest you pay on money borrowed to invest in real estate is tax-deductible, as long as you use the property to generate income. For instance, any interest you pay on a loan used to invest in real estate for the purpose of generating rents, dividends, interest or royalties is deductible. However, If the only profit you can reasonably expect to receive from the property comes from capital gains when you sell it, interest is not deductible.
Fees and Expenses
Both the IRS and the Canadian Revenue Agency allow investors in real estate to deduct some of their fees and expenses. For instance, management fees for the purchase or sale of real estate are tax-deductible. The cost of property assessments, valuations and other consulting services are also tax-deductible. You can even claim the cost of paying someone to fill in and file your tax return, as long as you are receiving income from the property and paying for accounting services is a regular part of running your business.
Investment Tax Credits
Canada offers tax credits to individuals who invest in real estate used for particular industries and activities. These activities include farming, logging, fishing and manufacturing. To claim these credits you must fill in and file a Form T2038 (IND) with the Canadian Revenue Agency before 12 months have elapsed from the date your tax return was due. If your tax credits exceed your income, you may use the credits to reduce your tax liability in future years.
Foreign Tax Credit
The IRS allows taxpayers to deduct the taxes paid to another country on a foreign source of income, such as a property investment. This foreign tax credit is designed to minimize the double tax burden when the United States and another country, such as Canada, want to tax you on the same income. To qualify for this credit, the tax paid must be a legal and official income tax liability and you must be the person taxed, which means you can't claim taxes paid by a relative or a business partner.
- Invest in Canada: Summary
- Homebuyer.ca: Homepage
- Canada Revenue Agency: Line 221 Carrying Charges and Interest Expenses
- Canada Revenue Agency: Line 412 Investment Tax Credit
- Financial Consumer Agency of Canada: Deductions From Income
- IRS: Home Mortgage Interest
- Taxes for Expats: Foreign Mortgage Deduction
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