Canada: Overview

RENTAL YIELDS

Last Updated: Nov 26, 2008

Toronto and Montreal yields hold steady

We find that condominiums in Toronto have yields of around 6.3%, which is just slightly lower than 2007 Global Property Guide yields research results. Larger units still tend to have higher yields, reaching up to 6.48%.

Montreal apartments are less expensive to buy at around US$383,200 for a 120 square metre (sq. m.) property, versus around US$478,000 in Toronto. Gross rental yields are slightly higher in Montreal (by 1.08%), so that an average apartment yields around 7.4%. Yields are higher for smaller apartments, unsurprisingly - 55 sq. m. apartments have average yields of around 8.59%, according to Global Property Guide research.

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TAXES AND COSTS

Last Updated: Dec 03, 2008

Taxes are generally high

Effective Tax Rate on Rental Income
Monthly Income	US$1,500	US$6,000	US$12,000
Tax Rate	14.9%	11.3%	8.1%
Click here to see a worked example
Source:			Disclaimer

Rental Income: Gross rental income is subject to a fixed 25% tax, withheld by the tenant. However, non-residents can elect to pay under the section 216 of the Income Tax Act, wherein they will be liable to pay tax on their net income at the progressive federal tax rates. Non-residents electing under section 216 are also liable to pay 48% surtax.

Capital Gains: Only 50% of the capital gains are liable to tax. Capital gains are computed by deducting the costs incurred in selling and purchasing the property, capital expenditures, and such costs as additions and improvements in the property.

Inheritance: There is no inheritance or estate tax in Canada.

Residents: Canadian residents are subject to Canadian income tax on their worldwide income. Income is taxed at the federal level and at the provincial level.

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BUYING GUIDE

Last Updated: Jul 02, 2007

Transaction costs are usually low

Total costs and taxes for buying properties amount to around 4.7% to 11% of the value of the property. Transfer Tax differs in each province, ranging from 0.5% to 2%. Typically, real estate agent's commission is 7% on the first CA$100,000 of the sale price and 3% on the remainder, plus 6% Goods and Services Tax (GST). Total roundtrip costs are higher for new and renovated houses because of the additional 6% GST.

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LANDLORD AND TENANT

Last Updated: Feb 06, 2008

Tenant protection laws are strong

Canadian tenancy institutions are pro-tenant.

Rent: The initial rent can be freely negotiated in all provinces, except in some provinces like Quebec, where initially negotiated rents can be appealed if they are higher than a rent charged by the same landlord for the same apartment within the previous 12 months.

Tenant Security: The contract cannot be terminated by the landlord within the duration of the fixed-term lease (usually one year), except for cause (e.g., tenant's non-payment of rent, tenant conducting illegal activity, and so on).

Subleasing needs a written permission from the landlord but this permission may not be unreasonably withheld. However, the landlord can insist on screening the prospective new tenants and may reject them on the basis of financial risk.

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ECONOMIC GROWTH

Last Updated: Sep 29, 2009

The Canadian economy is still struggling

Canada is the world’s second largest country in terms of land area (9.9 million sq. km.) after Russia. However, its population of 32.3 million is only about a fifth of Russia’s, making Canada one of the least densely populated countries in the world. Canada has a GDP per capita of around US$45,000 in 2008.

After three consecutive quarters of declining GDP, Canada’s economy is still struggling. The economy has been dragged down by the economic turmoil in the US, its largest trading partner.

Canada’s real GDP growth rate rose by a mere 0.5% in 2008, due to declines in the manufacturing, automotive and financial sectors, a sharp drop in exports and reduced residential investments. From 1992 to 2007, the average GDP growth rate was 3% p.a..

     • In Q4 2008, the economy slid into a deep recession, as GDP contracted at an annualized rate of 3.4%.
     • In Q1 2009, GDP plunged 6.1%, the biggest drop on record.
     • In Q2 2009, the Canadian economy contracted further by 3.4%.

The economy posted positive growth of 0.1% in June 2009, the first monthly increase since July 2008. Despite this, Canada’s growth outlook remains gloomy because of weak exports, which amount to 40% of Canada’s GDP. In 2009, the economy is projected to contract by 2.3%, as exporters continued to struggle to find markets.

Any further recovery in the housing market, if not backed by a recovery in exports and other vital sectors like the automobile and oil industries, is expected to have a muted impact to the overall economy.

Rising unemployment is also a major concern. In August 2009, the country’s unemployment rate rose to 8.7%, the highest level since January 1998, according to Statistics Canada.

Canada is projected to run very large deficits until 2015, according to Finance Minister Jim Flaherty. In 2009, the overall deficit is expected to hit CA$55.9 billion (US$51.7 billion), mainly due to increased unemployment benefit claims, slowing export revenues, and the auto industry bailout.

To tame inflationary pressures, the Bank of Canada (BoC) raised key interest rates to 4.5% in July 2007, from 4.25% (unchanged since May 2006). However, in 2008, the BoC reduced key rates six times, from 4% in January to 1.5% in December, following interest rate cuts in the US. Then in 2009, the target rate was reduced again three times to a record low of 0.25% in April
The BoC intends to hold this rate until end of second quarter of 2010, conditional on the outlook for inflation levels.

Mortgage interest rates have followed these rates down.

     • The 1-year conventional mortgage rate fell to 3.75% in August 2009 from 6.65% in August 2008.
     • Interest rates on 3-year conventional mortgages moved to 4.55% in August 2009, from 6.7% in the same period last year.
     • The 5-year conventional mortgage rate moved to 5.85% in August 2009, from 6.85% a year earlier.

Economic recovery in Canada is expected to be slow and fragile with many obstacles looming in the way. "While we see light at the end of the tunnel, we're still in the middle of a global economic recession," said Transport Minister John Baird. "A potential recovery is still both tentative and fragile."