Is Rent To Own an Affordable Alternative to paying the NRST?

Is Rent To Own an Affordable Alternative to the NRST

Written by David Pereira

Managing Partner and Co-Founder

October 12, 2023

The Non-Resident Speculation Tax (also known as the Ontario Foreign Homebuyer Tax) was introduced in 2021. Originally, it was a tactic aimed at stopping the overseas (mainly Chinese) investors from snapping up condos in Toronto and leaving them vacant which would drive up rent and home prices. However, it’s reach was expanded in 2022 and it now applies to any foreign national (with some exceptions) who has not obtained their PR status and wants to buy a home in most Ontario areas.

Here is the main NRST webpage from the Ontario Government. – https://www.ontario.ca/document/non-resident-speculation-tax

The purpose of this blog post is to go over some of the details of the NRST and show how we were able to use Rent To Own as a better alternative for a family that couldn’t afford to proceed with a purchase because of the NRST.

How is the NRST applied?

The NRST applies on the purchase or acquisition of an interest in residential property located anywhere in Ontario by individuals who are foreign nationals (individuals who are not Canadian citizens or permanent residents of Canada) or by foreign corporations or taxable trustees. Effective October 25, 2022, the NRST rate is 25%.

The NRST is applied to the value of the consideration for a conveyance

https://www.ontario.ca/document/non-resident-speculation-tax#section-0

Yes..that’s right. The tax rate is 25%. And it’s applied to the value of the house.

What this means is that if you’re on a work permit and you want to buy a house that’s worth $400,000, the government is expecting you to ALSO pay an additional $100,000 of NRST tax.

When does it get paid?

The Ontario Foreign Homebuyer Tax or the Non-Resident Speculation Tax (NRST) is due at the time of closing, often paid through the buyer’s real estate lawyer.

The NRST must be paid and all paperwork submitted to the Ministry of Finance at least 15 days before the date of conveyance (i.e. when the property legally changes ownership).

https://taxpage.com/articles-and-tips/a-canadian-tax-lawyers-guide-to-ontario-foreign-homebuyer-tax

So, from our example of the home with the $400,000, that $100K is due 15 days BEFORE closing.

What if 3 people are on the mortgage and two of us are permanent residents and one is on a work permit?

I’ve copied and pasted this entire section from the government page.

The NRST applies to the value of the consideration for the transfer of residential property if any one of the transferees is a foreign entity or taxable trustee. For example, if a transfer of residential property is made to three transferees, one of whom is a foreign entity that acquires a 33% share in the land, the NRST would apply to 100% of the value of the consideration for the transfer.

As an example, Tomoko, Shoshana, and Lieven buy a home together. Tomoko acquires 33%, Shoshana acquires 33% and Lieven acquires 34% interest, with a value of the consideration of $1,500,000. Tomoko and Shoshana are Canadian citizens, but Lieven is a foreign national. The NRST is applied to the full value of the consideration, resulting in NRST payable of $375,000. They do not pay NRST on just 34% of the value of the consideration. The NRST is not prorated to the interest acquired by the foreign national.

Each transferee is liable for any NRST payable. If a foreign entity or taxable trustee does not pay the NRST, the other transferees will be required to pay the tax. This applies even if the other transferees are Canadian citizens, permanent residents of Canada or non-foreign corporations.

https://www.ontario.ca/document/non-resident-speculation-tax#section-3

So if even just one of the people who’s making the purchase is considered to be a foreign national, the NRST would apply to 100% of the value of the home. And each individual is liable for any NRST payable.

Do I get my money back?

It appears that you can get all or a portion of the NRST refunded when you become a permanent resident. The government has outlined the conditions and the process to get a refund.

https://www.ontario.ca/document/non-resident-speculation-tax/non-resident-speculation-tax-rebates-and-refunds

Well that all sounds terrible.

Ok..so if you’ve made it down here, you might be a bit discouraged that the Canadian government has gone through such great lengths to invite skilled workers to come to Canada with their families and then penalize them when they follow the proper channels to obtain home ownership.

I certainly was appalled and discouraged the first time I read through these pages in the summer of 2023. A realtor brought it to my attention because she was hoping that Rent To Own might be an option for her client that didn’t have an extra $100,000 lying around.

Can Rent To Own Help avoid the NRST?

The short answer is YES.

We recently helped a family get into a new home through Rent To Own. Their family of 5 (2 parents and 3 school-aged children) moved to Canada in 2022. Both parents are working in Cornwall and their combined annual salary is about $115K. Their landlord was putting the house up for sale and the family wanted certainty and a nicer place to call home.

Even though the bank approved them for a purchase price of $400,000, they didn’t have the extra $100,000 for the NRST. So, after we qualified them for our Rent To Own program, they found a home they really liked. We bought it for $380,000 and we are doing a 2-yr term with them. They’ve agreed to buy the house back at the end of the 2-year term at $418,950 which is determined by our assumption of 5% annual appreciation.

In Sept 2023, they moved into their new house in Cornwall and are delighted with the home and the neighbourhood. Since their down-payment with us is $20,000 which is much less than they would have to outlay had they paid the NRST, they’ve been able to allocate extra money to some small renovations to make the home truly theirs.

The Advantages of Rent To Own

Reduced Up-Front Costs: Let’s face it. Most new Canadians don’t have an extra $100,000+ sitting in a bank account. While there are ways to get private loans to cover the NRST, the interest rates will likely be extraordinarily high because of the lack of credit history. And the lender often fees and other conditions that can make the deal unfavourable for the borrower.

Predictability: Our Rent To Own program is structured so that there’s predictability for everyone. Before the tenant buyer moves in, we already know the following numbers and they remain constant throughout the term:

  • Up-front deposit
  • Monthly rent
  • Monthly option credit
  • Purchase price at the end of the term
  • Length of term
  • Amount of down payment that the tenant buyer needs to purchase the house at the end of the term

And you never have to worry about the landlord selling since our investors have contractually obligated to not sell until the tenant buyer exercises their option.

Better Mortgage Terms: At the end of the 2 years, our tenant buyer will have an improved credit score and more savings. This will likely help them get a better mortgage. In our case, with interest rates expected to go down in 2025, all signs point to a much better mortgage rate.

Next Steps

If you (or someone you know) is interested in home ownership but can’t afford the NRST, we might be able to help.

The first thing I suggest is to find out if you’re exempt. If you’re unsure, talk to a lawyer who has experience handling cases with immigrants and home purchases

If you’re not exempt, but are still interested in earning home ownership in a predictability manner that won’t hurt your budget, fill in this form and I’ll be happy to speak with you to see if I can help.

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