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Globe Wealth Tempted to buy a beach house? How to make the dream a reality

Potential buyers must consider numerous factors, including the right location, currency exchange, financing, taxes, rental income, insurance, maintenance, timing and immigration issues.

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It’s been the sort of cold, dreary winter that brings Canadians to consider escaping to the sun and sand. Snowbirds may also be tempted to make their diversion a regular – or semi-permanent – thing by purchasing their own beach house in a warm place.

But buyer beware, experts say. The economics of owning a luxury vacation property abroad, no matter how wealthy you are, require the careful consideration of tax and legal issues.

“You’ve got to know what you’re doing,” says Terry Ritchie, director of cross-border wealth services for Cardinal Point Capital Management Inc., a firm with offices in Canada and the United States that specializes in wealth management for individuals in both countries.

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Mr. Ritchie, who is a registered financial planner in Canada and a U.S. tax specialist who is based in Calgary and owns a home in Arizona, hears from a lot of clients at this time of year eager to buy properties in warm places.

“You can get more bang for your buck in the U.S., for instance, than you can in Canada,” he says. “It’s night and day.”

Indeed, according to the U.S.-based National Association of Realtors, Canadians bought $19-billion worth of U.S. residential property from spring 2016 to spring 2017, double the amount from the previous year.

“There’s a lot of impulse buying,” says Mr. Ritchie.

He cautions, however, that potential buyers must consider numerous factors, including the right location, currency exchange, financing, taxes, rental income, insurance, maintenance, timing and immigration issues.

He recommends buyers rent first and check out multiple locales through services such as Airbnb and VRBO. “Why don’t you go down and kick the tires?”

But renting comes with downsides, including no equity in real estate, little sense of community and the task of searching for a place each year.

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One advantage of purchasing property abroad is that “foreign exchange can now be your friend, when it used to be your enemy,” says Grant Gilmour, an international tax partner at Gilmour Group Chartered Professional Accountants, a Vancouver-area firm that specializes in cross-border tax issues.

The value of your dream home can increase when exchange rates change, Mr. Gilmour says, but it can go the other way, too.

Owning also comes with responsibilities. The chief concern is tax; owners must pay property levies and report any income from rentals. (Note that if you simply own a place that is part of a rental-property pool, such as a time-share, you have to file a tax return in the foreign location.)

Estate taxes may be triggered if you die with a significant real-estate holding abroad.

Residency rules must also be considered. They cover the amount of time you can spend outside Canada and in the new country, and in some locales they are complex. The time periods affect your tax exposure, immigration status and health coverage.

Most countries have tax treaties with Canada, each with its own rules, Mr. Gilmour says.

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“You find people referring to six months as the magic number until you have tax responsibilities in the other country, but it is not as simple as that,” he says, recommending that people read the tax treaties, which can be found on a Department of Finance website.

Canadians with means who own foreign properties often set up structures such as trusts for tax purposes, “but you’ve got to love complexity to do that kind of stuff,” Mr. Gilmour says. “You have to have a lot of net worth to afford the advisers to help you avoid the landmine of intersecting rules out there.”

He warns buyers of foreign property to seek legal and tax advice at home from experts who know the Canadian regulations.

“I have seen clients buy properties in completely inappropriate structures for tax because the local realtor or lawyer recommended it,” he says. “That increased their reporting and tax without them knowing it.”

Snowbirdadvisor.ca, which provides online resources for snowbirds, is starting a concierge service for Canadians who purchase property abroad. The organization will provide access to professionals in real estate, finance, property management, law and title and closing companies, says Stephen Fine, president.

“It’s a daunting prospect to go out and buy a property in a foreign market,” says Mr. Fine, noting that Canadians increasingly can arrange reasonable mortgages on homes abroad through financial institutions that have links with Canada.

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The rule of thumb for those considering foreign ownership rather than renting is whether they will spend at least four months there, he says. Buying also brings stability, like-minded neighbours, suitable amenities and a network of friends nearby.

Renting out your property can help recoup costs; indeed, you can write off almost all the income raised, given expenses such as financing payments, insurance, condo fees, repair and maintenance.

But you still have to report the income on Canadian and foreign tax returns, which can be a hassle and trigger accounting fees. And renting can result in damage or losses.

Property owners can hire a management company or neighbour to oversee the arrangements, but technology has brought new, inexpensive ways to monitor your foreign property, says Mr. Ritchie, who uses electronic sensors and webcams to alert him to who’s coming and going. “I don’t trust anybody,” he explains.

Mr. Ritchie says he increasingly receives inquiries from well-to-do Canadian retirees who want to spend even more time at their homes in sunny Florida, California or Arizona than the rules allow. One option is to apply for an EB-5 visa, which comes with permanent residency through a minimum US$500,000 investment. (Under the federal program, a foreigner who invests cash in a project that will create at least 10 jobs can apply for a green card.)

“For wealthy individuals, it happens more often than not,” adds Mr. Ritchie, noting that further issues to consider in such cases include health care, estate planning, tax planning and tax payments associated with their Canadian exit and U.S. entry.

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