Tread carefully in foreign lands
Don't let the lure of recessionary bargains blind you to the risks of buying property or businesses abroad
Whether it's for a vacation refuge, retirement spot or business dream, buying property in a foreign land has an exotic appeal. But while some experts say the current economic downturn is a choice time to buy, financial and tax advisers warn that venturing outside your home country can involve dizzying financial, legal and other problems.
"There's a romanticism about having something in some other place - some exotic foreign jurisdiction. Or it may be related to an area of convenience for the family, where everyone can come together for certain occasions," says Brett Simpson, a certified financial planner (CFP) with Rogers Group Financial in Vancouver.
Buyers may find bargains, but dollar signs shouldn't cloud reason or reality, says Tina Tehranchian, a CFP and branch manager at Assante Capital Management Ltd. in Richmond Hill, Ont.
"I have clients who have been buying property anywhere from Florida to Dubai. You also have property bubbles forming in Spain and Panama," Ms. Tehranchian says. "Some are looking for vacation properties and some are looking for investment properties.
"But you have to make sure you're willing to make the commitment to go down there, do the due diligence, do your homework beforehand, take into account all the maintenance costs and hassles, [and] figure out who's going to look after your investment when you're not there," she says.
The National Association of Realtors in the United States has reported a dramatic increase in buying by foreign customers in the past five years. Some real estate agencies are reported to be wooing foreign investors by paying their travel expenses and providing agents who speak foreign languages.
Despite the "buy now" message, Canadian investors must assess whether a foreign investment - be it a business or other property - fits into their futures, says Mr. Simpson.
"Your investment decisions should be evaluated in the context of an overall financial plan, not independent of it," he says. "Too many people end up with a plan that is just a collection of stuff - their plan comes by default instead of, 'Here's what I want to have, here's what I need to accomplish my objectives.'"
In the case of Sharon Hobin, a school trustee in Mississauga, Ont., buying a home in Florida wasn't a snap decision. Ms. Hobin, 56, and her family took more than four years to find and buy their dream retirement home in Sarasota when the Canadian dollar was riding high over the greenback last spring.
"For years we would go to Florida on vacation and loved it in Sarasota, and we would say, 'This would be the nicest place to retire.'"
Ms. Hobin says one of the smartest moves she and her family made was to consult a real estate agent who found exactly what they were looking for: a two-bedroom home with all the furnishings, in a gated community, for $300,000 (U.S.). Ms. Hobin recommends finding an agent with links to other legal and financial experts who can conduct title searches or find an insurer, for example. For a mortgage, she consulted her Canadian bank, Royal Bank of Canada, which directed her to RBC Centura in the U.S.
"We learned a lot about owning a place in Florida - for pest control, the home is sprayed outside and inside once a year because of the bugs in that area, and sand fleas. There's a lot of research you need to do. For us, though, we probably had a little less to worry about because this is not a rental property for us: This is where we're going to retire," she says.
Whether you're buying a property for retirement or vacation or as an income-producer, one of the biggest considerations for investing abroad is taxes, experts say.
For example, many countries levy a form of capital gains tax against property sellers, and buyers can end up paying more if they are non-residents. Some countries, such as Canada and the United States, share a double-taxation treaty that prevents foreign owners from paying taxes twice.
"Check the tax rules: Speak to a tax expert in that particular jurisdiction because there are withholding taxes for non-residents not just in the U.S. but in many countries," Ms. Tehranchian says.
The experts also warn that buying into a foreign business may involve even more intricate taxation rules - depending on the type of business and how it's structured - as well as laws governing what happens to foreign-owned assets in case of death.
Ms. Tehranchian gives this example: "In certain Muslim countries, the rules of inheritance are subject to Muslim law - your Canadian will will not necessarily be honoured, for instance, if you leave everything to your cat, because according to the rules of Islam, you can't will property to your pet if you have a next of kin.
"There are also complicated tax rules when it comes to U.S. estate taxes," she adds.
Mr. Simpson stresses that it's important to have someone in the community where you buy property - be it a management company, a partner or someone you trust - looking after your investment.
"If you're a silent shareholder in a business, and not going over there and working actively in it, you have to look at how to manage that relationship," Mr. Simpson says. "You have to trust whoever you have working there."
Ms. Hobin's experience with one aspect of her new Florida home serves as a warning that no matter how careful a foreign purchaser is, unpleasant things can happen.
For three months, she was unaware that cheques sent to the Florida power company for her water and electricity were not being accepted. The utilities "sent us notes to say your cheques are bouncing, and threatening to cut off water and electricity," she recalls.
Her Canadian banker told her that other clients were in the same boat: U.S. banks were growing more cautious because of the economic downturn and suddenly began turning away cheques from foreigners.
"Now they just take the amount directly out of our bank account in the U.S.," Ms. Hobin says. "That's why it's so important to have a U.S. bank account in these situations."