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M_Richard

Property in SA and some other general financials

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M_Richard

Hi all,

My wife and I are considering moving to Canada in about 2 years or so. Earliest probably in Jan 2021. Still a long ways away, but I am already thinking about the finances.

We own a two-bedroom apartment in Cape Town (not bonded, fully paid, have the title deeds). We currently live in the apartment. But once we move to Canada, my idea is to rent a place in Canada for the first year or two. In this period I want to rent out the apartment in Cape Town, and remit the monthly rental income (around R12k per month) and use it to subsidize our rent in Canada. The idea is to sell the Property in Cape Town and use it as a down payment for the house in Canada once we feel comfortable to buy there. I am assuming the rental income can be added to your Canadian income for tax purposes to form your total taxable income or something like that?

Is this a viable strategy, or are there any tax implications or anything like that?

I probably still have a lot to read about the money particulars. Financial immigration and all that, I always feel bad for starting topics if I haven't completely done all my homework.

 

And other than the property, what about cash capital invested in South Africa. From what I can gather, the interest on cash in Canada is low (like 2%) compared to a guaranteed 8%+ you can receive in SA. So is there reason to move cash capital to Canada, or any rules forcing you to move your money once you move to Canada. 

Let's say you have R500,000 in a fixed deposit in South Africa, and you earn 10% interest PA or around R4000 per month. Can you keep this account open in South Africa and transfer the money to Canada every month and pay tax in Canada according to it being additional income. Instead of moving the R500,000 to Canada as soon as you move there and only earn 2% interest PA. I am assuming it cannot possibly be this simple, probably some rules that do not allow you to keep your SA accounts? Apologies, these are probably very stupid questions, I have only really started learning about tax like a year or two ago.

Any comments or feedback will be greatly appreciated.

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Reibtseb

Re. sending money over per month, you will probably end up paying transfer fees on that R4k every month, which with RBC amounts to $17 on their side (receiving fee or something like that). This is in addition to whatever you'll pay your SA bank.

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Gary van der Westhuizen

Hi @M_Richard

My two cents worth on some of your questions. 

There is a dual tax agreement between Canada and SA which means you should only be taxed in one. I don't have any practical experience with this, but that is the theory. Practically you can however file in both countries and not tell the other about the previous, but technically you shouldn't. As @Reibtseb mentioned, transferring money monthly might be costly, so probably better to do it quarterly. 

Financial immigration. DO NOT DO IT. Unless you love wasting your time, money and energy and entertain idiots gladly. We went through it, and I would not recommend it to anyone. Wait the 5 years so you don't need the clearance certificate. It will make your life much easer. There is no rule that says you have to financially Immigrate, you can just file nil returns each year. Sure you know this, but it has nothing to do with citizenship. You can also take ZAR 1 Million a year out of the country and not have any Reserve bank issues. 

As far as investments go, you can do much better than 2%, sure not in a savings account, but look at an ETF or the like. You need to also keep in mind, of your 10% interest rate, a good 6% is actually just inflation, so your real return is much smaller. This is purely my opinion, but having assets in one place and you live in another, is not a long term viable solution. Ver van jou goed, na aan jou skade. We found it difficult to live in one currency and save in another, but as I said, just my opinion. 

Feel free to send me a personal message if you have more specific questions on the tax issues. 

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Jaco_W
Posted (edited)

Hi @M_Richard

I'm happy to give you some comments based on what I've learned along the way.  Please note, though, that I'm not a financial advisor or tax professional 😁  Some of the information may be out of date or not applicable to your specific situation, so you may want to check the facts.   I'm happy to point you in the direction where to look for information - feel free to ask.  CRA (Canada Revenue Agency) website is pretty good. 

Also, don't apologize for asking questions on here.  We've all had to learn and research these matters and can help each other out because often the information out there can be confusing and sometimes contradictory, so it helps to get a first-hand account from someone who has been through it .  It is good that you are researching and planning now already given your move is still 2 years away!

Apartment

You can definitely keep your property in SA and use the rental income to subsidize the rent you pay in Canada until you are ready to buy here.  It is a good strategy and it is what we did.  It gives you a chance to find your feet, get a feel for the property market here, and decide which area you want to settle. 

Canada, like South Africa, uses the residence based tax system, which means that if you are a tax resident of Canada you need to pay taxes on your world-wide income.  This include rental income from South Africa, and you are right, that gets added to your taxable income here.   You can of course deduct from the taxable income any expenses that you incurred in order to earn the income, for example if you pay a rental agent to manage the rental,  cost to find a tenant, municipal taxes, levies, mortgage interest  etc etc. (https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income-2016.html#P109_3004).  You must always show the full rental received, and then show what expenses you are claiming as deductions.                    An implication that you need to be aware of is that when you eventually sell the Cape Town property, you will be liable for Capital Gains Tax in Canada.  You will be taxed on the portion of the property's capital appreciation from the date that you arrived in Canada until the date when you sell it.     Basically CRA (Canada Revenue Agency) treats it as if you bought the property on the day that you arrive in Canada at its market value (its called a "deemed acquisition".). It is therefore a good idea to have it valued at or near this date and keep the valuation for when you sell, in case CRA wants to see it.  (https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/newcomers-canada-immigrants.html#PBC)

So lets say you originally bought the property for R2million and when you arrive in Jan '21 Canada it is worth R4million, and you then sell it two years later for R5million, you will have to declare to CRA a capital gain of R1million.  Of course you can deduct expenses like estate agent's commission. 

Naturally SARS will also claim its' share of the capital gain.  And because you were no longer living in the property when you sold it you won't get the full SARS R2million per person primary residence exception (it will be pro-rated: period you lived in it over the time you owned it).   Luckily there is a tax treaty between Canada and SA to avoid double taxation. (https://www.treaty-accord.gc.ca/text-texte.aspx?lang=eng&id=102407).  So, depending when you sell and where you file taxes first, you will claim the tax paid in one tax territory as a tax deduction or credit in the other tax territory.  

Cash / Investments in South Africa

Regarding your other question, about the cash invested in South Africa:

I cannot tell you about what the impacts and rules of Financial Immigration are as I have not looked into this.    So my response pertains only to the scenario where you have not done financial immigration from South Africa as this is the situation that I am in.  

- I have left investments, bank accounts and money market accounts in South Africa.  I have told my SA bank that I am out of the country for an extended, undermined period of time.  I have a personal banker who is very responsive to emails and phone calls, for when I need something that cannot be done online.

- Moving proceeds out of the SA is perfectly fine - but you need to keep the South African Reserve Bank (SARB) exchange control rules into account.   (https://www.resbank.co.za/regulationandsupervision/financialsurveillanceandexchangecontrol/faqs/pages/individuals.aspx).  Basically up to R1million per person per year ie R2m for you and your wife  (called a Single Discretionary Allowance, or SDA) is very easy and you don't need any clearance or permission - you can literally transfer it via internet banking from your SA bank to your bank in Canada.  In addition to this you also get a Foreign Investment Allowance (FIA) of R10 million per person per year.  For this you need to get a tax clearance certificate from SARS.  Some admin but no big deal if your taxes are in order.  Above R10m you will need to get permission.    Like Reibtseb said the transaction costs of transferring funds every month is going to be high because  there is a fixed portion regardless of the amount - so if you can do it less often you will lower your overall transaction costs. 

- Of course you will have to report all investment proceeds, interest and dividends that you earned in South Africa to CRA and pay tax on it here in Canada - regardless of whether you brought the funds here or not.  Once again, if you were taxed on it in SA you can deduct that.  

- Regarding the higher interest rate in SA vs lower interest rate in Canada:   this is definitely so that you will earn significantly more interest in South Africa.  This is only part of the story though, and you need to be careful when comparing it.  Part of the reason for the higher interest rate is that South Africa has a much higher rate of inflation.  Over the last 10 years the average rate of inflation in Canada has been 1.74% per year.  In South Africa the average over the same period it has been 5% per year.  So, lets say the same rates continue:  in South Africa in 10 years, what you can now buy for R500,000 will cost you R840,000, whereas in Canada the cost of 500,000 worth of goods will only increase to 588,000.   You may think that the cost of goods in SA in 10 years time will not affect you because you because by then you live in Canada.  But the higher relative rates of inflation and interest in South Africa if it continues, should eventually result into a weakening SA currency against say Canada.  And historically over time we can see this happened:  10 years ago you paid 7.16 Rand for one Canadian dollar, today that is 10.69 Rand. The R500,000 in your example would have bought you nearly 70,000 Canadian dollars 10 years ago, and today you will get a little less than CAD 47,000.   Now, nobody has a crystal ball to predict what will happen in the future.  And there are many other factors that impact on the exchange rates.  I'm simply trying to illustrate that the difference in interest rates between the countries must not be looked at in isolation because the gains you get with a higher interest return could be negated over time if the Rand weakens against the Canadian dollar.  So I'm not saying don't leave investments in SA - I certainly have, but for other reasons than the higher interest rate.

I hope I have not rambled too much and that what I wrote makes sense.   Feel free to ask if it is unclear or if you have other questions.

 

Edited by Jaco_W
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Jaco_W

Hi @Gary van der Westhuizen - I see that while I was typing my overly long reply (ek moet alewig 'n opstel skryf) you made some of the same points but more succinctly    

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MaryJane

I can’t comment on the capital invested in SA as this I think would be a personal choice. I believe @Jaco_W has highlighted how forex can affect the balance in the end.

On the subject of the apartment and renting it out, I rented out our home after we left SA in 2012 and eventually sold the property in 2017. I collected rent each month and once there was enough, I transferred the money over to Canada (normally once a year). The issue of transferring monthly is as mentioned above by Jaco, @Reibtseb and @Gary van der Westhuizen, the bank fees may become ridiculously expensive.

On declaring the income on the tax return, I declared the rental income when I submitted to SARS and declared the income when I submitted to CRA.

I don’t know all but do hope my experience helps you. Good luck with the research.

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Nelline

We rented out our house in the UK while we settled here in Canada. We were lucky to have great tenants. My advice would be - unless you have someone to keep a close eye on your property / investment, you may have problems down the line. My sister-in-law and her hubby had this issue when they moved to the USA. The tenants TRASHED their property. "Ver van jou goed, naby jou skade"

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M_Richard

Hi all, thanks for all the replies on this thread, it has been immensely helpful. I will not be replying to all comments individually, but I have read everything and considered it all.

I will just add some further information about my situation:

I am currently 29 years old and have only been working for 3.5 years so haven't built up a major net worth yet. Most of my net worth is in the apartment we bought, so the R1M reserve bank limits shouldn't be an issue. My wife is the same age as me but has been working a bit longer (5.5 years) as a pharmacist and didn't have many expenses for her first couple of working years. Thus, she has saved up a substantial bit of cash, and also purchased the property with me (50/50). 

 

Most of the comments were on the monthly transfer costs. I should have made it a bit clearer, but we should not have the need to transfer money from SA to Canada on a monthly basis, we should be able to only do it bi-yearly or so. So the transfer fees shouldn't be too much of a concern unless it is percentage based. 

 

The reason I am asking about cash investment interest rates is: If we do relocate to Canada, she will not be working for the first year (maybe a bit longer), since she has to go through a long process of getting licensed as a pharmacist in Canada. In this time, her cash and property share can be used to generate at least some income. And also its more of a short term thing (2/3 years maximum), so higher risk ETFs which give a 10-14% pa return is too risky. Maybe there is a decent income fund ETF which can be used for a more low risk 6/7% return. I just basically want to ensure that her capital grows during the time she does not work, and also receive some income from it. And since she will not be working, her income will be low and she will have to pay almost zero tax. 

 

Thanks for pointing out the property capital gains rules in Canada, it is great to be able to talk to people who have gone through this process. Now I am wondering if it is better to sell the property before leaving since we will pay capital gains tax in Canada. Compared to if we sell it beforehand, we will not pay any capital gains tax as it is our primary residence. That being said, we only bought the property last year, so the capital gains will not be much, but I guess any penny you can save from tax is worth it. 

I will have to go have a deeper look at the type of rental income we can make and what tax implications it will have. At least we have family that live 10km from the property. They will be able to look after it if we do not trust rental agents with something. Finding a good tenant might be hard, especially if we decide to rent the place furnished. It's hard to trash a structure, but furniture and appliances is a different story. 

 

And thanks for all the comments on economics. I have limited knowledge about economics, however, it does interest me. Over the past 10 years, the CAD exchange rate has gone from R6.5 to R10.5 (as high as R12). Which means that the global value of the assets we worked for in SA has decreased by more than 35%. I understand how inflation plays a role in investment value over the long term.

But there are certainly many economic factors to consider, and as mentioned no one knows what will happen in the future. However, I do not have much faith in South Africa to keep up with the global economy, and the Rand will probably become R20 to the dollar, just a matter of time. So rethinking my original statements, a 6% income fund in Canada will likely yield better results over the long term compared to a fixed 10% return in SA.

 

I still have a lot of research to do (luckily also a lot of time) but this thread has been extremely helpful. Thanks again to all contributors!

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