In Guide
Freehold vs Leasehold in Canada: What You Need to Know
Are you not sure what “freehold” and “leasehold” mean when it comes to Canadian real estate? You’re not by yourself.
There are two types of property ownership: freehold and leasehold. Freehold property means you own both the land and the building, while leasehold property means you only own the building and rent the land. We’ll talk about what each means legally and financially in Canada.
To help you choose, we’ll look at the pros and cons of both freehold and leasehold control, including the initial costs, the chance of the property going up in value, and the ongoing fees.
Lastly, we’ll talk about the differences between regions and advise you on picking the right type of property for your dream home in Canada.
Understanding Freehold Ownership in Canada
When you own something in Canada, freehold, also called free simple ownership, gives you the most rights. It means that you own the land and everything permanently connected to it, like buildings. With a leasehold, you rent the land, but with a freehold, you own the land outright and get long-term benefits.
Types of Freehold Properties in Canada
Freehold applies to various property types, including:
- Single-detached homes: The most common freehold property, offering complete ownership of the land and house.
- Freehold townhouses: Similar to single-detached homes, they share one or two walls with neighbouring units. You own the land beneath your specific townhouse.
- Some detached garages and sheds: If built on freehold land, you own them outright.
Advantages of Freehold Ownership
Freehold ownership comes with several advantages:
- Greater Control and Flexibility: You can renovate, modify, or add features to your property as you wish.
- Potential for Increased Value: Land ownership can appreciate over time, increasing your property’s overall value.
- Security of Ownership: Freehold ownership is permanent, offering peace of mind knowing you possess the land for the long term.
- Inheritance Rights: You can pass your freehold property to your heirs without limitations imposed by a lease agreement.
Understanding Leasehold Ownership in Canada
Leasehold ownership grants you the right to occupy a building for a predetermined period, typically ranging from 40 to 999 years. You essentially own the building itself but not the land it sits on. A separate entity owns the land, and you pay rent (often called ground rent) for the privilege of using it.
Types of Leasehold Properties in Canada
Leasehold properties are most common in:
- Leasehold condominiums: These function similarly to freehold condos, with shared ownership of common areas. However, the underlying land is leased, and you’ll pay ground rent and condo fees.
- Apartment buildings: Many apartment buildings in Canada operate under leasehold ownership, with tenants essentially leasing their units from the building owner who leases the land.
Advantages and Disadvantages of Leasehold Ownership
Leasehold ownership has both pros and cons to consider:
Advantages:
- Lower upfront cost: Leasehold properties can be more affordable than freeholds, especially in desirable locations.
- Maintenance-free living: The landlord is typically responsible for the exterior maintenance of the building and the land, potentially reducing your burden.
Disadvantages:
- Limited control: Renovations or modifications might be restricted by the lease agreement and require permission from the landowner.
- Uncertain future value: The value of your leasehold property can be impacted by factors like ground rent increases or lease expiration terms.
- Renewal challenges: Renewing the lease upon expiry can be expensive and complex, potentially impacting your ability to sell or the property’s value.
Legal and Financial Aspects in Canada
To understand property transfer taxes in BC, you must know the legal and financial differences between freehold and leasehold control. Let’s break it down:
Freehold Title and Ownership
- Legal Ownership: When you purchase a freehold property, your name is registered on the title deed, granting you complete legal ownership of the land and buildings.
- Financial Implications: You’re responsible for all property taxes, maintenance costs, and potential improvements. However, you also benefit from any potential appreciation in the property’s value.
- Property Transfer Tax: In British Columbia, the property transfer tax is based on the total purchase price of both the land and the building for freehold properties.
Leasehold Title and Agreements
- Lease Agreement: You purchase the building, but ownership is documented in a lease agreement with the landowner. This agreement outlines the terms of your occupancy, including the duration of the lease, ground rent amount, and potential renewal options.
- Financial Considerations: In addition to the purchase price, you’ll pay the landowner regular ground rent throughout the lease term. Property transfer tax in British Columbia might be lower for leaseholds, but it’s calculated differently.
Comparing Freehold and Leasehold in Canada
It is essential to have a solid understanding of the fundamental distinctions between freehold and leasehold ownership to successfully navigate the property transfer taxes in British Columbia.
It is important to consider the following crucial points:
Ownership and Control
- Freehold: You own the land and the buildings, granting complete control over renovations, modifications, and future use.
- Leasehold: You own the building but lease the land. The lease agreement might restrict renovations or modifications; you don’t own the underlying land.
Costs and Financial Implications
- Freehold: Requires a higher upfront cost but offers the potential for appreciation in the property’s overall value. You’re responsible for all property taxes and maintenance costs.
- Leasehold: This may offer a lower initial purchase price but comes with ongoing ground rent payments to the landowner. Ground rent increases and lease expiration terms can impact the value of the leasehold. Property transfer tax in British Columbia might be lower for leaseholds, but it’s calculated differently.
Duration and Security
- Freehold: Ownership is permanent, offering long-term security and the ability to pass the property down to heirs without limitations imposed by a lease.
- Leasehold: Ownership is for a predetermined period, typically ranging from 40 to 999 years. Lease renewals upon expiry can be expensive and complex, potentially impacting your ability to sell or the property’s value.
Regional Considerations in Canada
Property transfer taxes vary across Canada, and understanding freehold vs. leasehold ownership takes on a regional dimension. Here’s why:
Freehold and Leasehold in Different Provinces
- Dominant Type: Freehold ownership is the most common form of property ownership across most of Canada, including British Columbia.
- Variations: Leasehold properties are more prevalent in certain areas, particularly in provinces like Alberta, where some condos operate under leasehold.
Market Conditions and Availability
- Urban vs. Rural: Leasehold options might be more common in high-density urban areas with scarce land. In contrast, rural areas tend to favour freehold ownership.
- Supply and Demand: The availability of freehold vs. leasehold properties can depend on local market conditions. High demand for housing might lead to a rise in leasehold developments.
Impact on Property Transfer Tax
Since property transfer tax in British Columbia is based on the purchase price, freehold properties generally incur a higher tax because they include the land value. The property transfer tax calculation might differ for leaseholds in provinces with a mix of freehold and leasehold options.
Making the Right Choice in Canada
When it comes to understanding property transfer tax in British Columbia, it is critically important to select the ownership structure that best suits your requirements.
To assist you in navigating this decision, here is a guide:
Factors to Consider
- Budget: Freehold properties typically require a higher upfront investment, while leaseholds might offer a lower entry point but come with ongoing ground rent.
- Long-term Plans: Freehold ownership offers greater control and potential appreciation, making it suitable for long-term ownership. Leaseholds might be better suited for shorter stays or if upfront affordability is a priority.
- Level of Control: Freehold grants maximum control over your property, while leaseholds might have restrictions on renovations or modifications as dictated by the lease agreement.
- Local Market: Research the prevalence of freehold vs. leasehold properties in your desired area. Consider how this might impact property values and resale potential.
Considering Property Transfer Tax
In British Columbia, property transfer tax is generally higher for freeholds due to the inclusion of land value. However, the lower purchase price of leaseholds might translate to a lower overall tax burden. Regardless, the tax implications are just one aspect to consider.
Conclusion
To get around the Canadian real estate market, you must know the difference between freehold and lease ownership. Freehold gives you full ownership and control, the chance for the property to appreciate in value, and long-term protection. Leasehold has lower start-up costs but also ongoing fees and some limits.
Which one to choose depends on your budget, long-term goals, the amount of control you want, and the state of the local market.
People Also Ask About Freehold and Leasehold in Canada
In freehold ownership, you indefinitely own the building and the land. In leasehold, you own the building but lease the land for a set period, typically 99 years or less.
It's possible in some cases but not guaranteed. This process, called "enfranchisement," depends on factors like property type, location, and the landowner's willingness to sell. Laws vary by province.
Typically, the property reverts to the landowner. Leaseholders may negotiate an extension, purchase the freehold, or be required to vacate. Outcomes vary based on lease terms and local regulations.
Yes, potential hidden costs include:
- Ground rent payments
- Service charges for property maintenance
- Lease extension fees
- Restrictions on renovations or subleasing
- Potential increases in ground rent over time
Freehold properties are more valuable and appreciated over time. This is due to full ownership rights, no expiring lease, easier mortgage acquisition, and higher buyer appeal. Leasehold properties may be cheaper initially but can be harder to sell and may depreciate as the lease term shortens.
Jahangir Alam
As the Business Development Officer at Mi Property Portal, Canada's premier property management software provider, I've been fueling our growth and forging key partnerships since May 2016. Our mission? To deliver an all-in-one property management platform that's efficient, effective, and cost-cutting.