You are considered a first-time home buyer if neither you nor your spouse or common-law partner owned a home that you occupied in the current year or the four previous years. However, in order for a property to be considered a qualifying home, it must be located in Canada. So, your Portuguese vacation property is not going to qualify for the HBP.
If you were to withdraw from your RRSP to buy this property, Andy, the withdrawal would be added to your other income for the year and be fully taxable. This probably makes it a bad option to use for buying the property.
In my opinion, if you are not going to use a property for a good part of the year, or you are not open to renting it out when you are not using it, the math typically supports renting something rather than owning.
Taxes on rental income from a foreign property
If you own a rental property in a foreign country, the rental income is often subject to tax in that foreign country. Non-residents of Portugal, for example, are subject to tax on income from Portuguese sources. You must report foreign rental income on your Canadian tax return as well, because Canada taxes worldwide income. In Canada, foreign tax typically qualifies for a foreign tax credit to avoid double tax on the same income. Interest on funds borrowed to acquire the property, whether in Canada or in the foreign country, would be tax deductible.
When you own foreign assets like a rental property, use Form T1135 – Foreign Income Verification Statement to disclose your ownership as part of your annual tax filing. This form is required if you own certain foreign investments, like a rental property, with a cost of more than CAD$100,000.
Taxes on the sale of a foreign property
A foreign property can qualify for the principal residence exemption, meaning its sale would not be subject to capital gains tax in Canada. However, most people’s foreign real estate is less valuable than their Canadian real estate, so it is not common to claim a principal residence exemption on a foreign property.
If your primary residence is in Canada and you sell a foreign property, including one in Portugal, it will typically be subject to foreign tax on the capital gain in the local currency. Canada will tax the capital gain as well, based on the purchase and sale prices in Canadian dollars.
So, to decide on the right course of action, you need to calculate the property’s Canadian-dollar price as of the original purchase date and the sale date. The currency exchange can lead to your Canadian capital gain being larger or smaller than the foreign capital gain in the local currency.