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Everything You Need to Know About Paper Flipping/Assignments Taxation

real estate tax tips

I am so grateful that we have organizations like Fraser Institute, calling out the government’s lies.  

If you go to their site, they have a lot of great research available – https://www.fraserinstitute.org/

Their latest report released on Sept 26 was about how ALL Canadians are paying more taxes, including the middle class, wealthy, everyone.  

When Justin Trudeau first became the Prime Minister, he proposed to lower the income tax rates by 1.5% for tax brackets between $46K to $92K.

He claimed that he would get the money from the wealthy to compensate for the difference.  He raised people who earned more than $200K to 33%.  

At the same time, he took away family splitting for families who have kids under 18.  He also took away all the children activity and art credit benefit.  He also cancelled the public transit tax credit.

Middle class, the exact people that Justin Trudeau’s government claims to help, is paying $840 more to the government as a result.  

Wow!  Thank you, Fraser Institute, for calling out the government’s lies.  Everyone is paying more tax.  Not just the middle class.

You may think that the proposed tax changes on private corporations are not related to you.

Think again!  

On Fraser Institute’s website, they had also done a bunch of other research.  A couple of them really resonated with me.

Canada has one of the most well funded universal health care systems in the world, but we have the least amount of doctors and the longest wait times.  

If these doctors are not getting their tax break through private corporations, why stick around in our country paying over 50% to CRA?   

For those of you who don’t know, allowing doctors to incorporate was part of the negotiation from Ontario’s government so they didn’t get a pay raise.

We will have even fewer doctors practising in Canada.

Our Ontario government just raised the minimum wage, it is expected to rise to $14 per hour in 2018, and ultimately $15 in 2019.

This is rising the cost of doing business, combined with less tax incentive, what would you get?  

Fewer people are willing to go into business.  Risk and rewards are not balanced.  

I am not speculating, look at the article from Fraser Institute –

Provincial labour markets in Canada performing poorly compared to U.S.; training in job growth  and Ontario’s $15 minimum wage threatens jobs for young people and low-skilled workers province wide.

Raising taxes are not giving the benefits to the middle class.  We all end up paying more taxes in Canada.

Whether you are at the lowest bracket or the highest tax bracket, you are paying more taxes today than yesterday and will be paying more taxes tomorrow than today.

These new rules would cause more issues in our medical system and further weaken our labour market.

If you have not reached out to your MPs (Member of Parliament) and the Finance Minister, stop waiting and start writing your email!  You still have time!

I just had a birthday celebration with two of my friends last night.  One of them worked for the bank’s front office and she’s not allowed to purchase any individual stocks.  

She then started investing in real estate.  She bought a new build in Bowmanville.

Her plan was not to close the property, rather, she would sell it before closing to another person.

In this case, the transaction is considered “adventure or concern in the nature of trade” in tax terms.  In our every day term, it’s considered trading or flipping.  

We discussed in many of our previous blog posts that flipping is considered business income.

Business income is 100% taxable.  

The tax does not stop there.  

According to recent court cases, assignment fees are subject to HST.  What does this mean?

If you are committed to buy a pre-construction home, you decide to sell it before closing for $100,000 more.  

You are now liable to pay HST on the $100,000.  This is equivalent to $11,500 roughly.  

Now you owe the government $11,500 for HST.  Your true profit is $88,500.

Wait a minute, the Ontario Government came out in the 2017 budget saying that they don’t like to see paper flipping.  

They would like to see that all paper flippings are reported and land transfer taxes is added.  Ouch!

As most of us know, land transfer tax can be pretty expensive, depending on where your new build resides.

The Ontario government would also share their list of people who did assignment to CRA to make sure the corresponding reporting is done properly.

In our example, the taxpayer would be required to report $88,500 as income, he’s eligible to deduct expenses such as closing cost and realtor fees against the income and even the land transfer tax, but the net profit is then taxed at your corresponding marginal tax rate.  

Highest marginal tax rate in Ontario is 54%!  

Government surely didn’t make it easy, the cost of doing paper flipping is pretty high.  

P.S.  If you are a non-resident, all these still apply to you, provided that proper election is filed.  Withholding tax on the net income is 25%.  

A final reminder to send an email to your MP and the Finance Minister to express your disappointment in our tax system.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

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