5 Lessons I Learned from My 13th Tax Season

Erwin and I were at Game 2 of the Raptors against Miami Heat series. Oh, it was so much fun!

Our star players were still not playing at the same level as how they used to at the regular season, but a win is a win! And we were so happy to be there to watch this overtime win!

This cannot be a better way to celebrate the end of my 13^th tax season as an accountant.

As an accountant, you tend to have a fairly intimate relationship with your clients. You get to know their personal stories, their investment stories and financial situations.

Sometimes we may even get to participate in their investing decisions!

Here are some of the lessons that I’ve learned from doing people’s tax returns over the years.

1. Stock market investments generally don’t make money
   I’ve done thousands of returns and I’ve noticed that very few people actually made money in the stock market.Many of us have a full time job. Savings are often invested.Very few people invested in the stock markets these days. Even if they do, fewer made money on it.I’ve only seen one person making money from his mutual fund account, which is managed by a financial advisor, whom received a decent amount of fees to earn the capital gain.

   But for most people, none of them actually make money. Sadly enough, capital losses can only be offset against capital gains that you will earn in the future.

2. Documentation matters
   I share this with my clients all the time – one bank account, one property!All the receipts should be kept in a separate folder for each property.This allows your bookkeeper to record everything accordingly.A little sorting and patience at the beginning to set up the system pay long dividend.

   Always remember, you gotta earn your deduction.

3. Having a refund can be a good thing, but don’t get disappointed if you have to pay some taxes
   If you have a job, the tax withheld by your employer should be sufficient to cover the tax liability. When we file the tax returns at the end of the year, chances are you don’t owe anything.With the elimination of some benefits (such as the children amount credit) and the addition of rental income, many of my clients found themselves into a tax owing situation.Yes. It sucks to pay more tax.But this also means that you are progressing in the right direction! You’re creating more wealth for yourself and you’re getting a second stream of income!

4. Just because you spend the $$$ on your investment, doesn’t mean you always get the deductions!
   Properties often require maintenance from time to time.Some expense is considered a current expense but some are considered an improvement.Improvements are required to be capitalize and capital cost allowance can be claimed against the cost.Yes. This means that the $20k to $30K that you’ve spent on legalizing the basement apartment isn’t deductible immediately.

   For those people who legalize their home’s basement apartment, this may mean that it would never be deductible as you want to preserve the principal residence exemption on your house.

5. It’s not how much you make, it is how much you keep that counts!
   Savings are tough. I’ve relied heavily on real estate to help us save for our future.I even increased my rental property mortgage payment so that we can save faster.The biggest lesson I learned from Rich Dad Poor Dad is that as I made more money, I spent more money.I didn’t set aside enough money on the side to invest so my money can be working for me.

   The more tax returns I do, the more often I see people spending majority of their earnings and are unable to save.

Some people make great money but they spend most of it, like how I used to be. They are left with little to invest. I worked for the money, but money didn’t work for me.

For many of my clients, they make modest income but they have rental income that pay down their mortgages. They have their equity working hard for them.

Many real estate investors who make less than $100K combined annual income are worth more than couples who make combined income of over $250K.

And these real estate investors aren’t stopping anytime soon. They are still rolling and buying more properties.

Until next time, Happy Canadian Real Estate Investing!

GO RAPTORS GO!

Cherry Chan, CPA, CA

Your Real Estate Account