Important Update on the Federal Budget 2018

I went to a conference in sunny San Diego for a few days last week.

Like all the other conferences that I have been too, I learned a lot. Some are life lessons from Damon John and Dave Asprey, some are technical skills from various experts.

Nothing has made a bigger impact than Jon Morrow’s story this time.

If you don’t know Jon Morrow, here’s a bit about his story

His story brought tears to my eyes.

He was born with a disease called spinal muscular atrophy, a degenerative neuromuscular disease that progressively weakens the body to the point of complete atrophy and eventual death.

He cannot move any part of his body except his voice and his face.

When he did the presentation, he was in his wheelchair not moving anywhere.

Most people with this disease would give up, live in a nursing home waiting to die according to him.

Somehow, he went the opposite.

He went to school.  When the teacher asked questions, he knew the answer and he wanted to raise his hand to answer it, but he couldn’t.

Time after time, he had the answer and couldn’t even do the simplest thing, raise his hand.

One time, his teacher asked a question and again, nobody in the class knew the answer.  Of course, like all the other times, he knew.  

His friend grabbed his hand, raised it for him, and he finally got his chance to answer.

Simple things that we take for granted can mean an achievement in other people’s lives.

He also thanked his mom for not giving up.  (That’s the part that got me sobbing!)

He showed a picture of him and his mom in a swimming pool.  He was floating on the water while his mom was behind him.

Mothers have special powers.  Mrs. Morrow is a superwoman.

I have built an accounting practice, a couple of investment properties and I’m also mommy of two small children.  From time to time, people praised me as a supermom.  I thanked them but I never felt that I could live up to this compliment.

Especially after hearing Jon’s story.

Mrs. Morrow is the REAL supermom.

Jon, with the help of speech recognition technology, has written articles read by more than 5 million people.  He’s the founder and CEO of Smart Blogger which is a $100K+ a month business based around teaching people about writing and blogging.

He’s also traveled to different cities and lived in San Diego, Miami, Austin and even Mazatlan, Mexico.

He accomplished all these with only his eyes and lips.

If you are in a rut today, just remember Jon’s story.

If you are angry at your destiny and your current circumstance, but you can raise your hand without a problem, you have no right to complain.  

We are so blessed that we take everything for granted.

We are so blessed that we often forgot to appreciate the simplest things in life.

When you are down, take a moment to count your blessings. We are still moving, we are still walking, and we are still living. We can type, we can jump and we can raise our hands.

When you are grateful, you cannot be angry at the same time.  

It may sound cheesy but being grateful will get you out of the rut.

Now onto this week’s topic.

How the Federal Budget 2018 affects Real Estate Investors

One of the biggest reasons why accountants encourage small business owners to incorporate is because of the tax deferral advantage.

Most of you would be familiar with the small business deduction concept. If you own a business and run it inside the corporation, you pay only 13.5% income tax rate for the first $500K net income.  

This means that if you earn $100K business income in your corporation, you only pay 13.5%, leaving $86,500 in the corporation.

You can take this $86,500 to buy properties and invest in real estate.

But if you were to take out this $86,500, you will have to pay personal tax on it.  If you don’t have any other income, you can pay another $11,500 tax in your personal name, resulting in net after tax income of roughly $75,000.

If you were to purchase properties in your own name (instead of the corporation’s name), you only have $75K to invest, instead of $86,500 inside the corporation.  Over $10K tax advantage a small business owner would get by investing in the corporation.

Bill Morneau and Justin Trudeau don’t like that idea.  They came out with a few plans to stop this idea July 2017.  One of which could potentially tax small business owners as much as 70%.

After the public outcry that I am sure you’ve at least heard about once or twice before 😉, they finally decided to make radical changes to their plan.

If you are a real estate investor AND DO NOT have any active business, this new change will not affect you.

If you are a real estate investor and a small business owner, and you own your business and properties in the corporation, this change can potentially affect you.

If your passive income is over $50K, it will lower your small business deduction ($500K).  For every $10 over $50K, your small business deduction will be lowered by $5.  

If you earn passive income over $150K, the entire small business deduction will be gone.

So how much tax would you pay if you don’t have access to small business limit?

Well, it is about 26.5%.  

Using the example above, if you earn the active business income in the corporation and are not entitled to small business rate, you are required to pay 26.5%.  

After paying corporate tax, you are left with $73,500 for investment.

Is it still worth it to invest through the corporation?  

As always, the answer is, it depends on your situation.

Are there any strategies that we can use to avoid this?  Absolutely.  

Consult a professional real estate accountant to get your answer.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan

Your Real Estate Accountant

Real Estate Tax