Today is a special day. Today is the day my own home is listed for sale. Yes, we’re moving!
I’m no stranger to moving. I moved from Hong Kong to Toronto over 20 years ago. I stayed in North York for two years before I went to Waterloo. I moved twice before I headed to Waterloo. With the co-op program there, I moved between Waterloo and Toronto numerous time in the five year period.
I graduated. Moved out from my family, moved to a condo then to a townhouse. I met Erwin and all of a sudden I found myself living in Hamilton. When we decided to start our family, we moved to our current place.
Moving had not been easy, but it was never emotionally draining for me.
Yet, it feels so different this time.
We started our family in this house. We moved into this house before we had kids. It’s full of memories.
For a veteran “mover”, I would have never expected how difficult this move had been!
Some decisions are easier than other though.
Recently, a fellow entrepreneur, who also owns a handful of multiplexes in Toronto, asked me about my take on whether a corporation should be setup to own properties.
She saw a comment in a group that she belonged to – “I regretted putting any properties in our corp. It costs more money to maintain the corporation. It costs more to finance, even building permits cost more.”
It isn’t an easy question to answer. But it certainly is an easier decision to me than moving. 😉
This is why I’m hosting a FREE webinar January 27 Wednesday at 8pm to help you navigate through all the criteria. You can register here.
The truth is that, it depends… I provided a “brief” answer to her…
If you are thinking of growing to 5 to 10 properties or even beyond, and you own everything in your personal name, you can max out your credit fairly quickly.
By taking advantage of a corporate structure, you can grow beyond that five to ten properties, as the mortgages are registered in one corporation.
If your plan is to buy a couple, a corporate structure might not be as important.
Yes, it might cost more in financing (I signed up for 2.54% five year fixed for my latest rental properties), but it also frees up some of the credit in my personal name.
How much is it worth for you to be able to get to that 10 properties?
I have a client who owns a small business. He used to leave $20K in the corporation and paid everything out to his personal name. At the time he made about $180K “salary” from his business.
He paid a lot of personal taxes and he didn’t need the money in his personal name. So we stopped paying him $180K, instead we paid him $40K. The corporation kept all the profit and paid only 15% corporate tax rate (small business rate was slightly higher back then). He used all the retained earnings in the corporation to purchase properties.
For small business owners who have successful businesses in the corporation, they could be benefiting from the low corporate tax rate environment and have more available to invest.
Why do you think our Prime Minister Justin Trudeau target doctors, dentists and other professionals in 2017? That’s because doctors and dentists are using this exact same strategy to invest in stock and real estate. 😉
If you are a small business owner, but aren’t interested in using CRA’s money to invest for your future, corporation isn’t for you.
If you’re doing flips and some other real estate strategies, flips are considered 100% taxable. If you own these flips in the corporation, you could be paying as little as 12.2% corporation tax rate.
If you do the flips in your personal name, you’re subject to the marginal tax rates …which can be as high as 53.5% in Ontario.
It also goes back to what you want to do with the money you make from the flips. Some investors simply want to reinvest the profit into the next project.
If reinvesting into the next project is the goal, you pay less tax in the corp and have more for your future project reinvestment.
Size of your real estate project and type of real estate project matter.
My best friend owns a few commercial plazas. Her insurance company refused to renew her insurance policy because there was a small fire happened in one of the tenants’ store. This small fire was covered by the tenant’s insurance directly. She had to rush to find another insurance provider and operated her plaza without insurance for three nights.
If you own all your properties in your name, technically ALL your personal assets are exposed to the risk associated with running a rental portfolio.
When I say ALL, it means your stock portfolio, your primary home mortgage, may even be your future earnings.
I had a client whose rental got “blown up”. Tenant in the basement was burning some marijuana oil, it somehow went wrong, and the entire house got lifted up for a second or so (according to the news report). The house was deemed not to be in a liveable space afterwards. It was a triplex.
Thankfully no one was there at the time. The insurance did pay for the entire bill, but you really don’t know what you don’t know. From that point on, she always puts her properties in the corporation just for risk segregation purpose.
If you want an extra layer of protection, you have to pay for it.
If you are comfortable with the risk exposure, corporation is definitely not needed.
Typically in the tax world, when a high net worth individual decides to pass their asset to the next generation on a tax efficient way, many accountants would suggest an estate freeze.
This estate freeze is normally done through a corporation. If you transfer your assets to the corporation at that point, you would trigger land transfer tax at fair market value at the time of transfer.
Land transfer tax can be quite costly, especially if your portfolio is all in Toronto.
Of course, everyone’s situation is different.
This is why we host the FREE webinar to share with you insights from meeting with hundreds of real estate investors.
Wish me luck on my listing!
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
Here’s a Quick Guide to Understand Bitcoin Taxation
Happy New Year.
We celebrated my daughter’s birthday over the holidays, I couldn’t believe she turned 7 already!
It’s unfortunate that we have to start our new year in a lockdown. I’m very grateful that my kids are enjoying their virtual learning. They feel that they’re all of sudden grown-ups, using mommy and daddy’s laptops.
We kicked off the new year with some new team members in our office and a commitment to an 8 week lean muscle challenge at our gym.
Of course, if you already setup your PREC and you’re expecting to save a bunch of taxes this coming year, you might want to find out how you can invest this money. Join our team at 8pm tomorrow night for a free demo on how I generated a 6 figure stream with stock trading. Registration link here.
For real estate investors out there, my team is putting a webinar together in the next couple of weeks. Just so we can provide some insight as to whether you should setup a corporation to own your portfolio or not. Stay tuned.
We’re wealth hackers, not just real estate investors. As the governments around the world are printing more money to stimulate the economy and provide bail outs to businesses, someone somehow at some point would have to pay for it.
The theory is that the paper money that we are transacting today would lose its value and ultimately all of us are going to pay for it eventually.
In another words, holding cash, also known as the paper money, means our wealth is depreciating as the governments print more money.
If you don’t want your hard-earned cash to depreciate, or better yet, if you want your hard earned cash to work hard for you, many smart people around me are looking for things to invest so that it can keep its value.
Many purchased real estate. Some did shares. Public companies are buying back their shares in the open market. Some ventured out to digital currency.
The most popular one today is Bitcoin, as bitcoin supply is limited, unlike the paper money.
CRA is exceptionally busy these days making sure no one is getting any benefits that they are not supposed to be getting.
They have some general guideline provided on the tax implication, but there’re still many holes in the current CRA position with respect to taxation on digital currency.
There’re three common ways to use and invest in digital currency.
Let’s have a brief overview on each implication.
Some businesses are starting to accept bitcoin/digital currency in exchange for goods and services, even though CRA does not consider bitcoin as a legal tender yet.
Receiving bitcoin/digital currency for services/goods provided is considered a barter transaction.
Even if you receive bitcoin (in replacement of actual paper Canadian dollars) as business owners, you’re still supposed to report the Canadian dollar equivalent amount on your tax returns for the goods/services provided.
By the same token, you are still required to charge HST (sales tax) on the goods and services you provided.
If you receive bitcoin/digital currency from selling a property (disclaimer: I am not sure if it is legal in Canada yet), the sales proceed of your property is the Canadian dollar equivalent of the amount of bitcoin you receive in the exchange.
You are still required to report the disposition of the property on your return.
If you buy goods/services using bitcoin/other digital currency, you’re still required to pay HST on the purchase. If you buy properties using bitcoin/other digital currency, the tax cost of purchasing the property is the Canadian dollar equivalent of the amount of bitcoin/digital currency that you pay.
Many investors that are currently buying bitcoins/other digital currency are using bitcoins as a way to store the value of money.
Many of them are planning to hold their assets long-term, just to safeguard against the collapse of paper money system.
If you are investing in bitcoins long-term, the act of buying itself does not impose any tax implication.
When you sell the bitcoins sometime in the future, it’s likely that your profit is considered capital gain.
Currently capital gain is 50% taxable. So 50% of what you make from selling bitcoins would be taxable.
If you are trading bitcoins on a daily basis, and showing day trading behaviour, the profit you make can be considered income in the eyes of CRA.
Income is 100% taxation. Profit from selling bitcoins would be 100% taxable at your marginal tax rates.
If you are holding bitcoins/digital currency in excess of $100K Canadian dollars outside of Canada, you have reporting responsibility on your tax returns.
Be sure to report that on your T1135 Statement of your annual return.
Admittedly, I have very limited knowledge in this area. I’ve had one client who considered mining bitcoins and he subsequently abandoned the idea.
Tax implication on mining can vary, depending on whether you are treating it as a hobby or a business.
If you are mining as a business, the income generated is taxed 100%. All the related cost of operating this business can be deducted.
Regardless of what you do, it’s always best to keep all your receipts and records.
In that case, regardless of what the tax law is on digital currency, you have all the supporting documentation required.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
PS If you want to learn how I grow another stream of income, you can also join my team tonight on a free demo – registration link here.
What a year!
If you have followed my blog post long enough, you would have known about our charity – Hamilton Basket Brigade.
We got a large quantity of shoe donation from a wholesaling company that’s shutting down. As a family, together with the help of our charity co-founder Roger Auger, we picked up 25 BIG boxes over the weekend.
With the help of our team, we were able to sort all the shoes for school donation this past week. Our office was a mess, but our team had the BEST XMAS party ever.
I’m so grateful to be surrounded by all the generous people.
As we are slowly winding down for the Christmas holiday, there are a few reminders that I want to share with all of you.
Tax loss harvesting
It can be because I’m the founder of Stock Hacker Academy, it can be because I am trading as well. I get a lot of questions about stock trading taxation.
Stock option taxation is complicated.
Many of my clients made a killing trading stock option during the pandemic. Many people hit the 6 figures return this year.
P.S. if you want to find out how these people made a killing, we have a Christmas promotion running right now… It’s our end of year blowout sale (meaning HUGE DISCOUNT). You can start where they started.
If you are one of these people who made a killing in the stock market, you might want to investigate your current holding and see if there are any losing positions right at this moment.
You might want to realize the loss NOW. 😊
If you are a real estate investor who sold your property this year and made a fortune, it might be worthwhile realizing some capital loss in your stock portfolio.
By realizing the capital loss in your portfolio, you can offset the capital loss against the capital gain that you have made.
You might still be optimistic about the future of the stock, can you realize the loss and buy back the stock right away?
Unfortunately, the answer is a no.
You cannot realize the loss, then buy back the stock the next day. CRA would deem it as “superficial loss” and disallow the capital loss you just realize.
You can, however, buy it back after a 30 day period.
Can you realize the loss in your regular trading account (non-registered) and buy back the stock in your TFSA or RRSP account?
Unfortunately, the answer is still a no. ☹ They can still disallow your capital loss.
Can you realize the loss in your personal trading account and buy back the same stock in a corporation account?
Unfortunately the answer is no, especially if the corporation is fully owned by you or your spouse. You cannot buy back the identical stock in a different entity.
For those stock option traders there, you might wonder, can you roll a losing option to a different expiry date and avoid superficial loss?
Superficial loss rule applies when an investment is sold and the same or identical property is repurchased within 30 days.
Rolling a losing option (meaning selling an option and repurchasing another one with a different strike price and expiry date), chances are, the option sold and the option purchased aren’t considered the same or identical property.
Chances are, superficial loss rule will not apply.
CEBA loan expanded
CEBA loan is finally expanded.
For those of your who are unaware of what CEBA loan is, it is basically a government interest free loan that is available to qualified small business owners to apply.
To qualify for the CEBA loan, you will have to either
The interest free loan has been increased from $40K to $60K.
If you have already got y our $40K approved, all you would need to do is to go back to your online banking platform, hit a few button, and you will be able to qualify for the additional $20K.
Out of the $60K loan, $20K will be waived if you repay $40K by the end of December 2022.
Commonly asked question:
If you a real estate investor and own your residential rental in your personal name and you do not have a business number registered, chances are, you won’t be able to qualify.
If you are a real estate investor that owns your properties in a corporation, chances are, you can qualify. Make sure you speak to your accountant to understand it.
If you are a real estate agent and does not have a business bank account, you might be able to qualify now. For our clients, we have already prepared a video on how to apply without the bank account.
You can always find out more about the loan from their website directly.
Home office expense deduction
It’s COVID year. Many of us work from home.
In the past, if you want to deduct home office expense, you need a form filled out by your employer declaring that you have worked from home for certain % of your time.
That form is T2200.
CRA decided to give a break to taxpayers and employers this year and provided a simplified process for home office expense deduction, provided that you, as the employee, meets the following criteria:
To use the temporary flat rate method, you are eligible to claim $2 for each day you worked from home up to a maximum of $400 annually. If you use the flat rate method, no receipts are required. 😉
Of course, you can always find out more from CRA’s website.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
When you put your name out there and share your knowledge, it’s inevitable that some other people do not agree with you.
Earlier this week, someone made a comment on my Instagram post that investors would pay double taxation if they setup a corporation to earn passive income.
I responded by explaining that the Canadian Tax system is designed with tax integration in mind. Basically, you should pay more or less the same amount of taxes whether you earn your business income/passive income in a corporation or personally, assuming that you take out all the profit from the corporation and report them personally in the same year.
Tax integration isn’t always perfect. Sometimes, you pay a couple % more. Sometimes, you pay a couple % less.
He responded by saying that he knew about tax integration and he’s a tax advisor himself. He insisted that it wouldn’t make sense to setup a corporation for people who’s already at the highest marginal tax bracket, i.e. 53.5% in Ontario.
He might be right to a certain extent, but he’s only looking at one piece of the puzzle without finding out all the facts of the individual taxpayer.
What if you flip properties and build new homes?
This tax advisor did mention that if you flip or build new homes, that’s the ONLY time it would make sense to earn the income inside a corporation.
Flips and profit from building new homes are considered active business income. Active business income is taxed at 12.2% in Ontario when it’s earned inside a corporation.
I agree with his comment 100%.
What if I have a small business in a corporation?
I own a couple of small businesses and I am funding my real estate investment using my small business income. My businesses only pay 12.2% corporation tax rate.
For every $100K I earn in the corporation, I would pay $12,200 income tax. I have $87,800 to invest in the corporation.
If I have to take out the $87,800 to my personal name to invest, I will have to pay an additional layer of personal income tax. I would have substantially less to invest if I were to invest in my personal name.
In this scenario, it would not have made sense for me to invest in my personal name.
What if you want to grow your portfolio to the next level?
Well, recently we have many clients asking us how to take their real estate investment portfolio to the next level.
They’ve started out investing in their personal names. They qualify for financing using their own income and the banks have already given them 5 mortgages.
Now they want to buy more. Most banks are saying no. ☹
They’ve hit the wall!
Buying properties directly in the corporation allows investors to borrow based on the cash flow of the properties. Mortgages on these properties are registered in the corporation’s name, increasing the investors’ capability to qualify for more mortgages.
(Disclaimer: I’m not a lawyer, this is experience talk, not advice. Consult with your bank on how to qualify for more mortgages.)
If your goal is to grow, exploring different avenue that would allow you to buy more properties is important.
Owning your properties and mortgages inside the corporation can be an option to help you getting to the next level.
What if you want limited liability protection?
Say, you have $200K sitting in your RRSP and a fully paid off primary home.
Now, you’re planning to buy a 20-unit residential building, would you be comfortable owning it in your personal name?
I wouldn’t.
If you own this property in your personal name and if you ever get sued, guess what, your personal assets can be at risk too.
Having your property inside a corporation can provide an extra layer of protection that you would not otherwise have.
Recognizing that tax cost is one piece of the puzzle is the key. There’re many factors that go into making the decision of ownership structure.
It’s irresponsible to make a blanket statement saying that earning passive income in corporation would cause double taxation, which isn’t even true, without considering the taxpayer’s objective and personal situation.
Most importantly, my Instagram post is meant to be for real estate agents who can be interested in setting up corporation, not for real estate investors.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
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