We had been helping many real estate agents setup corporations in the past few months.
Many of them are high income earner, high commission income with little deductions.
One thing we suggested to those who are interested in buying a new car is to purchase an zero emission vehicle.
(As a disclaimer, I am not a big proponent to buy a car to get deduction. But if you are required to buy a new car anyway, you may as well take advantage of this deduction.)
A zero emission vehicle, if purchased before 2024, allows the taxpayer to get a bigger deduction than buying a regular car.
Of course, this includes Tesla as well. 😊
Many of these top producers decided to get a new car so that they can get a bigger write off the year they purchase the vehicle.
And here’s how it works:
If you drive a car to earn business income or property income, you’re eligible to deduct the business use of the vehicle expense.
Typically speaking, when you purchase any vehicle, you can claim the annual wear and tear of the purchase price of the car (up to a maximum of $30K plus HST).
The annual wear and tear deduction is called capital cost allowance in tax terms.
The annual rate of deduction is usually 30% on passenger vehicles, exception applies to first year of deduction.
You may spend $22K on a used vehicle, CRA would take the $22K as the starting point of the CCA calculation.
You may spend $60,000 on a new Lexus, CRA would only count $30K plus HST as the starting point of the CCA calculation.
Using an example to illustrate, you purchased a $60K new Lexus in 2021 and you only drove 80% of the time for business purpose:
1st year deduction = $30,000 x 1.13 x 30% x 80% = $8,136
2nd year deduction – you start with the amount that has not been depreciated first and apply the 30% rate decided by CRA = ($33,900 – $30,000 x 1.13 x 30%) x 30% x 80% = $5,695
Year 3, 4, 5, 6…and so on…are all the same… amount of deduction is gradually going down every year.
Now… when you buy a zero-emission vehicle after March 18, 2019, and you DON’T take any government rebate, you will get bigger deduction. Here’re the difference.
Maximum capital cost is increased from $30K + HST to $55K plus HST to start off.
And…the capital cost allowance that you can claim annually is…wait for it… 100% for vehicles acquired after March 18, 2019 and before 2024.
What?! 100%?!
Instead of buying a Lexus, you’re buying a Tesla Model 3. This is an emission free vehicle, and again, you use the vehicle 80% of the time to earn business income.
1st year deduction = $55,000 x 1.13 x 100% x 80% = $49,720
That’s it. No year 2, no year 3, no year 4 deduction. Done and over with!
This can be translated to an immediate tax benefit in year 1 of $20,792! (assuming you’re 50% marginal tax rate)
Of course, there’s some other impact when you eventually sell the car, that’s a topic of another day!
Now, when you are off to shop for your next car this year, maybe there’s just a bigger incentive for you to pick a zero-emission car over a regular car!
Make sure you consult with a qualified accountant before you start shopping!
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
It’s March 18. Our team is getting extremely busy during tax season.
With the lockdown rules changing by the minute, we were fortunate enough to visit a ski hill for a couple of runs this past weekend.
I learned skiing properly the very first time in the last ten years. I wouldn’t consider myself as a control freak, but I do prefer to have a bit more control than skiing… at least that was how I felt last year.
With a couple more falls and another proper lesson this year, I feel that I have a lot more control this year. 😊
It wasn’t easy for sure, but it was still enjoyable.
All I want is be the example that my kids can follow.
It’s okay to start something new.
It’s scary to start something new.
And it is going to hurt when we start something new.
It will get better with practice… and practice makes progress.
Hopefully, that few falls that I suffered were well worth it. 😉
In my accounting practice, I work with hundreds of real estate investors. Many real estate investors make good money and have built a great rental business using real estate.
Some landlords, however, are not as lucky as others. Some tenants are delinquent in rent and they refuse to pay.
Late last year, we came across a service offered by a Toronto-based company called Landlord Credit Bureau.
Essentially Landlord Credit Bureau partners up with Equifax Inc., a Canadian credit bureau that tracks a tenant’s rent payments.
Landlords report the rent payment history to Landlord Credit Bureau.
If tenants are on time, the rent payment history builds up the tenants’ credit score.
If tenants are late, the late payment history also hurts their credit score.
Tenants get rewarded for being good tenants. They also get penalized for being delinquent.
You can find out more about them in this Financial Post article.
Before this service, we, as landlords, have no way to report the amount of outstanding rent owed by tenants.
Many landlords, myself included, either “eat the loss” or go through the collection agency to recover some of the losses.
When I learned about the service offered by Landlord Credit Bureau, I thought it would be a great tool to level the playing field between landlords and tenants.
But being a busy mom, I didn’t really get a chance to look into it much further.
Then I saw this earlier this year on Facebook…
For the record, I am not affiliated with Landlord Credit Bureau in any shape or form.
I just want to spread the message, share with you the tools that some of the landlords are using to level the playing field.
Do your own research. See if this is something you want to add to your toolbox. 😊
Hopefully, we can help the well deserving tenants to build up the credit that they would need to buy their own homes one day.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
Recently, our team has been getting a lot of questions about cash damming and how to turn a non-deductible primary mortgage into a deductible mortgage, also known as smith maneuver.
It would be nice to take today’s blog post to talk about how to turn a non-deductible primary mortgage to a tax deducible mortgage.
The bottom line is, interest is not deductible when it is not incurred to earn taxable income. You can always refer back to this Youtube video.
Here’re the few requirements that must happen to allow your primary residence:
It gets more complicated when you own your small business in your corporation name. That’s a topic for a one-on-one consultation.
If you don’t know what a re-advanceable mortgage is…
The most important concept to keep in mind is that interest is deductible if the loan is borrowed to earn investment income.
If you can somehow paydown your mortgage, your line of credit is increased. You then draw the funds out from your line of credit for investment. Line of credit interest is deductible.
The key here is that you must invest. If you don’t invest, you can’t turn your primary home mortgage as a tax deductible mortgage.
Here’s a general process how a real estate investor can turn their primary home mortgage to a tax-deductible mortgage:
Yes. Gross rent. We’re using gross rent to pay down your primary home mortgage.
I made a mistake in the past thinking that we would only use the net rent to paydown the mortgage. Using gross rent speeds up the process tremendously.
Here’s a general process how a stock hacker can turn their primary residence mortgage to a tax deductible mortgage:
All of these get more complicated when a corporation structure involved.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
Today is a big day.
Today is the first day of 3-day full day training for our March Stock Hacker Academy beginner course.
We added in an all-new day to make sure our students can get the most out of it. As always, I am going to present on the tax implication of stock options trading.
Today is also the closing day of our new home. We’re not moving yet, we’re doing some small renovation before we move in.
I smiled when I typed up the word small. We usually start with something small, then the next small thing and then we end up also updating the kitchen as well.
Oh well… 😊
It’s also March, which means that tax season is here.
I want to take this opportunity to recap on the top 10 tax deductions a real estate investor should not miss.
Many real estate investors think cash flow as their net income and they think that they get taxed on their net cash flow. If you would like to learn more about real estate investors.
Monthly mortgage payment consists of mortgage interest and principal pay down. Mortgage interest is a deductible expense but principal pay down is not.
The breakdown between the two can usually be found on your annual mortgage statement you receive at the beginning of next year.
When you estimate the tax liability owing, you need to add your net cash flow to the mortgage paydown to compute your taxable income.
Insurance coverage for rental properties is different than the home that you live in. Make sure you notify the insurance company about the change of use and that appropriate coverage is taken.
Generally speaking, insurance premiums on rental properties are more expensive than your personal home.
Make sure you do have sufficient third party liability insurance.
Any advertising cost incurred for the purpose of renting out the property is deductible. This includes all the Kijiji ad costs, ‘for rent’ signs that you purchase from Home Depot or specifically made for your property, etc.
If you hire a property manager or use a realtor to fill the property for you, these are all deductible expenses. Make sure you get the invoice from them to support your expense.
Repairs & maintenance are generally deductible expenses. The tricky part is to determine whether an expense incurred should be capitalized or should be expensed.
Expenses incurred to repair are deductible. Expenses incurred to improve the property should be capitalized.
If you paint the house, generally speaking it is a deductible current year expense.
If you pay for the stamp concrete for your driveway which did not exist before, this will be capitalized and appropriate capital cost allowance can be taken on it.
Municipal property taxes and utilities are generally deductible against the rental income. One of the most missed property tax and utilities deduction is at the year of purchase or the year of sale. Some of the adjustments are handled by the lawyers and many investors would miss these deductions.
Specifically for investors who converted their primary residence to a rental property, only the expenses related to the rental period would be deductible.
Financing charge is usually one of the most missed deductions for real estate investors. Some real estate investors incur mortgage insurance expense or finder fees for their mortgages.
These expenses can be deductible over five years, even though these fees might be added to the mortgage.
This one is tricky. Different criteria apply if you own one property versus when you own more than one property.
For investors who only own one property, you are only allowed to deduct motor vehicle expenses if
But you cannot deduct the expenses you incur for the purpose of collecting rent if you have only one property.
Now for investors who own more than one rental properties, on top of the expenses incurred for repairs & maintenance and transferring tools & materials as mentioned above, you can also deduct the following expenses:
To qualify for the multiple properties criteria, they must have at least two different locations than your principal residence. This means that if you rent out your basement apartment and have one single family detached home as rental property, you still cannot deduction any expenses incurred for collection of rent, supervision of repairs and general management of the properties.
Capital cost allowance is the tax term Canada Revenue Agency uses to represent the wear and tear on the building. It is a deferral mechanism allowed by CRA to defer the income on your properties until the year you sell it.
You can deduct capital cost allowance to reduce your net rental income to zero.
However, capital cost allowance is somewhat similar to RRSP. It’s a tax deferral, not a tax deduction.
When you sell it, all capital cost allowance taken against your rental property throughout the year are reported as income, assuming the amount you sell it for is higher than the amount you pay for the property.
You don’t pay tax not, but you pay the tax when you sell.
Many real estate investors start out by refinancing their own home to obtain the downpayment of their real estate investment.
As a general rule of thumb, any interest expenses you incurred for the purpose of earning income are deductible subject to a list of exception in the Income Tax Act.
In Canada, you have to “earn” your deduction. What it means is that documentation matters.
Whether you are claiming home office expense or automobile expenses, you are required to keep the actual receipts or the invoice.
VISA card statement and bank transactions are not enough to prove that the expenses were incurred for earning income. CRA does not accept bank statements as a proof of deduction.
Make sure you keep all the receipts and all relevant documentation.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
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