First and foremost, thank you so much for all your emails about Bruce. He’s home now and his left cheek goes back to normal.
He was admitted to the hospital this past Sunday. A minor fall caused an infection on his left cheek. Our family doctor was concerned that the infection can affect his brains through his eyes.
He’s discharged the second day after showing significant improvement from the day before. His swelling completely went away as I write this blog post.
Having gone through this relatively minor incident made us appreciate simple things in life so much more.
Since the kids are with me this week, I’m going to keep today’s post short and sweet.
Quick update for those of you who follow my blog:
If you are eligible to apply, make sure you submit the application before August 31.
I got an approval on one CEBA application $40K earlier this week. I got one rejection as well.
It turns out that a lot of clients had to resubmit their documents multiple times before they get their approval from the government.
One client, who’s a contractor and house flipper, pays his trades as subcontractors. He had to resubmit his documents for 5 times, with more documentation every time, before he got his approval!
As a result of COVID-19, CRA has originally extended the tax filing deadline and also allowed taxpayers to pay for any of the balance owing at September 1.
September 1, to be honest, is quite confusing to many of us. Many people mis-read it as end of September.
Now, they’ve made it official that we’re allowed to pay for our tax owing by the end of September 30.
Yay – we got yet another tax extension!
For those of you who still have not filed your taxes, you have until September 30 to file your taxes and issues payment to avoid any penalties.
Make sure you reach out to your accountants to get this sorted before any penalties imposed.
Good luck to all you guys out there with CEBA loan application. 😊
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
It was a fun and interesting week last week.
We originally planned to go up north, and spend some time at our friend’s cottage. Things changed last minute and we cancelled our trip.
Since I had the entire week blocked off for vacation, I figured it would be nice to keep it off and enjoy my staycation.
Erwin recently picked up golf and has been playing every week. I golfed, but hadn’t played for a long time.
Erwin and I are value hunters. He had been buying coupons off some golf websites to get better golf rates at different clubs. We finally ended up ordering a thick coupon book to take advantage of all these great golf courses nearby.
Golf is a humbling game. The more you play, the more you realize that you need to practice.
So we started doing a few practice swings in our backyard.
One of my favourite parenting quotes – “Children close their ears to advice but open their eyes to example.”
Seeing us practicing inspired my son to ask me later, ‘Mommy, can I practice golf in the backyard today?’
It’s cute and sweet. Also goes to reinforce my life mantra – “lead by example”.
Lead by example is my life mantra and my parenting mantra. 😊
Many of us invest because we want to have financial freedom. We want to be able to provide for our kids’ future education. We want to have enough for our own retirement and still have some left for our children.
Recently, I met with a prospect who’s a widowed mom and decided earlier on that real estate investing would fund her retirement.
She went on to purchase a couple of investment properties and she would like to sell one of these properties to her son at below market value.
What would the tax implication be when you sell a property at a price significantly lower than fair market value?
Well… just like everything else in the Income Tax Act, it can get complicated.
Mom’s tax implication
When mom sells a property to her son at below fair market value, the property would still be deemed to dispose at fair market value.
Let’s use an example to explain.
Mom purchased the property for $200K and has been using the property exclusively as a rental property.
Current fair market value of the property is $500K.
Mom would like to sell to her son for $300K.
In this example, the Income Tax Act would deem to have the property disposed of at fair market value.
In other words, mom’s deemed sale price = $500K.
Mom’s purchase cost is $200K.
Mom would need to pay tax on the $300K capital gain.
Son’s tax implication
Son purchases the property for $300K.
He would need to pay land transfer tax on $300K. Ontario land transfer tax on this $300K purchase would have been $2,975.
If property is located in Toronto, son would need to pay double.
Son’s adjusted cost base acquiring this property is $300K + $2975 + legal fees, say $2,000 = $304,975.
If he keeps it as a rental property and eventually sell the property for $600K, the capital gain is calculated as the following:
$600,000 – $304,975 = $295,025.
If you’re following along, you may wonder…hey, mom just paid taxes based on the sale price of $500K.
So the tax between $500K and $300K (the transfer price) would have been taxed one in mom’s return.
Why is the son taxed again?
Unfortunately, transferring the property at below fair market value would result in double taxation.
Son would have to pay taxes again on capital gain that mom has already paid tax on.
Sucks!
Solution?
If mom is able to gift the property outright, the adjusted cost base (tax cost) to son would have been the fair market value. No land transfer tax is triggered as the gift is given out of love and affection. 😊
If that isn’t an option, and the son’s intended use is to live in the property until it is sold, mom can still sell the property at $300K as intended and not get double taxed.
If that isn’t the case, make sure you consult with a professional to calculate the cost and benefit analysis for each option.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
One of the most common misconceptions is how we calculate capital gain tax on sales of property.
Many real estate investors would estimate their taxes on a cash flow basis:
Net sales proceeds – mortgage balance
This may be how you calculate how much cash is left in your pocket, but capital gain taxes are not calculated this way fortunately and sometimes unfortunately. 😉
Capital gain is calculated like this:
Capital gain = net sales proceeds – adjusted cost base of your property
If you need a refresher on how capital gain taxes are calculated – here is the link.
Continuing on the same example from the same capital gain tax blog post.
Taxpayer purchased a property for $250K in year 1 with an 80%, interest only mortgage of $200,000. Taxpayer invested a total of $50K.
Taxpayer refinanced the property in year 5 and it was appraised at $350K, got 80% loan to value with a mortgage at $280,000. To keep things simple, it is an interest only mortgage.
Taxpayer sold the property for $350K in year 6.
Myth#1: I sold the property for $350K and my mortgage is $280K. Shouldn’t I just pay taxes on $70K only?
We know from the previous blog post that tax calculation is based on the sale price and adjusted cost base of the property.
Adjusted cost base of your property typically includes purchase cost, land transfer tax, legal fees and all the improvements you’ve made to the properties over the year.
In this particular example, capital gain tax is calculated as below:
Not based on the $70K cash available.
Myth#2: I sold the property for $350K and its adjusted cost base is $250K. I made $100K. Why am I getting less than that from my lawyer?
Well, let’s examine the sequence of events.
Year 1 – the net investment is negative cash flow of $50K.
Year 5 – when the refinance happena, the taxpayer would have gotten $80K out from the refinance.
Year 6 – sale occurred. After paying $25K of taxes, the taxpayer would only pocket $45K.
Combined with the cash flow from all these years – the net after tax profit is $75K.
What if the taxpayer never refinanced?
It turns out, the net after tax profit is the same $75K.
What if the taxpayer refinanced multiple times?
Well, it is possible that you’ve already taken out all the equity from the property. And it is possible that you would end up paying out of your pocket for the taxes on sale.
Make sure you consult with a real estate professional accountant before selling.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
Erwin and I have scheduled date nights weekly.
It’s not easy to commit to these dates regularly.
Putting it in our schedule is one thing, making time for each other and going on a real date is a different thing though.
Stuff happens, last minute client request, kids’ commitment, etc.
I was almost going to cancel it this Tuesday so that I could hang out with my friend instead, but I didn’t.
We were more committed before COVID-19 lockdown, we fell off the wagon over the last few months.
We somehow pulled it off for the last three weeks in a row. (Big high five to ourselves for our commitment.)
When we read the fairy tale stories to our kids, they usually end with “the princess and the prince live happily ever after.”
I would always add to the ending that there is no such thing as happily ever after without work.
We must put work into it for it to work, just like everything in this world.
Just like using trust agreement and beneficial ownership to own properties in the corporation. You need to put in some work to make the relationship work.
BIG DISCLAIMER: Before I dive into the nitty gritty, I want to tell you that I am not a lawyer. I’m trying to explain a concept that we routinely use in the real estate world from a tax perspective. Make sure you consult with a lawyer on how beneficial ownership works from a legal perspective.
There are two types of ownership – legal ownership and beneficial ownership in Common Law.
Legal ownership is the legal title. If you own a property, your name is on title in the Land Registry. Your name would appear on mortgage documents, utility bills and property tax bills. Basically, on paper, you’re the owner of the property.
It turns out, you don’t have to be the registered owner of a property, but you can still own the property.
If you are the beneficial owner of a property, you have control of the property, get to use the benefit of the property and get to pay the bills related to the property.
Beneficial owners are the real owners. They are ultimately the natural person/persons that own and control the property.
In many cases, legal owners = beneficial owners.
Using your primary residence as an example, you purchase property in your name, you’re the legal owner. You control the property, get to enjoy the use of the house, pay for the bill, you’re also the beneficial owner.
In some rare cases in the real estate investment world, mostly for financing, joint venture and legal liability reasons, legal owners may not be the same as the beneficial owner.
Many real estate investors find it to be more convenient to purchase properties in their personal names.
The mortgage qualification process in your personal name is a lot easier compared to getting a mortgage in a corporation. Interest rates are higher for corporate mortgages. Terms are not as favourable.
But these investors would still like to take advantage of the tax planning flexibility offered by a corporation.
So they take advantage of this beneficial ownership concept, also acknowledged by CRA, own properties in their personal names, but designate the beneficial owners as their corporations.
In layman terms, legal owners = personal names. Beneficial owners = corporation.
The Legal owner signs a trust agreement declaring that the beneficial owner is the corporation.
The Corporation reports all income and expenses, ownership and liability.
The Corporation pays for the downpayment for the purchase of the property.
The Corporation also receives all cash, pays all expenses, signs off on lease agreements.
What’s the catch here?
Transactions involving trust agreements pose another layer of complexity in the real estate investing world.
If the trust relationship is not properly executed, the CRA can deem that the relationship did not exist.
Every step along the way must be properly executed and documented.
Legal documents have to be done in the proper name, money must be deposited in the corporation bank account.
If the CRA determines the corporation does not actually own the property, the individual taxpayer has to report all the years of income related to the property.
Not good at all.
If you’re considering owning properties in the corporation via trust agreement, make sure you consult with a knowledgeable accountant in this area.
Better yet, own the properties directly in the corporation’s name and qualify for mortgage in the corporation’s name.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
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