I first heard about this line years ago from Nick Karadza at the Rock Star Inner Circle member event.
When I was in my early twenties, I thought success means that living in a nice home while driving a Mercedes. I did it to appear successful, at least in my parents’ eyes.
As it turns out, living paycheck by paycheck cannot really be considered “successful”.
Years later, I started my accounting business when my daughter was 10 months old.
My dad asked me how much I made after the first year in business… and I couldn’t respond, I net less than $30K that year. To put it in perspective, at the time, if I were to work for a corporation in the accounting capacity, I would be making around a 6-figure salary.
I was juggling being a new mom, starting a new business and managing my real estate portfolio.
I did weekly blog post and free consultation. I drove to different real estate events to market myself. I had to do follow up with prospective clients and provide quotes. I saw prospective clients in the morning, at night and over the weekend. I saw them in Markham and Oakville, while I lived in Burlington.
Once they decide to work with me, I gather information from clients, prepare the returns, review them 2nd time by myself, ask client questions, collect response, prepare invoices, receive e-transfer, deposit cheques, follow up with accounts receivable.
When I was working for someone else, I spent a lot of time during work hours on personal stuff. I was such a bad employee. Then I started my business, my life turned upside down.
When I finished my book Complete Taxation Guide to Real Estate Investing, I woke up everyday at 5am to put it together. Otherwise, who would have the time to finish putting a book together?
Today, I’m grateful to have a team to work with me… but I still can’t find time to buy a pair of hiking shoes.
Hiring, office management, cash flow forecast, marketing, manage and coach my team…
Today, my definition of success is to be the best version of myself. If I can be better than yesterday, even by a little bit, I consider myself successful.
This may mean, choosing to have a black coffee over my favourite Second Cup Mocha, which contains over 1,000 calories. 😉
This may mean, waking up early to spend a bit more time with my kids.
This may even include paying more taxes. I know, paying more taxes sucks! But the reality is that, you need to make more money to qualify to pay more taxes.
But…not everyone has the same philosophy though.
In a recent court case, two individual taxpayers formed a corporation to purchase a restaurant business.
The restaurant was run on a point-of-sale system (POS), which recorded all the sales. The restaurant accepted cash, Interac and credit card payments.
At the end of the day, the individual taxpayer downloaded all the transactions from the POS and amended them to eliminate all cash sales.
He then delivered the amended record to the accountant for bookkeeping and tax return filing purpose.
They amended 9,715 sales entries to no sales entries in 4 taxation years.
They essentially pocketed ALL cash sales and HST on all these sales.
The corporation is liable to pay back all HST AND the income tax owed on all cash sales.
The two individual shareholders are also liable to pay personal income taxes on all cash sales that they pocketed, plus, gross negligence penalty 50% on the tax payable.
People do go out of their way to make sure they get to keep more money in their pocket – even illegally.
Do get better everyday, legally, not illegally.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
I was lucky enough to golf with a couple of friends and clients yesterday at a local golf course located in a residential neighborhood.
We often had to cross local streets to get from one hole to the next.
At one of the intersections, I ran into a kid selling used golf balls to “fund his college education”.
While I was a bit amused by what he was doing, I moved on quickly.
Then I realized how much courage and planning this kid had to put in there to setup a stand selling used golf balls.
As a mom, and a fellow entrepreneur, I can’t tell you how much I appreciate what he does. 😊
I quickly stopped my cart at the next hole, ran back, gave him $15 to buy 3 bags of golf balls.
I want to share with my kids this story so they can also be inspired to put themselves out there.
They don’t need to be business owners, but I hope that they can be brave enough to try different things, things that they like, things that they fear. Be open minded, not afraid of failure.
I want to support and encourage the creativity.
Unfortunately, not all ideas are legitimate.
A client recently informed us about his intention to implement the TFSA maximizer strategy.
While we are all for minimizing taxes and maximizing tax free investment, not all tax strategies out there are born equal.
Some are a legitimate arrangement.
Some are not and CRA is aware of it.
Turns out that CRA is also aware of the TFSA maximizer scheme.
Promoters of the TFSA maximizer scheme generally claim that they can help their clients transfer money from their RRSP account to TFSA account without paying taxes and without regard to the annual TFSA contribution limit.
When I first read about the scheme on the CRA website, I thought it was a brilliant way to transfer money out of your RRSP into TFSA. I’ll share with you how it works based on what I learned from CRA’s website.
Typically, the promoter of the scheme promotes and operates a special purpose mortgage investment company (MIC) that invests in mortgage loans.
The MIC has two different classes of shares. One class of shares pays high yield of dividends while the other pays very low rate.
The taxpayer buys high rate shares using his/her TFSA money and low rate shares using his/her RRSP money.
MIC lends the share proceeds back to the taxpayer in the form of mortgage bearing interest at rates corresponding to the dividend rates of the two classes of MIC shares. The loan is secured by the taxpayer’s primary residence.
The loan is then being used by the taxpayer to invest with the promoter to earn taxable investment income.
If you’ve been on this blog long enough, you would have known that interest is deductible if you are borrowing to earn investment income.
The taxpayer gets a deduction in his tax return.
The taxpayer then withdraws money from their RRSP to offset against the interest deduction.
In a few years the entire RRSP balance is “shifted” to the TFSA and the money earned in TFSA is not subject to the annual TFSA contribution limit.
Brilliant! 😊
But…
CRA discovers this scheme, and they think that it is unreasonable that the TFSA can earn higher dividend than RRSP.
They also think that the interest earned by the MIC, which then gets distributed as dividend to the MIC’s shareholders, is unreasonable commercially.
The high interest rate paid for by the taxpayer on the mortgage and the high dividend that the TFSA receives are unreasonable.
The taxpayers who participate in these schemes are borrowing against themselves.
The increase in value of the TFSA would be considered an advantage subject to 100% advantage tax.
This can be equivalent to the fair market value of the benefit received by the TFSA – essentially the entire high rate dividend paid to the TFSA account.
Boo!
If you are planning to participate in any of these schemes, be aware of them. Make sure you stay on the right side of CRA.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
A recent headline from Global News caught my eyes “CRA study from 1996 found migrants bought BC luxury homes despite having low incomes”.
CRA conducted a study 25 years ago in 1996 found that a majority of homes bought in Burnaby and Coquitlam were purchased by immigrants who declared minimal income.
Specifically, 33 out of 37 homes worth more than $800K purchased in a two-month period in 1994 were purchased by recent immigrants who declared a global income of $16,430.
The other 4 buyers who were long-term residents within the same period were showing over $263K of annual income.
Another example found was that one buyer reporting $174 income in 1994 purchased a $2.88-million home in the same year.
Some were reporting negative global income as well.
The article is alluring that these immigrants under-report their global income, possibly “laying the foundation of Vancouver’s current housing crisis”.
The article also suggested that long-time Canadian tax residents buying similar houses would have to make a lot more money and pay a lot more taxes to afford them.
The fact that these new immigrants were reporting such low global income created an unfair playing field for local long-term residents.
While I agree that there’re immigrants who are not reporting all global income on their Canadian tax returns, this article also failed to consider many other factors new immigrants have to face.
1. New immigrants are required to declare the amount of cash they’re bringing in when they move to Canada
When new immigrants first land in Canada, they must submit a detailed listing of what they have and how much they will transfer to Canada in the near future.
New immigrants may have been millionaires in their home country, to begin with. However, if they liquidate all their assets before moving to Canada, they can transfer the money to Canada without paying any taxes.
It isn’t unusual for immigrants to sell all they have in their home country, have enough cash to buy a place, and have a sufficient amount of cash reserve to pay for their living expenses.
2. Information about business and assets would have to be supplied to the government for a certain type of immigration application
My family was approved to come to Canada because of my dad’s business in Hong Kong.
He was required to provide information about his business to the Canadian government and his statement of assets during the application process.
If our finances didn’t meet the minimum requirement, we couldn’t have got approved.
In other words, the Canadian government purposely selects certain immigrants who have entrepreneurial backgrounds and certain assets to come to Canada.
Many of these immigrants were successful financially, to begin with. As a result, their assets and previous income would not have to be taxed by CRA before becoming Canadian residents.
3. Difficulty of new immigrants to get a job or open a business immediately
My family had a humble beginning. We went through multiple applications and interviews before we could get approved.
One of the requirements was that my family would have to open a business locally and hire at least one local Canadian resident within 2 years after coming to Canada.
Starting a business is challenging.
When I first started my accounting business, I made very little money. Nothing compared to what I made when I was working for someone else.
It isn’t surprising that many of the new immigrants are reporting a minimal level of income.
Immigrants who came here as skilled workers would also have a hard time getting a job.
It isn’t easy to convince local employers to trust someone who has no local experience and education.
Many immigrants took a long time to settle down – which means that they would not have had a job to earn any income.
Then they started looking for jobs, which normally pay less than what they made back in their home countries.
They still come with their savings. They still have enough assets/cash they earned before coming to Canada to support their initial lifestyle.
4. Lack of tax knowledge
I moved to Canada when I was 16, and I was the only one who spoke English. I still remembered how difficult it was for my mom to get any local knowledge.
Everything was a process… from applying for health and SIN cards to getting a driver’s license.
From renting a place, furnishing the property, to taking public transit, everything was a learning experience.
I remembered that my mom often turned to some self-proclaimed specialist that could speak English and Cantonese for advice.
Some are true specialists; some may just know a bit more than my mom.
It isn’t particularly easy for a newcomer to understand everything, including our complicated tax law.
These new immigrants might not even be aware that they are required to report global income. It isn’t an excuse; it’s just the fact.
5. CRA can use the Net Worth Method to hunt down undeclared income
For those of you who don’t know, CRA has a secret weapon that can catch unreported income locally or globally. It’s called the “Net worth method”.
If Canadians are buying luxury homes and vehicles with minimal income reported, CRA can take the value of your homes and vehicles, add them all up, compared to all your after-tax income from all the years, to see if you have any unreported income.
Canadian residents can provide proof of source of income to how they afford to purchase these luxury items. If they originally got their money from funds outside of the country, they would have to show documents proving so.
It might not have been easy, but they do have their tools to go after unreported income and unreported global income.
As a long-term Canadian resident, once an immigrant and an accountant that focuses on working with real estate investors, we need to consider all factors as to why our housing prices keep going up and why we are faced with a housing crisis.
Immigration increases the housing demand and pushes housing prices up… but Canada has been a country of immigrants since the 16th century.
Can we afford not to have immigrants? Probably not.
Unreported global income from other countries by new immigrants may have been just one small piece of the puzzle, but by no means is it the main cause.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
Many real estate investors and small business owners wonder if they should pay themselves salaries or dividends from their corporation.
I started off paying myself all dividends in the early days. Nowadays, I pay myself a combination of dividends and salary.
The truth is, there is no one size fits all solution.
Let’s revisit the blog post I wrote four years ago on this topic.
1. Salary is a deductible expense, and dividend is notLet’s use an example to illustrate.
Say a corporation makes $400,000 before paying a salary. Now they have to decide whether they should pay the salary or dividend.
Say the corporation pays $100,000 to the shareholder as a salary, the corporation is taxed on $300,000 at 15%. The individual who receives the salary will then pay tax on the $100,000.
If the corporation decides to pay the dividend instead, the corporation would first get taxed for $400,000 at 15%.
The individual then receives the $100,000 as dividend.
When the corporation pays a salary, it is also required to withhold taxes, employee’s portion of Canada Pension Plan and Employment Insurance and remit them to the government.
When you get paid for $100,000 salary, you always know that your net amount is never $100,000.
As an employee, you are responsible for making contributions to CPP & EI.
In addition, you are, of course, also responsible for paying personal income tax on the $100,000 you earn.
CPP is maxed out at $3,166. EI is capped at $889.54.
The employer, which in this case is the corporation, is also required to make the same amount of contribution of CPP and 1.4 times of EI, capped at $1,245.36.
If you own the corporation, more often than not, we advise the clients to opt out from paying EI. The theory behind it is that you cannot fire yourself from your own company.
Unless you get pre-approval from CRA to opt in for the Employment Insurance plan, you are likely not eligible to claim employment insurance anyway.
The corporation is incurring an extra deductible expense of $3,166 if it chooses to pay you a salary instead of dividend.
If you combine the employer portion and employer portion of CPP, the total cost is more than $6K that you will not otherwise need to pay if the corporation chooses to issue a dividend.
Although the costs seem to be higher with salary, there’re some other benefits from paying a salary.
RRSP contribution limit is calculated as a percentage based on earned income. So salary is one of them, but dividend isn’t.
If you want to save money in your RRSP account, paying yourself via dividend won’t work.
Banks look at employment income more favourably when you apply for a mortgage. So, paying yourself a salary can allow you to qualify for more mortgages and purchase more properties.
For the parents out there with young kids, you may incur childcare expenses, of which a portion of it is deductible against your income. Although, it is only deductible against the lower income’s spouses earned income.
Dividend income is not part of the definition of earned income, but salary is. In other words, if you make a $100,000 dividend income, you’re the lower-income spouse.
If you also incur $8,000 of childcare expenses, you will NOT be able to deduct the $8,000 expense in your personal tax return.
When you earn a salary, you get another $2,000 employment amount as non-refundable personal tax credit. Self-employed individuals are not eligible to claim this amount, unfortunately.
Calculated on the base personal tax rate, this is equivalent to $2,000 x 15% = $300 non-refundable tax credit.
This isn’t available when you earn a dividend income. In other words, you got to save $300 if you pay yourself a dividend.
When you pay a low-income spouse or adult child salary, it must be a reasonable amount.
The family members must work for the company, and the amount must be comparable to the market.
But when you declare a dividend, you can choose the amount you pay them.
See my earlier blog post about splitting income with a lower-income spouse.
If you are using your corporation to split income with your lower-income family members via dividend, you might want to consider issuing them a salary instead.
In 2017, our current Prime Minister Justin Trudeau implemented new tax law imposing significant taxes on the amount of dividend you could potentially pay to your lower-income spouse and family members, with certain exceptions apply.
If the dividends aren’t reasonable, the amount can be subjected to the highest marginal tax rate. ☹
If salary is paid, the risk is limited.
Okay, it is not a simple answer, isn’t it?
Speak to a professional accountant that knows your personal situation before making a decision. Don’t forget to consider the five points illustrated above.
Until next time, happy Canadian Real Estate investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
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