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
Last week, I discussed the process of applying for the CEBA loan under the expanded criteria. I also got a chance to be interviewed by one of the best real estate coaches, best-selling author, Russell Wescott, aka the JV Jedi.
We spoke mostly about the government subsidies programs that are available to real estate agents and real estate investors. Of course, we also spoke about the CEBA loan available – that real estate investors who own their portfolio in a real estate corporation can potentially qualify.
If you are interested in finding out more about him, you can contact him via this link.
During this interview, Russell asked me what I’ve learned over the last few months of pandemic lockdown.
There’s always something good in every bad situation.
It forced me to re-evaluate our businesses as a whole and appreciate what we have.
It forced me to slow down (although if you ask people around me, we did not slow down a bit) and make the best out of the situation.
It’s all about flipping a switch, looking at the bad situation through a positive lens.
Speaking of bad situations, I recently met with a couple who had left their rental units vacant for a while due to renovations and subsequently, health issues.
Their previous accountants did not allow them to claim the carrying cost of the property on their returns. They initially thought that they could be getting a large amount of refund from the government, but they ended up getting a nominal amount.
This poses a very valid question:
If you leave your property vacant, can you claim the carrying cost as an expense against other sources of income?
This depends on your particular situation. Here’re the most common scenarios we have encountered.
If you own a cottage (a residence other than your primary residence) and you don’t rent it out as short-term rental, the carrying costs including property taxes, insurance, mortgage interest and utilities are not tax deductible.
However, capital improvements you’ve made to the property, including structural changes, a new HVAC system, etc., can be added to the cost of your purchase.
When you eventually sell the property, your capital gain is lowered by the capital improvements you’ve made throughout the years.
As you all know, in Canada, we must earn our deduction. This also means that you have to keep the receipts of these capital improvements until you sell the property. 😊
We went to my best friend’s cottage for a weekend getaway. Her cottage is located right on the lake. She often rents out the property for the summer and winter to make extra income while her kids are busy with hockey practice.
Her cottage is partially rented out, therefore, the carrying cost of her cottage is partially deductible.
In other words, a portion of the property taxes, insurance, mortgage interest, utilities and maintenance and repairs on the property is tax deductible.
The portion that is deductible is purely based on the duration of the time the cottage is available for rent and rented out.
Capital improvements, similar to scenario #1, are added to the cost of the building and claimed when the property is sold.
If you purchase an older property, renovate to get it ready for rent, the cost of renovation is considered capital improvement to the property.
Similar to what we describe in scenario #1, capital improvements are added to the cost of the building and claimed against the future sale of the property.
In terms of the carrying cost, i.e. property taxes, utilities, insurance and mortgage interest incurred during the period the renovation is conducted, they are also added to the cost of the building and claimed against the future sale of property.
Yep. If you do major renovation and can’t rent out the property, the carrying cost of the properties are capitalized (added to the cost of the purchase) and used to reduce the future sale of the property.
Pandemic can be a difficult time for landlords to fill their vacant property.
We had one tenant move out in June, and the new tenants won’t come until August 1st.
The property is vacant in the month of July.
Can I deduct the carrying costs in the month of July?
Absolutely.
We engaged a property manager to advertise the property for July, but most tenants can’t commit to start until August.
Property is available for rent. It is in great shape and doesn’t even need any repairs.
WARNING: The CRA does not like to give refunds. Whenever you are asking for a refund, you will need to be prepared for an audit.
If the property is left vacant for a longer period of time because you aren’t able to locate any tenants, not as a result of renovation, this can pose a problem with the CRA.
I have gone through an audit whereby it took an investor three months to find a tenant. We produced all the reports, including Kijiji ads receipts, FB ad receipts, but the CRA auditor took an aggressive stand to disallow the three months of expenses.
Yep, not fair, but if we object, the cost of fighting is higher than the tax bill.
If you can’t locate a suitable tenant in a short period of time and deducting the carrying cost during this vacant period may trigger an audit, it is wise to consider capitalizing some of these expenses.
Add the costs to the purchase cost of the building and you can still claim them in the future. 😊
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
Happy belated Canada Day everyone.
Coincidentally, Canada Day is also the changeover anniversary day of my homeland, Hong Kong, from UK to China.
It’s a bitter-sweet day for people who still have ties over there.
On this anniversary day, China imposed a new set of security laws, which “makes secessionist, subversive or terrorist activities illegal…”
If someone shouts slogans or holds up banners and flags calling for Hong Kong’s independence, police now have the authority to arrest this person.
In other words, expressing political opinion is no longer a right over there.
Violation of the law may mean that you could be extradited to China. China has the death sentence.
Over 300 protestors were arrested within hours of this law coming into effect early yesterday.
Even the Canadian government has issued a travel advisory against this new legislation, travellers may be at increased risk of arbitrary detention on national security grounds.
Freedom of speech, that we Canadians all take for granted, is no longer available there.
We’re all beyond blessed as Canadians.
Speaking about being blessed, I just completed the online application for the Canada Emergency Business Account for my real estate holding corporation.
The application was supposed to be open two weeks ago, but the process got delayed. They are finally rolling it out to the major banks.
The process is surprisingly simple.
Here’s some of the information required:
I’m asked to confirm if I had filed my 2018 or 2019 tax returns. If so, I would need to provide Box 400 of my corporation tax return so that the bank can verify my application.
I’m also required to provide the total projected eligible non-deferrable expenses for 2020.
Based on my 2019 financial information, I was able to come up with my 2020 projection relatively easily. Here’s the sample I prepared for my own application for your reference.
The number I submitted is the TOTAL amount of non-deferrable expenses, i.e. $179,748 in my example.
I was then asked to provide proof of $40K of eligible non-deferrable expenses.
I provided my mortgage commitment letter that I received from my property refinance. Monthly mortgage payment is just under $3,000. I enter the frequency of payment and it works out to be $36,000.
I also submitted my property tax bill for the year, which works out to be around $5,000.
Combined of the two is over $40K. That’s all I have to supply.
The application process was much easier than I expected.
I have not got the official approval yet, so I am hoping the information I provided was sufficient for the approval.
For those real estate investors that own your properties inside a corporation, if you have more than $40K eligible non-deferrable expenses, make sure you apply and get some help from the government.
This CEBA loan will provide you $40K immediate cash to pay for these expenses. The loan is interest-free until December 31, 2022.
If you repay before December 31, 2022, $10K is waived.
If you aren’t sure you qualify, visit the government website to read through the eligibility requirement.
Potential problems for real estate corporation
Some real estate investors own properties in their personal names from a legal perspective, but designate the beneficial owner as the corporation.
This can potentially pose an issue when applying for the CEBA loan, as some of your mortgage statements can be showing your name, not the corporation’s name.
Additional documentation may be required to prove the corporation is the true owner.
In addition to that, when bills are issued, more often than not, the vendors/contractors would issue them to the real estate investors’ names directly, rather than the corporation’s name.
You might want to make sure your agreements and invoices received are addressed to the corporation. This ensures that your application gets approved.
Good luck with your application.
Until next time,
Cherry Chan, CPA, CA
A blessed Canadian and Real Estate Accountant
Our office is finally complete and we’re officially open as of last Thursday.
It isn’t particularly easy the past few months. Tax season, COVID-19 lock down, to office opening, we’re extremely fortunate to work with an amazing team that supports us through this process.
We won’t be regularly staffing our office until July though. Our team needs a bit of a transition period to get used to this new routine.
If you’re interested in getting an in-person meeting/consultation with us, we are more than happy to schedule that with you. 😊
Now, onto the topic that’s on everyone’s mind…
A few weeks ago, Prime Minister Justin Trudeau announced that he is expanding the criteria to qualify for the $40K Canada Emergency Business Account loan.
Application is OPEN Friday June 19 under the expanded criteria.
It is an interest free loan until 2022. If you repay by December 2022, $10K of which is waived.
To qualify, as a minimum, you need to have
Under the expanded criteria, a business must have more than $40K of non-deferrable expenses.
Non-deferrable expenses include:
(1) wages and other employment expenses to independent contractors (arm’s length parties)
(2) Rent or lease payments for real estate used for business purposes;
(3) Rent or lease payments for capital equipment used for business purposes;
(4) insurance related costs;
(5) property taxes;
(6) telephone and utilities in the form of gas, oil, electricity, water and internet;
(7) Payments for regularly scheduled debt service;
(8) Payments incurred under agreements with independent contractors and fees required in order to maintain licenses, authorizations or permissions necessary to conduct business by the Borrower.
Application will be open this Friday via your online business bank account. You have to apply through the major Chartered Banks that you regularly bank with.
From the first glance of these criteria, it looks like many real estate holding companies will qualify, provided that the amount of expenses mentioned above are over $40K in 2020.
The application process is a lot more cumbersome though. You will be asked to provide the documentation that supports the requirement that you have over $40K of expenses.
This means – if you have property tax bills for the year, mortgage documents, insurance policies, telephone and utilities bills, etc., then those are the expenses that you would need to provide.
My position is that you won’t know what we need until you submit the application and get a response back.
Be prepared to get your books up to date, receipts ready to provide documentation tomorrow!
For real estate agents…
If you’re realtors, some common expenses that you might consider including in the non-deferrable expenses calculation –
You might still not be able to apply at this point, given that you don’t have a business bank accounts with regular bank. Justin Trudeau did make a commitment to provide a workaround to this short fall.
Be patient. Your help is coming.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
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