Category Archives: investors

Capital gains explained

Source: MoneySense.ca – by   

 

Capital gains explained

How it’s taxed and how to keep more for yourself

What is it?

You have a capital gain when you sell, or are considered to have sold, what the Canada Revenue Agency deems “capital property” (including securities in the form of shares and stocks as well as real estate) for more than you paid for it (the adjusted cost base) less any legitimate expenses associated with its sale.

How is it taxed?

Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 33% tax bracket for example, a $25,000 taxable capital gain would result in $8,250 taxes owing. The remaining $41,750 is the investors’ to keep.

The CRA offers step-by-step instructions on how to calculate capital gains.

How to keep more of it for yourself

There are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:

  • Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.
  • The sale of your principal residence is not subject to capital gains tax. For more information on capital gains as it relates to income properties, vacation homes and other types of real estate, read “Can you avoid capital gains tax?
  • A donation of securities to a registered charity or private foundation does not trigger a capital gain.
  • If you sell an asset for a capital gain but do not expect to receive the money right away, you may be able to claim a reserve or defer the capital gain until a later time.

If you are a farmer or a newcomer to Canada, they are special capital gains rules for you. The specifics can be found at the CRA website.

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Pay less tax on rental properties

Q: I have five rental properties in my name. Should I switch them to a numbered company?

–Travis

A: Hi, Travis. Incorporating a holding company to own rental properties has some advantages and disadvantages depending on the objectives you have in mind in both the short and long term. However, you should first speak with a tax accountant about any tax ramifications both personally and corporately to ensure as perfect an integration of the two systems as possible. Then speak with a legal advisor to draft up the appropriate corporate structure before making the transfer.

From a tax point of view, there are two things to consider. While the transfer of real property held personally should qualify for a Section 85 election to rollover the properties at their cost base, you will want to be sure the CRA will not consider your properties to be held as “inventory”; that is property, held primarily for resale rather than rental. If so, they will not qualify for a tax-free rollover or capital gains treatment. Therefore, the transfer could trigger unexpected tax consequences. Your history of receiving rental income from the property will help you avoid this.

Second, you’ll also want to understand the difference in taxation rates both inside and outside of the corporation. Recent tax changes may have made it less desirable to own passive investments inside a corporation, depending on where you live in Canada.

Some advantages of incorporation include limited liability and creditor protection. However, if you are holding mortgages, most financial institutions will still require personal guarantees. Corporate directors and officers can also be held liable on default, so proper insurance protections for these instances is critical.

From a retirement planning point of view, incorporation may provide more flexibility as to when income is taken as dividends. It could help you to avoid personal taxes or spikes into the next tax bracket, and benefit from the recovery of refundable taxes in the corporation.

Consider also that there will be costs for setting up and annual reporting of the holding company. Transferring the properties from the taxpayer to a holding company may have tax consequences, other than income taxes. If your province has a land transfer tax (or equivalent), you may have to pay the land transfer tax when the properties are transferred.

The bottom line is this: you’ll want to be thoughtful about the transfer, and you’ll want to match your investment objectives and desired tax outcomes as closely as possible.

Source – MoneySense.ca – Evelyn Jacks is a tax expert, author, and founder and of Knowledge Bureau in Winnipeg

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Five ways to maximize your investment property

Wasim Elafech of Century 21 Bravo Realty in Calgary is among the banner brokerage’s top sales agents in the world. Century 21 operates in 78 countries with over 100,000 agents, and Elafech managed to become their number one unit producer in 2015 and number three in Canada last year, so he knows a thing or two about getting the best bang for your buck out of a rental property. He shared some of those tips with us.

1. Maintain the property
Elafech says some he’s sold properties to clients who in turn rented them out, but without putting in the necessary work. “The work you do doesn’t have to be expensive, but it has to be brand new,” he said. “It will be liveable but it won’t look good. The floors will be cracked or peeling, and when people walk in they get the impression it’s a rundown property, but they won’t if you do the work. Make sure all the fixtures work, that they’re not broken; make sure door handles are loose or need to be replaced. If the place is well-maintained, 100% of the time you’ll get more money for your rental.”

Elafech added that properties are often reflections of the people who live in them.

“A really good tenant won’t look for a rundown place, first of all, so they wouldn’t take that place. You’ll attract the type of people your property looks like. People who accept living (in shabby properties) aren’t the best tenants.”

2. Bungalows yield higher rents
Bungalows are excellent rental properties because the top and bottom floor can be rented out as separate units. “One guy I know pretty much made his whole house different rooms with a common living room, couch and TV.”

Typically, however, the upper and lower floors of a bungalow can be rented as separate units. “Bungalows are the easiest houses to sell in certain areas here because you can rent the upper and lower levels, if it’s properly treated. In an area where you’re renting a whole house to a person, you’d get, say, $1,600 a month, but if you’re renting the floors separately, you can get maybe $2,200 a month. It’s about volume.”

3. Screen your tenants
Screening tenants adequately ensures your rental investment doesn’t become a nightmare.  “I see it a lot,” said Elafech. “They don’t want to lose a month on the mortgage payment, so if it’s been sitting for a couple of weeks they’ll rush into a deal and rent it to whoever comes next, and sure enough the people either do a midnight run or don’t pay. I’m going through that now with my client.”

Elafech recommends waiting it out, even if that means the property sits empty for a month or two. Ask tenants for references and their job history. “If the tenant is reluctant, there’s usually a reason. Keep a look out for red flags.”

He also suggested hiring a rental management company if an apartment building, rather than two or three properties, needs to be maintained. While pricey, they’re well worth it – and they screen tenants.

Sometimes, though, less is more.

“I have a client that’s renting out a house with a garage for $1,000 month that usually goes for $1,800, because he has a good tenant. He cuts the grass and maintains the property. He does everything for the landlord, so that peace of mind is worth more than the money he’d get from renting the parking pad and garage in the back.

4. Rent the garage and parking spot separately
Elafech mentioned a rental property he’s currently showing. “The owner is going to park his trailer on the parking pad, rent out the garage and both floors of the bungalow separately – rental income from upstairs, downstairs and the garage.”

5. Location, location, location
Location is everything in real estate, so Elafech recommends investing in a property that’s surrounded by prime amenities like transit and schools.

“In Calgary, we have LRTs and buses. Even having shopping centres and schools nearby is important. A client had a condo with an LRT across the street, and he got more for it than a similar place he owns that had a similar layout but was a bit bigger, because it was six or eight blocks away and farther from the LRT. In Calgary, when it’s minus-40 outside, you’re not walking, or waiting for a bus when it’s cold. People pay for convenience.”

Source: Canadian Real Estate Wealth – Neil Sharma

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Learn from a flipping pro

A former teacher turned full time investor is dishing all the secrets needed to make a go as a professional real estate investor.

“I tried different ways of investing and I found real estate was the best and quickest way to build wealth,” Quentin D’Souza, a professional investor with over a decade of experience, told Canadian Real Estate Wealth.

D’Souza left a successful career as a teacher – one that he could have easily held down until retirement age – to take a crack at investing.

“When I first left my position as a public school teacher, I had done quite well for myself in teaching,” he said. “The first month that I did my first flip after making the transition, I made the same amount of money in a month that you made the previous year teaching.”

The veteran, who has invested in over 40 homes, is sharing his tips with fellow investors at the upcoming Investor Forum in Toronto.

D’Souza’s favourite investment strategy is to buy, fix, refinance and rent.

“Some people call it the long flip. It gives you the power of a flip, where you’re getting an instant lift in value and it hypercharges your ROI,” he said. “It allows you to get a return quickly and if you do it with cash flowing properties, you get ongoing cash with very low or no money into the deal.”

He will host a session entitled “Real estate flipping: Pitfalls and lessons learned.”

In this session, D’Souza will show you the flipping methodology and process from A to Z by using real-life examples and scenarios. You will walk away with concrete strategies and practical steps, including dos and don’ts of flipping. Through this session, you will learn how to avoid making future mistakes, including:

  • Five mistakes that make house flipping a flop
  • How to flip homes and make real estate profit the right way
  • Tax consequences of flipping
  • What is shadow flipping, and how does it work?
  • Long flip versus quick flip
  • Over a decade

“The best time to invest in real estate was 15 years ago,” D’Souza said. “The second best time is today.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage.

Source: Canadian Real Estate Wealth – 15 Feb 2017

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Syndicated mortgage a high-risk investment bet – analyst

Syndicated mortgage a high-risk investment bet – analyst

The emerging trend of syndicated mortgages for Canadian condominium units might appear to be convenient for would-be investors, but Maclean’s senior business and finance writer Chris Sorensen argued that the arrangement is a high-risk choice that might even upend the market in the long run.

A syndicated mortgage involves hundreds of individuals lending money—in some cases even as little as $25,000—to a developer “in exchange for a fixed annual interest rate of between eight and 12 per cent over a term of two to five years.”

The popularity of the set-up is such that in Ontario, it has garnered nearly $4 billion in sales in 2014 alone, the latest year with available numbers.

However, Sorensen noted that much of the money in a syndicated mortgage goes to expenses for the development and pre-sale of enough units to convince banks to provide financing. The analyst said that this presents the risk of buyers not getting their funds back should the deal go south.

“Even in a hot market like Canada’s, there are no guarantees a given condo project will get off the ground, regardless of how quickly buyers snap up the units,” Sorensen wrote in an April 4 piece published on the Maclean’s website.

“If something goes wrong with a project, syndicated mortgage investors are subordinate to banks and other primary lenders, meaning they’re further back in line for repayment—assuming there’s enough money left over after other lenders have received their share,” he added.

The analyst cited the observations of Toronto-based mortgage broker John Bargis in proving why the present wave of syndicated mortgages isn’t sustainable in the long run.

“I’ve been exposed to multi-million-dollar projects where things have gone bad really fast. It’s not because it’s not a viable project, but there’s just so many moving parts. You’ve got construction managers, contractors, builders—so many things that can go wrong from an investment perspective or a sales perspective,” Sorensen quoted Bargis as saying.

Despite the dour prospects, Sorensen acknowledged that syndicated mortgages would remain popular among enterprising individuals for the foreseeable future.

“The myriad risks explain why syndicated mortgages pay interest rates approaching double digits at a time when a five-year Guaranteed Investment Certificate, or GIC—a truly ‘safe’ investment—offers only 1.5 per cent annually for a five-year term,” he said.

Source: MortgageBrokerNews.ca by Ephraim Vecina | 13 Apr 2016
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Are syndicated mortgages sufficiently regulated?

With syndicated mortgages back in the news, one veteran suggests further regulatory restrictions on these investments may be needed.

“Here is simple proposal for FSCO: put a moratorium on all syndications over $2 Million,” Ron Butler, a broker with Butler Mortgage, wrote in the comments section of MortgageBrokerNews.ca. “Just freeze this multi-million dollar sales activity today and wait until further study is finished and a total redesign of the rules around large syndication are completed.

“I think it is important for the public good and it will also protect our whole industry.”

The Financial Services Commission of Ontario (FSCO) revealed sales of syndicated mortgages for condo units in the province reached nearly $4 billion in 2014, the latest year with available numbers.

Their growing popularity has one analyst questioning the safety of these investments.

“If something goes wrong with a project, syndicated mortgage investors are subordinate to banks and other primary lenders, meaning they’re further back in line for repayment—assuming there’s enough money left over after other lenders have received their share,” senior business and finance writer Chris Sorensen wrote in MacLeans earlier this week.

And while some question whether or not syndicated mortgages are sufficiently regulated, one industry veteran who specializes in them argues they are.

“Private mortgages, syndicated or not, and rules governing disclosure, suitability, etc. are, in my opinion, all adequately addressed in Ontario via the Mortgage Brokerages, Lenders, and Administrators Act and subsequent Regulations. The Financial Services Commission of Ontario (FSCO) ensures brokerages follow these rules,” Glen May-Anderson, president of FDS Broker Services, wrote in an email to MortgageBrokerNews.ca earlier this year.

May-Anderson also pointed to the fact that FSCO has recently addressed the regulation of syndicated investments.

“Improvements to the governance of traditional private mortgages and syndicates for development and construction mortgages were implemented by FSCO last year, with the introduction of the revised Investor/Lender Disclosure Statement for Brokered Transactions (Form 1) and the new Addendum for Construction and Development Loans (Form 1.1),” May-Anderson wrote.

Source: MortgageBroker.ca Justin da Rosa | 07 Apr 2016

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The red-hot market that has a property type for every investor

Forget the GTA: This one booming market could be the next big thing, according to one veteran.

It’s being billed as Silicon Valley of the North and for good reason.  Due to many factors, including an influx of technology companies, Waterloo is one housing market that is ripe for the investor picking, according to Karl Innanen, managing director at Colliers International.

“Waterloo has become recognized as a diverse market – it has universities, it’s home to some of the largest insurance companies, its known for its technology and manufacturing sectors,” Innanen told Canadian Real Estate Wealth. “It’s not a one-horse town so it allows for great diversity in terms of investment options.”

It’s become a hot and, indeed, safe market for investors because of the large transactions and liquidity that has poured in over the past few years, according to Innanen.

The Waterloo Region is also unique in that it comprises three different cities that each offer their own investment options.

Waterloo offers opportunities for office investment; Cambridge is known for its industrial offersings; and Kitchener is home to many urban office opportunities.

And there are plenty of residential opportunities throughout the region for investors as well.

“Residential is front-and-centre in the Waterloo Region; there are 3,200 new homes built every year … and the demand is there (for rentals),” Innanen said. “There are a lot of condos being built; 2011 was the first time there were more apartments built than there were single-family homes.”

Innanen argues the Waterloo region is a better option for investors than the GTA.

“A lot of people are pushed out of the GTA because of product availability; Waterloo also offers higher returns (than the GTA),” he said. “You will get a 1% higher cap rate in the Waterloo region than the GTA for apartments. And apartments offer the lowest cap rates in the region.”

Source; Canadian Real Estate Wealth – by Justin da Rosa 26 Feb 2016

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