24 Feb

When Your Mortgage Term Matures, First Get a Second Opinion

Mortgage Tips

Posted by: Garth Chapman

Calling your Mortgage Broker when your mortgage is about to mature is akin to getting a second opinion on a medical diagnosis.  So when your mortgage is soon to mature, for the sake of your financial health,  please do make that second opinion call to your Mortgage Broker.  He or she might advise you that your existing bank is making you the best offer you are likely to get and recommend that you take that offer.  Or they may simply help guide you in negotiating a better offer from your existing bank.  Or they may advise that they believe they can find you a mortgage better suited to your needs and objectives.  Often a good Mortgage Broker can make that assessment on the first phone call.  In those cases think of us as providing a sound professional second opinion.

When should you start thinking about this?

Most of us will find that much has changed in our life, career and financial position during the 3, 4 or 5 years since we took out or last renewed our mortgage.  That means that a proper review of that mortgage against those new realities is in order, and the good news is that process is really a pretty easy one.

Virtually all banks and mortgage lenders will hold an interest rate for you to protect against possible rate increases for up to 120 days (4 months).  So a little before 4 months in advance of the maturation date of your mortgage is when you should begin the process.  If you’re a Jencor Client then you will receive in the mail 4 months ahead a letter advising you of your upcoming renewal.  In this way we ensure that our clients are properly prepared in advance to ensure they make the best decision.

What are your rights and opportunities when your mortgage matures?

First a quick description of what the words mean.  The mortgage ‘term’ is the time period of the current mortgage contract.  This is distinct from the ‘amortization’ period, which is the number of years to go until your mortgage is totally paid off.  So with that in mind, mortgage term maturity in Canada means that the term you signed with the bank for your mortgage is up, and you can then in most cases either renew with that bank or you can transfer (aka Switch) your mortgage to any of a few dozen other mortgage lenders, generally without cost.

So in effect, on the mortgage maturity date you will be a ‘free agent’.   Let’s take this sports analogy a little further.  When you are a free agent, assuming you are a good player (ie good credit, income etc) the other teams (ie banks) will want you to change teams and play for them (ie take over your mortgage from your existing bank).  So this means you can move your mortgage to any other team (ie bank) to get the best deal for your needs, and usually without any costs as the new bank will pick up the Appraisal and legal costs for the mortgage transfer since they are growing their market share by talking some business away from a competitor.

An important thing to know is that the single biggest motivator or goal for banks in the mortgage business is growing their share  of the overall mortgage market. That’s a key reason they put money on sale (by lowering interest rates) when the real estate markets are busier in spring and summer.

A sports Agent knows all the teams in the league, and they know their athlete client’s capabilities and needs and goals.  The Agent then negotiates with the teams that fit their athlete client best to find the best fit, and then negotiates with the team(s) selected to get the best contract for their client.

Just like an athlete, you too have an ‘Agent’, your Mortgage Broker, whose role in this process is to assess your needs and objectives, to gather your information, and then to present you in your best light to the banks who have the mortgage products that will best fit you, and then to negotiate with those other banks to get you the mortgage that best fits your needs.  And finally to shepherd the mortgage completion through to the end to ensure everything goes according to plan, so you don’t have to.

So what are the details of how your Mortgage Broker will act for you in this process?

Your Mortgage Broker will work with you to understand what your needs, objectives and preferences are.  These will include things like Pre-payment Penalties, Portability, Bridge financing, Variable or Fixed rate selections, Term length, Pre-payment Privileges, Increase Payment privileges, Payment holidays, and more.

If you are an existing Client of your Mortgage Broker then this will mean a simple update of your previous Application and gathering the documents required, less of course the ones they have from your earlier file.  If you a new Client then it’s a fresh Application and gathering your documents.  Expect to spend 15-20 minutes to get acquainted and allow the Broker to learn what they need to know to allow them to minimize the documents and time needed from you going forward, then again about 15-20 minutes on the Application, and usually that much again providing the required documents.

So it can be from less than an hour, to perhaps a couple of hours in complex scenarios.  It really isn’t much of a time commitment on your part, especially when you consider the value that comes to you as a result, and with how significant your mortgage is in your overall financial picture, we think it’s time well spent.

And then they will review what your bank and the other banks are offering on rate and on terms and the above and present you with your best options based on the needs and objectives you determined together.  That will allow you to make an informed decision on which mortgage is best for you going forward.

As I wrote above, your Mortgage Broker may advise you that your existing bank is making the best offer and their best advice is to take that offer, or they may help you to negotiate a better offer from your existing bank.  In the event your current mortgage lender is not making a competitive offer or their terms are not appropriate for your needs, or if you simply want to move to another lender, then your Mortgage Broker will recommend the best alternative(s) for you.

If you decide to Transfer (aka Switch) your mortgage to another lender your Mortgage Broker will complete the Application process as I described above and ‘book’ your file, and within as little as 2-3 days, will present you with a Mortgage Commitment from the lender best fit for you, and then guide you through signing those via a thorough review of the documents.

And here is a National Post article on the subject. This piece makes the point about how banks use our fears to get a surprisingly large percentage of people to sign their mortgage renewal notice, and usually at higher than market rates. And all without even the tiniest sliver of the review of their Client’s needs and objectives that you now know is so important.

Renewing your mortgage? Here’s why you should pick up the phone

 

I hope you found this helpful and of value!

23 Feb

Currency exchange: How to get more for your Canadian dollars

Financial

Posted by: Garth Chapman

With the current low value of the CAD against the USD travelling Canadians are once again paying close attention to the costs of exchanging their Canadian dollars (CAD) for USD or other currencies.  I have generally found that the fees charged by the banks for this service are higher that what is available from other providers.

These days your choices include Banks, Online currency exchanges, no-foreign-exchange-fee credit cards, and there is even a peer-to-peer currency exchange.  And if you want to get really sophisticated you can buy shares in an interlisted company on a Canadian stock exchange and then selling those shares on a U.S. stock exchange.

More here in this article I found on the CBC News Business section http://www.cbc.ca/news/business/foreign-currency-exchange-1.3412059

As we are now Snowbirds who spend several months in the USA, we have an ear tuned to the FX markets and the news on the subject of exchange rates and what drives them, and we’ll often buy up to a year’s worth of USD when we think the CAD is about to drop.  We use Payline by ICE and deal with Debbie Siouras who is National Manager, Financial Institution Services (see her contact info below).

Debbie Siouras
National Manager, Financial Institution Services – Payline by ICE
Phone: (604) 813-3393
Toll Free: 1 (888) 989-4636 ext 0572
dsiouras@paylinebyice.com
www.paylinebyice.com

12 Feb

Rental Property Tax Planning: To Depreciate or Not

Income Tax

Posted by: Garth Chapman

On your tax return you have the option to depreciate your buildings (to claim CCA).  The elements of this to consider include those below, and perhaps others as well.  This is both a tax planning decision and a mortgage qualification capacity decision. Here are 8 key points to understand and consider when deciding whether to depreciate or not:

  1. Claiming the CCA is actually optional and it can be started and stopped from year to year. Note that from a tax perspective CCA cannot be taken on a property that has the possibility of a principle residence exemption. So while CCA may be beneficial from a tax perspective a conversation is needed with the accountant about the ability to qualify for mortgages. Otherwise the tax savings will leave a sour taste in everyone’s mouth.
  2. CCA cannot be taken on a property that has the possibility of a principle residence exemption.
  3. Claiming CCA reduces your ‘cost base’ for the property.  This results in a higher Capital Gains tax when you sell the property.
  4. If you claim CCA you are depreciating for tax purposes the buildings on the land. The land does not depreciate.
  5. If you claim CCA (depreciate your buildings) you will reduce your taxes now, but you will pay more tax when you sell the properties, as you will have to ‘recapture’ the previously claimed CCA.  This means that you are essentially deferring the taxes due to a future date, and you might also be paying at a rate lower than what you would pay without depreciating.
  6. If you claim CCA the taxes currently saved are taxes on income whereas the future taxes are on capital gains, and there may be a difference in rate between the two.
  7. Consider what your likely income will be at the time you sell the properties, and how that might impact your tax rate then as compared to now.
  8. When you claim CCA you thereby reduce your income from the properties on your tax return.  Lower income can have a negative impact on your ability to obtain further mortgages from some lenders. This is a very important consideration, so consult on this piece with both your tax professional and your Mortgage Broker.

These tips are what I have learned over the years from various Canadian Tax Accountants.  Your own situation is always unique, so always seek out professional advice before you make tax decisions.

Articles containing more information on this subject below:

https://turbotax.intuit.ca/tax-resources/taxes-and-rental-properties/dos_and_donts-cca-for-rental-property-explained.jsp

http://business.financialpost.com/personal-finance/mortgages-real-estate/tax-tips-for-investors-clearing-up-real-estate-confusion

What if I move back in to the property later on?  http://www.mnp.ca/en/posts/changing-your-principal-residence-into-a-rental-property

12 Feb

First Time Home Buyer Tax Incentives and Credits

Building a New Home

Posted by: Garth Chapman

The good news begins with a generous definition of who is a first time home buyer: to qualify as a first-time home buyer, which generally means you and/or your spouse (whoever will be on the Title and Mortgage for the home) must not have owned a home in Canada for 4 years. And now, to the two plans currently available to Canadians.

 

First-Time Home Buyer’s Tax Credit (HBTC)

The First-time Home Buyers’ Tax Credit was introduced to assist Canadians in purchasing their first home. It is designed to help recover closing costs, such as legal expenses, inspections, and land transfer taxes, so you can save more for money for a down payment.

The Home Buyers’ Tax Credit, at current taxation rates, works out to a rebate of $750 for all first-time buyers. After you buy your first home, the credit must be claimed within the year of purchase and it is non-refundable. In addition, the home you purchase must be a ‘qualified’ home, described in more detail below. If you are purchasing a home with a spouse, partner or friend, the combined claim cannot exceed $750.

You will qualify for the HBTC if:

  • you or your spouse or common-law partner acquired a qualifying home; and
  • you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years.

Program in overview http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/369/menu-eng.html

Fact Sheet http://www.cra-arc.gc.ca/nwsrm/fctshts/2010/m01/fs100121-eng.html

 

The RRSP Home Buyers’ Plan – for first-time home buyers (HBP)

The Home Buyers’ Plan (HBP) is a program that allows you to withdraw funds from your registered retirement savings plan (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability. You can withdraw up to $25,000 in a calendar year. You must qualify as a first-time home buyer, which generally means you and/or your spouse must not have owned a home in Canada for 4 years.

Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year – see here http://www.cra-arc.gc.ca/E/pub/tg/rc4135/rc4135-e.html#P233_15310

Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years. You will have to repay an amount to your RRSPs each year until your HBP balance is zero. If you do not repay the amount due for a year, it will have to be included in your income for that year.

All the info here http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

And here’s some more info on how long the money must be in your RRSP before you withdraw it for the HBP.  Let’s say a qualified first-time home-buyer contributed to his RRSP near the end of February.  The buyer then finds a home with a willing seller, but is unable to get a possession date late enough to meet the following requirement: “Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year.”

It turns out that the client actually has 30 days after possession to still take out his money from his/her RRSP and use it for the Home Buyer’s Plan.

Moreover CRA does not care if the buyer uses that money to buy a car, go on vacation or spend it on anything else, as long as he/she buys a qualified home and is a first time buyer.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/cndtns/wn-eng.html

12 Feb

Reducing Capital Gains on the Sale of a Cottage/Cabin

Income Tax

Posted by: Garth Chapman

Many Canadians own a vacation property, aka cottage or cabin. And when it comes time to sell that property, as we learned when we sold ours in 2015, there are many things to consider. Not the least of these is the potential tax burden on the sale, which comes in the form of Capital Gain tax if you sold it for more than your capital cost.

It turns out that in fact there are a few options available to help save you tax money, and often the key to this lies in understanding that, while we can only have one principal residence (on which the capital gain is not taxed at time of sale) in cases where we own more than one property we are permitted to designate which property is the principal residence.

Here is an article from MoneySense magazine titled ‘Reducing capital gains on the sale of a cottage’ found here http://www.moneysense.ca/save/taxes/reducing-capital-gains-on-the-sale-of-a-cottage/

12 Feb

Rental Property Tax Planning: Conversion of home to rental status

Income Tax

Posted by: Garth Chapman

More and more often in the last decade or so when Canadians buy or build a new home they have been electing to keep their existing home and convert it to a rental property. Now not all homes make good rental properties, either for economic reasons or due to location or property type, but in many cases this can be an excellent way to further one’s financial independence goals, and/or retirement planning. A good rental property, once paid off, can often produce as much or more cash-flow as your CPP pension payments will generate. So one or two of these can make the difference between a frugal retirement and a rather more enjoyable one.

So for those thinking along those lines, there are a few key things to understand, so I have compiled a few good articles below to help with that.

You will first need to get a proper valuation of the property, as any gain up to the point of conversion to a rental, is tax free. As the below MoneySense article notes “…to convert one home into an income producing property by renting it out. You will trigger capital gains taxes but only from the time you started renting out the property to the time you actually dispose of the property. That’s because the CRA considers the change in the use of the property as a deemed disposition—tax talk for a change in use of a property is the equivalent as a sale at the current, fair market value.” Can you avoid capital gains tax?

CRA website re ‘Change Of Use’ http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/rsdnc/chngs/menu-eng.html

On designating a principal residence http://www.taxplanningguide.ca/tax-planning-guide/section-2-individuals/principal-residence-rules/

On Depreciation (CCA) https://turbotax.intuit.ca/tax-resources/taxes-and-rental-properties/dos_and_donts-cca-for-rental-property-explained.jsp

This one contains information on Renting Out A Portion Of Your Home http://deanpaley.com/renting-your-home-can-be-taxing/

Good overview here http://www.taxtips.ca/personaltax/propertyrental/changeinuse.htm

This article also discusses Terminal loss rules, meaning what you should look for if you sold at a capital loss. http://www.taxplanningguide.ca/tax-planning-guide/section-3-investors/rental-properties/

12 Feb

Thoughts on Minimizing Income Tax due on Your Rental Properties

Income Tax

Posted by: Garth Chapman

Couples who own rental properties will often have different income levels which can result in sometimes vastly different income tax rates. So when reporting the Net Rent Income on your tax return most will simply split the Net Income 50/50 as that is the usual ownership split. But are there ways to split the income in order to have more of the income in the hands of the spouse with the lower tax rate, and thereby save money? I think there are.

One very simple method of achieving some savings is to pay from the gross rents received a Property Management fee to the person who manages or does the larger share of the property management. I find that this is often the person with the lower income, as often they simply have more time to devote to looking after the rental properties.

Another method is to have an ownership agreement in place describing a beneficial ownership split other than the usual 50/50. Some investors have different percentages of ownership for Appreciation vs. Income & Expenses. Properly documented, this is fine.

Disclaimer: I am not a tax professional. So, as always, talk with your Tax Preparation professional to determine what will and won’t work in your unique case.

12 Feb

RECA Changes How Suited Properties are Listed on MLS

Investment (Rental) Properties

Posted by: Garth Chapman

Of interest to property investors who want to buy Suited Houses in Alberta will be a significant recent change to procedure made by RECA as a result of a recent lawsuit by a buyer of a property that was deemed to be improperly or incompletely described.

The result of all this is that REALTORs® are essentially now almost virtually unable to describe a house as containing a secondary suite.

An article by Edmonton Realtor James Knull describes why and how Realtors are now required to list properties in Alberta that have suites when it is not a legal suite.

Read James’ article here

12 Feb

Beneficial Ownership – a route to financing investment properties

Income Tax

Posted by: Garth Chapman

I have purchased well over 100 residential properties since 2002, and I learned early on that it is much easier to finance a property when it is held in your personal name rather than in the name of your Corporation, and this is especially so when dealing with new Corporations.  In fact these days there are fewer lenders willing to lend on rentals held by a Corporation, and those that do either require the Corporation to be a Holding Company, and others who require it to be an Operating Company.  And this list of lenders continues to shrink.

So I have used the concept of beneficial ownership to allow me to buy and hold properties in my name or my wife’s name In Trust for our Corporation.  To allow me to properly record this for each property, especially in case CRA came calling (and we were audited, and passed with zero changes to our tax filings) I had my real estate lawyer drew up a Trust Deed to clearly define that the subject property will be held by me ‘In Trust’ for our Corporation.  This means that the Beneficial Owner of the property is the Corporation.  The Beneficial Owner (the Corporation) must act accordingly, including the receiving of all revenue and payments of all expenses.  And of course it then follows that the tax reporting is handled by the Beneficial Owner (the Corporation) via its tax return as filed with CRA.  When the property is sold, the Corporation receives the proceeds of the sale, and is responsible for any tax on Capital Gains.

When you take out a mortgage in a Corporation you invariably will have to sign personal guarantees for the mortgage, unlike when done in your personal name. This means that if the mortgage goes into default and the bank forecloses, that the bank has the right to come looking to your other assets to cover for any shortfall they may have in proceeds they receive from the sale of the property.

If you do not already hold rentals in a Corporation I strongly advise you to get your tax advisers to weigh in on the implications of holding properties in a Corporation.  One thing to consider it that the net income derived from rental properties held by a Corporation is considered Passive Business Income and is therefore taxed at the highest rate.  Another consideration is the added complexity and costs associated with the Corporation, especially around keeping the books and filing tax returns.

IMPORTANT NOTE- Be sure to discuss this in detail with your professional Tax and legal advisers.  Each of us presents a unique set of circumstances, and as such, there is no one-size-fits-all recipe.

I have several template Trust Deeds for this, each specific to how many Title owners and Corporations are involved in the property.  Call or email me if you want to discuss this concept in more detail.

I hope this helps as you decide how to move forward in building your portfolio of investment properties.

12 Feb

Capital Gains Explained

Financial

Posted by: Garth Chapman

So what is a Capital Gain, as defined in Canada? Well, Duhaime’s Law Dictionary defines it here as follows:

Capital gain or capital gains is an accounting term but one with substantial relevance to tax law as jurisdictions are wont to tax capital gains when the capital asset is sold or otherwise disposed of, just as tax-payers would then seek tax credit or deduction in the event that, in lieu of a capital gain, the tax payer suffered a capital losses.

Therefore, to the extent that it is not expressly defined in a tax statute, what is or is not a capital gain has become a matter of judicial interpretation, often hotly contested as the tax authority seeks to capture transactions as capital gains, and the tax payer seeks to avoid the designation. The law reports contain complex decisions on the status as capital gains of lottery winnings, royalties, business income and many creative tax avoidance transactions.

In more simple language 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.

More on all this this MoneySense article with excerpts taken from it below:

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 35% tax bracket for example, a $25,000 taxable capital gain would result in $8,750 taxes owing. The remaining $41,250 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.

For more specific questions and stories on this topic, see the MoneySense section on Capital Gains here http://www.moneysense.ca/tag/capital-gains/