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How should your clients own real estate properties? – Advisor.ca

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Principal residence

Under the Canadian tax rules, capital gains realized on the sale of a principal residence are generally exempt from tax if the taxpayer qualifies for the principal residence exemption (PRE). The PRE can only be claimed by individuals and certain trusts (such as alter-ego, joint spousal, and qualified disability trusts) under specific conditions.

Given the costs involved in setting up and maintaining a trust, your clients may prefer personal ownership. However, in some cases, the costs are warranted due to the estate planning benefits of using a trust. For example, if your client wants to leave their property to a disabled child, a trust can be beneficial to ensure that the property is transferred to specific family members when the disabled child dies. Similarly, a trust can be useful in a blended family situation to control how, when and to whom the property is distributed after the surviving spouse dies.

A corporation can’t access the PRE, so any capital gains realized on the sale of the principal residence would be taxable to the corporation at high income tax rates (e.g., 50.17% in Ontario for 2020). In addition, personal use of a corporately owned property by the shareholder would be considered a taxable benefit to the shareholder. This could result in double taxation, as the taxable benefit included on the shareholder’s personal tax return is not deductible to the corporation and there is no step-up to the cost base of the property owned by the corporation. For these reasons, owning a principal residence through a corporation is usually the least tax-efficient approach.

Rental property

Personal ownership

If your client personally owns a rental property, the net rental income would be added to your client’s net income for the year and taxed at their marginal tax rates. In addition, net rental income is also considered “earned income” for the purposes of calculating RRSP contribution room. If your clients are not currently generating the maximum RRSP contribution room through other sources of “earned income,” the added income could be a benefit of owning rental property personally.

If rental expenses are greater than the net rental income in a year due to rental vacancies, the net rental loss may also be deductible against your client’s other sources of income. The deduction would provide tax savings and reduce the cost of maintaining a rental property during a poor rental market. This is generally allowed for real estate operations that are predominantly commercial in nature as opposed to personal or recreational. If the Canada Revenue Agency determines that your client is not primarily carrying on the rental operations to make a profit, then rental expenses either may not be deductible or the deduction may be limited to the extent of rental income generated from the property.

In terms of broader non-tax considerations, personally owned rental property is subject to creditor and spousal claims against your client. If this is a concern, personal ownership of the rental property may not be ideal.

Corporate ownership

If the corporation is not carrying on an active real estate business, any rental income earned inside a corporation is considered passive income and would generally be subject to high income tax rates (e.g., 50.17% in Ontario for 2020). This flat tax rate applies to every dollar of rental income earned inside the corporation and may be much higher than the graduated tax rates your client would have paid when earning the rental income personally. As such, your client may have lower after-tax dollars to reinvest and grow their investments in the corporation.

Passive rental income earned inside a corporation may affect your client’s access to the small business tax rate if their corporation is an active (non-real estate) business. In some situations, your client may decide to own real estate property used in a business through a corporation separate from the active business corporation. This can allow your client to use different ownership structures in each corporation to maximize income-splitting and tax-planning opportunities.

Unlike with personal ownership, net rental losses earned inside the corporation can’t be used to offset other sources of income by the shareholders. As a corporation is a separate entity for tax purposes, these losses are locked inside the corporation and can only be used by the corporation.

Despite the unfavourable tax consequences, a corporation provides some non-tax advantages. For example, a corporation will generally protect your client’s personal assets in the case of any lawsuits or creditor claims against the corporation. In Ontario and B.C., a corporation may allow your client to avoid probate fees or estate administration taxes on the rental property through the use of a secondary will.

However, using a corporation involves annual accounting and tax filing costs which may be greater than the one-time probate fees on the rental property.

Trust ownership

Your client may consider owning rental property through a trust. There are various types of trusts available and each has unique requirements and tax implications.

Unless certain income attribution rules apply, rental income earned inside a trust would generally be subject to the highest marginal tax rate (e.g., 53.53% in Ontario for 2020), and rental losses realized in a trust can’t be allocated to trust beneficiaries and must be used by the trust itself. In most situations, the rental income may be allocated and distributed to a trust beneficiary so that it is taxed at the beneficiary’s marginal tax rates.

A trust is commonly used as an estate planning tool to minimize probate fees because the rental property owned by the trust would not fall into your client’s estate when they die. A trust can also provide protection against creditors and spousal claims. Similar to the option of a corporate ownership, your client should consider the costs involved in setting up and maintaining a trust to determine whether the potential benefits outweigh the costs.

Conclusion

There are various options available when deciding on the ownership of real estate property. It is important for your clients to understand the options available and obtain professional advice to determine which option works best for them.

Vivek Bansal, CPA, CA, is director of tax and estate planning at Mackenzie Investments. He can be reached at vibansal@mackenzieinvestments.com.

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2021 home sales will rival 2016 boom year, says B.C. Real Estate Association – Vancouver Sun

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Last summer, real estate agents described pent-up demand for detached homes following the pandemic shutdown. They said this trend has been sustained as some buyers who want more space, often because they are now working at home, also have more purchasing power with lower interest rates. Overall, however, they weren’t seeing the dynamics of the boom years of 2015, 2016 and 2017.

Now, some of them are starting to sense a boom.

“The market is really hot right now and it’s not slowing down,” said Vancouver real estate agent Steve Saretsky. “Most of the froth is in the single family housing market. It’s insanely competitive and comparable to 2016. The condo market is much more balanced though, and buyers can take more time to sift through the inventory.”

“Single family inventory for sale is near record lowest on record. If you’re looking for a house under $2m, there’s 1.6 months of supply. That’s insanely tight and is creating bidding wars. People are seeing prices getting bid up, and now there’s a fear of being priced out.”

Marion Chekaluk, co-founder of Ecom Appraisals Inc. said mid-December to mid-January is usually a very slow time of year for the appraisers and lawyers who process real estate transactions.

But in recent weeks, everyone in her office has been “absolutely run off their feet. I’m getting lenders calling constantly. I had three this (Monday) morning, saying ‘a deal is supposed to happen,’ that ‘subjects need to be removed today. And we’re waiting on this report. You saw the property on Friday.’ They’re asking our appraisers not to take a weekend and I’m saying to them, ‘no, you take your weekend. Because if not, you’ll get burned out.”

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2021 home sales will rival 2016 boom year, says B.C. Real Estate Association – Vancouver Sun

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Article content continued

Last summer, real estate agents described pent-up demand for detached homes following the pandemic shutdown. They said this trend has been sustained as some buyers who want more space, often because they are now working at home, also have more purchasing power with lower interest rates. Overall, however, they weren’t seeing the dynamics of the boom years of 2015, 2016 and 2017.

Now, some of them are starting to sense a boom.

“The market is really hot right now and it’s not slowing down,” said Vancouver real estate agent Steve Saretsky. “Most of the froth is in the single family housing market. It’s insanely competitive and comparable to 2016. The condo market is much more balanced though, and buyers can take more time to sift through the inventory.”

“Single family inventory for sale is near record lowest on record. If you’re looking for a house under $2m, there’s 1.6 months of supply. That’s insanely tight and is creating bidding wars. People are seeing prices getting bid up, and now there’s a fear of being priced out.”

Marion Chekaluk, co-founder of Ecom Appraisals Inc. said mid-December to mid-January is usually a very slow time of year for the appraisers and lawyers who process real estate transactions.

But in recent weeks, everyone in her office has been “absolutely run off their feet. I’m getting lenders calling constantly. I had three this (Monday) morning, saying ‘a deal is supposed to happen,’ that ‘subjects need to be removed today. And we’re waiting on this report. You saw the property on Friday.’ They’re asking our appraisers not to take a weekend and I’m saying to them, ‘no, you take your weekend. Because if not, you’ll get burned out.”

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Skyrocketing cost of building materials could stress Victoria real estate market – CTV Edmonton

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VICTORIA —
The real estate market on southern Vancouver Island continues to be red hot.

“Condos were up single digits, low single digits,” said David Langlois, president of the Victoria Real Estate Board. “Whereas single family homes in a lot of markets were sort of low double digits.”

Inventory for condos has been holding its own. In contrast, the inventory for those sought-after single-family homes is bleak.

“When we look at the single-family home market, (there’s) very limited inventory and very strong competition for buyers,” said Langlois.

Besides inventory, developers say that the rising cost of building materials may also lead to a rise in costs for home buyers.

“Things are getting almost ridiculous,” said Phil Aitken, a co-owner of Thistle Construction.

“Some products are just getting exponentially more expensive and it’s reaching a point where guys are starting to say, you know, ‘Is there any point in me building this home anymore?’” said Aitken.

Thistle Construction is currently building three homes for clients in Victoria’s Fairfield neighbourhood. In September, they got a quote for lumber for the last home.

“By the time we got around to purchasing the material, it increased in price by about $7,000,” said Aitken.

That increase happened over a three-month period.

General contractors and those who work in sub-trades are also feeling the pinch.

“A 30-day quote is not available anymore,” said Iain Sorrie of Hybrid Plumbing.

For Sorrie, it’s gotten to the point where he can’t even give his clients an accurate estimate due to the rapidly changing costs of materials.

“Suppliers have told us not to give out 30-day quotes (for) the time being because their increases are going to happen quicker than the 30 days expires,” said Sorrie.

Plumbing supplies, lumber, drywall – everything has increased in price, which has many builders questioning if there’s a business case anymore for adding to that new home inventory.

“I think there are lots of opportunities out there at the moment for somebody to start flipping homes,” said Aitken.

“Certainly, finding an older home, new floors, a new kitchen, a coat of paint, some new exterior – you’re still going to pay a bit for materials but it’s not going to be anything like the cost of building a new home.”

The situation could put more pressure on that singe-family home inventory that is slowly becoming more out of reach for many families.

“You know, I feel for the younger generation,” said Aitken. “It’s really quite scary for those people trying to get into their first-time home.” 

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