Northeast BC Update - October 2014

Drilling companies gear up for large contracts related to LNG, Financial Post, November 1, 2014
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Canada’s Western Provinces Eye Tax Perk in Push for LNG –British Columbia and Alberta are banding together to push the Canadian government to apply the same tax treatment to multibillion-dollar energy plants that benefits Ontario manufacturers. Bloomberg, Oct 30, 2014

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According to Heffernan, drilling activity was up by 26 per cent in B.C. in 2014 compared to last year. If five LNG facilities were to come online, he said, one forecast predicted that by 2019, about four times as many wells would be drilled than there were in 2013. October 23, 2014 Alaska Highway News
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Petronas Still Evaluating Tax Impact on LNG Project – Vancouver Sun, Oct 22, 2014
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Why the LNG Industry could be Poise for Liftoff with BC’s Tax Regime, Financial Post October 22, 2014
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Petronas Led pacific Northwest LNG Consortium Reviewing BC Tax Announcement, The Canadian Press October 22, 2014
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Fortis commences expansion of British Columbia LNG Facility – Stockhouse, October 19, 2014
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BC Hydro Says Site C Dam  Construction Could Start in January 2015, The Province, October 21, 2014
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BC Introduces Pollution Benchmark for LNG Plants with Option to buy Offsets, Vancouver Sun, October 21, 2014
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By the Numbers: The Site C Dam Project, The Province blog, October 19, 2014
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Cold Lake heating up as oil boom accelerates

Interesting article published by Financial Post July 25th.

Cold Lake’s population has grown 9% in the past two years to just under 16,000, and non-residents would probably take the population closer to 18,000.

Read more…


An LNG revolution looks to Canada

The future of LNG depends on decisions we make today.  There is good reason why Christi Clark is travelling to Asia these days.  Asia needs BC gas; Asia is spending billions of dollars developing terminals to accept Canadian gas; and now is the time to forge strong working relationships to secure long term contracts necessary to attract investment dollars.  Some call this foresight, I call it smart business and making the right decisions at the most opportune time to secure the future for Canadians, more importantly build a strong BC.

NATHAN VANDERKLIPPE
TOKYO — THE GLOBE AND MAIL Last updated Tuesday, Jan. 21 2014, 6:52 AM EST
BC LNG
BC LNG

But in world energy markets, this addition to the Tokyo Gas Ohgishima LNG Terminal – the largest tank of its kind – is an unambiguous signpost of the broad energy transformation under way in Japan. Nearly three years after the Fukushima nuclear disaster, Japan is only part-way through the work of preparing for a rush of new overseas energy imports, one that stands to see tankers filled with Canadian LNG among the 69 ships each year that pour out their cargoes at Ohgishima. Read more…

Quick Facts:

  • Japan is the world’s third-largest economy and remains a high-tech powerhouse.
  • Japan is British Columbia’s third-largest export destination, as B.C. leads Canadian provinces in trade with Japan, with $4.2 billion of Canada’s $10.4 billion in exports to Japan in 2012. B.C.’s exports to Japan are two times higher than the next leading province.

B.C. natural gas reserves more than twice the initial estimate, new report says

Chinese consortium antes up $12 million for LNG lands in B.C.

New LNG plants planned for Vancouver, Edmonton


Tax Tip #5 Should I incorporate or not?

Different Ownership Structures

Incorporating may or may not make sense for your situation, so it’s important to seek advice from your accountant and other professionals such as your lawyer, insurance agent and lender. I recommend reading Don R. Campbell’s book, 81 Financial and Tax Tips for the Canadian Real Estate Investor for more information and background on the pros and cons of incorporating your business as well as other considerations for real estate investors.

Overall, income from passive sources, including rental income, is initially taxed at the highest rate; about 46 per cent depending on the relevant province. This can be reduced to approximately 20 per cent where dividends are paid to shareholders. Due to the tax-favoured treatment of dividends, these dividends may generate little or no personal income tax, but may be subjected to taxes at the rate of approximately 30 per cent, depending on your income and province of residence. This potentially creates double taxation.

For the most part there are very limited advantages to owing residential real estate in a corporation that is not connected to an operating company.  Profit is usually insufficient to justify the costs of creating and maintaining a company for this purpose.  The risk exposure is generally minimal and is normally mitigated by proper insurance coverage.  Tax rate on profit is high (46%) and removal of after tax profits subject to more personal tax.  Only in limited circumstances it might make sense to hold in a separate company, ie. there might be multiple owners so having one corporate name on title might be simpler.  Advice provided by  BRUCE HURST, SHAREHOLDER, DIRECTOR with Reid Hurst Nagy Inc.


Tax Tip #4 Eligible Expenses for the Real Estate Investor

profitUnderstanding what expenses are deductible is integral to your profitability

Whether you have invested through our turn key investing or you are self-managing your properties, understanding what expenses are deductible is integral to your real estate portfolio profitability.  For example, depreciation is one of those expenses that can make sense to include or not depending on your particular situation and how it is treated. Depreciation, or for income tax purposes Capital Cost Allowance (CCA) can be an effective way to shelter your real-estate income from current taxes by transferring your obligation to future tax years. In Canada, depreciation of the building portion of the asset is recaptured upon the sale of the property, so it is important to understand the impact on your taxes and bottom line. Consulting with your accountant on how to best approach this type of expense is very important.  You can claim capital cost allowance (CCA) on appliances within your property as well as the building itself if the income is positive. This should be considered if you are in a higher tax bracket now compared to when you retire. Later, when you retire and your income is lower the capital gain on sale and the recapture of CCA can be taken into income at lower tax rates.

  • Advertising Costs – The fees to market your rental unit can be deducted from your income.
  • Bank Charges – Check all your statements. Don’t forget your monthly and annual fees.
  • Depreciation – Depreciating your appliances and the like may be worth doing as they will need replacement at some point in the future. Your accountant will guide you through this process and may take care of that aspect in your tax return when filing. Even an older property can have significant depreciation benefits due to recently installed fixtures and fittings.
  • Gardening – If you pay for all the gardening/lawn mowing for your Rental Property (and it’s not part of your property management service package), ensure that you claim for all the costs. If the tenant pays for this, you cannot make a claim.
  • Repairs and Maintenance – All repairs and maintenance related to the property whether you do it yourself, hire someone or if you are a passive investor and it is included in the expenses that determine your investor distribution. Check with your accountant to find out if it’s an instant write off or a capital cost claim.
  • Home Office – You may write off a portion of your utilities, internet, interest on your primary residence mortgage, insurance, etc. directly related to the running of your real estate investment business. You also may be able write off all office expenses directly related to the running of your real estate investment business. Again your accountant will guide you as to what is applicable or not. This step is very important as you do not want to misreport when filing.
  • Insurance Premiums – Your insurance premium in full can be claimed for your rental property.
  • Interest Fees – The interest fees associated with your mortgage, related loans and credit cards expenses are all write offs. The mortgage interest and most operating costs are tax deductible against the rents received. For your credit cards or loans, the loans must be used for your rental property expenses in order to claim interest fees.
  • Professional Fees – Accountant fees, legal fees, appraisals, property inspections, etc. can all be expensed.
  • Property Management Fees – The fees you pay to your property manager are all tax deductible; be sure to get a month end report of your property and its expenses.
  • Property Taxes – The property taxes of your rental unit can be expensed.
  • Travel – In addition to mileage and Vehicle Expenses mentioned below, you may be able to claim travel expenses, especially if you manage the property yourself and you live a long way from your investment property. Travel expenses related to attending professional development and education opportunities regarding real estate investing may also be deductible.
  • Vehicle Expenses – Certain expenses for your vehicle can be written off such as; financing charges, fuel, maintenance, insurance, parking etc. as they relate to your accessing/maintaining your investment properties. You need to maintain accurate travel logs for your vehicle as to what you were doing so that you can claim the expense.

Other things to consider:

  • If there are any losses incurred in your investment, then the losses are deductible against other income.
  • In Canada, when the property is eventually sold and is not considered business inventory, the appreciation in value is treated as a capital gain and only half the appreciation is subject to tax.
  • Deducting capital cost allowance is something you should discuss with your accountant in advance.  While reducing the income generated in the year there is potential recapture on resale.
  • Unlike interest income and dividend income, you can include rental income in your total earned income calculation on your tax return to determine the maximum amount you may contribute to an RRSP.
  • Buyers of property will pay a provincial transfer tax that varies among the different provinces. An exemption may be granted on the first piece of Canadian property purchased by a buyer. Getting a good return on investment can begin with knowing which provinces have the lowest transfer tax.
  • Upon death, you can transfer the property to your surviving spouse without triggering any tax consequences until the surviving spouses dies.
  • If you have several properties and your spouse helps you take care of maintenance or administration, they can claim a reasonable salary, thus benefiting from income-splitting. Income splitting can also be achieved by holding the properties in joint names.

Words of advice re dealing with the Canada Revenue Agency (CRA): 

  • Pay attention to any and all communications from CRA
  • Meet their deadlines – don’t incur unnecessary fines or legal actions
  • Talk with your accountant to ensure your complying with tax regulations while maximising your profits related to your real estate investments

Sources: This article was developed with information from: The Bigger Pockets BlogCREOnline, Financial Web,Property InvestedRealestate.com.auREIClub.comWindsor Ontario Executive RentalTax tips for Investor Clearing Up Real Estate Confusion; CRA Guides RC4409 Keeping Records & T4036 Rental IncomeTop Tax Tips For Real Estate Investors


Tax Tip #3 Get and Stay Organized

Get Organized

It is your responsibility to keep adequate records and supporting documents

As far as the Canada Revenue Agency is concerned, if your expense transactions are not documented then they may as well not exist. When you own an income generating property it is your responsibility to keep adequate records and supporting documents in an organized fashion. As many of our clients know from investing with us, utilizing the investor binders that we or our developers provide each client when they have completed their purchase is a simple yet effective tool that keeps all your property related paperwork and information organized throughout the year. This in turn helps you avoid the dreaded last minute search for property statements, receipts and related documentation in March and April.

Contrary to popular belief, simply maintaining banking and credit card statements is not always considered adequate supporting documentation. Original contracts, purchase receipts, and other documents should be maintained. In addition, if you are claiming auto related expenses a detailed log of your driving should be maintained outlining the dates of travel, the kilometres travelled, and the reason for travel (it must be to support the production of your rental income). My suggestion is always: If in doubt, save it. The more detailed your back-up, the more likely it will pass the scrutiny of a CRA review or audit. For more information on keeping records and allowable expense see the CRA’s guides: RC4409 Keeping Records andT4036 Rental Income.

You need to be organized in your accounting and bookkeeping. By keeping track of your income and expenses, you can save a lot of money when it comes time to forward your files to your accountant. There are many digital bookkeeping programs that are relatively inexpensive to track all of your income and expenses related to your properties. I use a simple bookkeeping program called Quicken and it works great for me. It’s always better if you can organize every income and expense item in your real estate business into a digital bookkeeping system that is easily accessible and hopefully compatible with your accountant’s systems.

Before purchasing a bookkeeping program it may be wise to consult with your accountant regarding the best system for you to use. Many digital bookkeeping systems are also compatible with your bank’s systems, which enables smooth flow of information. It is important to have all your real estate investment deposits, bills and expenses transacted through bank accounts and credit cards specifically designated for your real estate investing business for better tracking.

If you’re not comfortable managing a digital bookkeeping system, hire a bookkeeper to keep track for your business’s deposits and expenses each month – it is well worth the investment and the expense is deductible.

As previously mentioned, whether you have one or multiple real estate properties, keeping your investments organized like a business and tracking expenses month by month will save you time, effort and money.

Sources: This article was developed with information from: The Bigger Pockets Blog, CREOnline, Financial Web, Property Invested, Realestate.com.au, REIClub.com, Windsor Ontario Executive Rental, Tax tips for Investor Clearing Up Real Estate Confusion; CRA Guides RC4409 Keeping Records & T4036 Rental Income; Top Tax Tips For Real Estate Investors


Tax Tip #2 Find A Knowledgeable Accountant


Accountant

Having a good accountant on your team is invaluable.

It’s important that they’re experienced in understanding and navigating the tax regulations regarding real estate investment. They should be able to guide you in structuring your business, maximizing your deductions while staying within the legal boundaries, as well as maximizing your profits. Your accountant can’t do it all though, so it’s important for you to follow their advice, keep your business organized and stay informed.

If you’re part of an investment group, ask your group members for recommendations for a good accountant. If you already have an accountant for personal purposes, make sure they are also experienced regarding real estate investment tax – not all accountants have a practice with that expertise.

Once you’ve selected an accountant, be sure they understand your real estate investment style and focus; also keep them informed of any changes. Make sure your business system is set up to provide your accountant with the information and documentation they need to prepare your tax return. Their ability to help you maximize your profits and reduce your taxes is only as good as the information you provide them.

Sources: This article was developed with information from: The Bigger Pockets BlogCREOnline, Financial WebProperty InvestedRealestate.com.auREIClub.comWindsor Ontario Executive RentalTax tips for Investor Clearing Up Real Estate Confusion; CRA Guides RC4409 Keeping Records & T4036 Rental IncomeTop Tax Tips For Real Estate Investors


Tax Tip #1 Know Your Real Estate Investment Style

 

Warren BuffetAre you a long term, flipper or short-term buy/sell investor? It’s important to consider your real estate investment style. Are you a long term rental property investor or a property flipper – a short-term buy/sell investor? What is your comfort level for risk and market conditions? If you have rental property investments, are you actively involved in the property management or do you use a property management company? Do you like all the aspects of what you are doing related to your real estate investments? Can you delegate some? What are your strengths and weakness? What is your time worth? Understanding your investment style is fundamental for you and for one of your most important supports for your real estate investment – your accountant.

Knowing this distinction is critical as the tax authorities treat flipping real estate significantly different than long term investing. For example, even if you are a long term investor and sell a property in a short time (a year or two after purchase) the tax authority may look at the property as inventory and lean towards treating the gain as business income vs. a capital gain. This can have a significant impact on your income and subsequent taxes. Recently, Canada Revenue Agency has made a point of focusing on the real estate investor and looking at this very important aspect of real estate investing.

Flipping a Property for Capital Gains?

Thinking of flipping a property and reporting the profit as a capital gain? You may want to think again. Capital gains are generally favorable to business or property income for tax purposes because of the fact that only half of your capital gains are subject to income tax. While the sale of a property held for the purpose of generating rental income would normally be considered a capital gain, this is not always a black and white scenario.

Use the analogy of an apple tree: An apple farmer purchases an apple tree in order to grow and sell apples. The apples are her inventory, while the tree is her capital property. When the farmer sells the apples she is generating business income, but if at some point down the road she decides to sell the tree, she is selling a capital property. If she makes a gain on the sale of the tree that would be a capital gain and taxed at only half her marginal tax rate. The same can be said for an income producing property. If you were to buy an income producing property, rent it out for a decade, profit during that rental period, then eventually sell the property at a gain, the rental profits would be taxed at the full rate and the gain on sale would most likely qualify as a capital gain (taxed at half your marginal rate).

The same cannot be said for short term property flips. When buying or selling a property on a short term basis for a profit (say buying, renovating, and then flipping) the CRA may consider the gains to be a type of business income rather than capital, thereby taxing the full gain at your marginal tax rate. Why is this? The law distinguishes between properties explicitly bought to generate rental income and those bought to profit on a sale. The former would normally be considered capital property to the taxpayer while the latter would be considered a type of business related inventory or more specifically an “adventure in the nature of trade.” While there are no concrete rules on whether a transaction is on capital account or an adventure in the nature of trade there are several indicators that the CRA and courts would take into consideration. Among these considerations are:

  • Whether the property was bought and sold in a manner similar to a dealer in that property
  • Whether the taxpayer has developed a pattern of buying and selling properties with short holding periods
  • Whether or not the taxpayer’s intentions were consistent with a business transaction or adventure in the nature of trade.

The determination of whether or not the sale of a property is a capital gain or business income is complex and has been played out in the courts on numerous occasions.


Canada's Housing Market is Poised...

Over the past 6 months there has been a lot of worry about how tightening mortgage rules will impact the Canadian housing market.  If you’ve been reading any newspaper you will have come across headlines to the contrary….even the Chicago Tribune recently published “A year of pleasant surprises for the housing market”.

HomeForSale5detail_Jan 14

BMO Capital Markets Assessment states Canada’s  housing market “is cruising at an above-normal altitude”.  The concensus Calgary is the place to be :

It is the strongest major market in Canada, with house sales 20 per cent above historic norms and benchmark prices up 8 per cent, virtually making up for the 16 per cent decline in prices from 2007 to 2009.  Prices remain at more reasonable four times median family income and demand remains extraordinarily high.

BNN Rebound in continues in Canada’s housing market – Home sales continued bo be strong in a number of major cities in November, with preliminary local data indicating that the country’s housing market is still rebounding.

The Globe and Mail Housing market on solid footing

The Financial Post What soft Landing? Bullish realtors see no slowdown

What is the prognosis?

Think house prices are unaffordable now? It gets worse – Globe & Mail

One thing for sure you can’t bet on a sure thing and you have to rely on the fundamentals when making your decision to purchase real estate.


Changes to Financing Rules – in Review

According to a recent Maclean’s article, this spring, in order to “cool down” the housing market and protect taxpayers from financial risks, Canada Mortgage and Housing Corp. (CMHC) started to limit guarantees for banks and other lenders on mortgage-backed securities. Click below to read the full article

Macleans CMHC cap

Banks, credit unions and other mortgage lenders were notified that they would be restricted to a maximum of $350-million of new guarantees this month under its National Housing Act Mortgage-Backed Securities (NHA MBS) program.

 Federal Finance Minister Jim Flaherty, stated he would limit the ability of banks to buy bulk insurance from CMHC.  He also shortened the use of government-backed insurance in securities sold by the private sector.

These mortgage changes forced banks and other lenders to assume more of the risk of mortgage defaults, rather than offloading that risk to Ottawa. As predicted, Canada’s housing decelerated as a result of tighter mortgage insurance rules.

At the start of this year, after discussions with CMHC, Mr. Flaherty said there would be a guarantee of a maximum of $85-billion worth of new NHA MBS this year. By the end of July, lenders had already distributed $66-billion worth of the securities, compared to $76-billion during all of 2012.

Now, CMHC is levying the $350-million cap on each issuer effective immediately, while it determines a formal allocation process this month for the remainder of the year.