I have met many real estate investors and real estate agents at various events. Many of them have expressed the frustration that they have over their accountants and bookkeepers for lack of advice on proper ways a real estate investor should do their accounting.
Of course, this can be avoided by using a company that offers consultancy and expert advice, as well as business accounting services. But I understand that not every company can find an accountant like that.
Sometimes, when I question why the financials were prepared in a certain format, they would turn to me with a blank stare, not knowing what I was asking.
Reflection and taking ownership is key. The financial education guru, Robert Kiyosaki, author of Rich Dad Poor Dad, said that everyone should learn some accounting. You need to know some degree of accounting to get you ahead in the quest to financial freedom.
Taking ownership: recognizing that you’re ultimately the one that’s signing off
“I don’t know what my accountants did, they did whatever they need. I just paid.” This is one of the most common comment I heard from many new clients.
More often than not, that’s a true statement. These real estate investors and real estate agent really don’t know what happens to their returns or financial statements.
Unfortunately, this statement usually isn’t sufficient to stand in court.
This is not even sufficient as a defence when CRA does reassessments and imposes interest and penalties.
Guess who’s responsible to pay for the interest and penalties if there’s any? You.
Understanding that you are ultimately the one that’s signing off your return and agreeing with all the numbers and information presented. This is the first step to take ownership of your financial return.
Learn to know your numbers
You don’t need to know everything, but you need to know to ask questions, whether that be to the software you’re using, like Quickbooks, or to your accountant.
Review your tax returns and review your financial statements.
When in doubt, ask why and ask how.
One of my clients was questioning why her refund was so low in this past year. She contributed maximum RRSP allowed and she even got her kid’s tuition tax credit transferred.
But she’s not getting a refund reflecting these tax deduction and tax credit.
Very valid question.
We dug deep into the situation and concluded that her employer did not withhold the taxes on her RRSP contribution when she directed her employer to deduct off the RRSP contribution off her bi-weekly payroll.
If something does not look right, trust your instinct, sometimes you just need clarification.
Understand what you can deduct and cannot deduct
Well, we, as accountants, can do as much from our end to educate our clients on what can be deducted and what cannot be deducted.
But we are not 24/7 with you.
Learn what you are allowed to deduct, what you are not, get a better understanding of what records you need to keep will go a long way to help you maximize your tax deductions and keep more money in your pockets.
Keep the receipt when you’re in doubt. Jot down everything that you’re in doubt of.
Ask your advisors and professionals at year-end.
Record keeping is required for CRA, you may as well use these reports to your advantage
You’re doing bookkeeping for tax filing anyway. You may as well use these reports to your advantage.
I look at my financial statements regularly.
From the rental income, my accounting business income, to payroll expenses and all the software subscription cost, I review them on a monthly basis.
Sometimes, I would even make a comparison between last year and the current year to spot any anomaly.
You can spot trends and outliers, you can then dig deeper to find out why.
Maybe some expenses can be cut, maybe you’re letting things slide on a certain area of business.
Review your financial statements regularly
Accountants prepare financial statement based on historical data. You can prepare the same set of financial statements, using most up to date figure – it is called net worth statement.
Prepare and review your net worth statement on a regular basis.
The fair market value of your investment properties is an asset.
The current value of your debt is liabilities.
The difference between the two is your net worth.
Simple as that.
Be cautious though.
The fair market value of your car may be less than the debt you owe on this car. ? That’s why people say cars are depreciating assets.
Reviewing your financial statements/net worth statement regularly and make a comparison with what you want to get out of can put you back on the right track to achieve your financial goal.
Financial freedom takes time and planning to achieve. The first step is to recognize that you’re the one responsible. From daily record-keeping to long-term financial planning, everything starts from you.
That’s why it’s so important to have some understanding of finances and accounting. However, if you aren’t completely confident with finances, it might be a good idea to try and get a financial advisor on board to help you.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant