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Reporting losses from Rental business? These are the dangers…

deducting losses from rental business

There are many dangers of reporting losses from the rental business… I’ll explain with this story.

A couple of years back, I advised a real estate investor not to take the entire apartment renovation as a one-time deduction.

The renovation was done in between tenancies. He didn’t put much improvement except giving the unit a fresh look.

Technically speaking, he could deduct it as repairs.

I looked at it differently.

He reported multiple years of losses.  His other rental property also had a huge expense creating a bigger overall rental loss of over $50K.

He’s self-employed as well, which means that he was at a higher risk of being audited.

He disagreed with my judgement…

People generally underestimated the amount of work involved in handling an audit and the stress it would add to your life.

This recent court case in Hamilton reminded me of this client. The taxpayer owned a few rental properties in Hamilton and Stoney Creek area.

He reported rental losses from 2005 to 2011 (see below for a summary).

He rented out two properties, detached bungalows, at significantly below market rent.

He rented out these properties for $450 per month for the most part, during the questioned period. He rented one of these properties to his lease for $200 per month.

CRA presented in court that market rent as per CMHC, which we all know as real estate investors are way low, is around $850 per month during the period.

The taxpayer simply argued that his rent was charged on a net basis with the intention that the tenants are responsible for utilities, snow removal and day to day maintenance of the properties.

He stated in court that his objective for these rentals was to “recover property taxes, mortgage interest and insurance”.

As a result, he reported significant losses in multiple years.

CRA audited his tax returns and challenged that he did not intend to carry on the rental with the intention to profit.

If you’re not intending on carrying the rental activities in a commercial manner, this means that you cannot deduct the rental losses incurred.

Losses offset against his income. If these losses are disallowed, that means he must pay back all the taxes he would otherwise be liable if he didn’t have these losses.

Judge didn’t think that he was carrying out his rental activities in a business-like manner.

  • He didn’t have any actual leases signed.
  • He didn’t make any attempt to determine comparable rent being charged in the Hamilton area.
  • He also failed to increase rent even though he’s incurring a loss every year.
  • He rented out one property to his niece for $200, significantly lower than what other tenants are paying, much lower than the fair market value rent.
  • The judge concluded that the taxpayer did not provide any proof that he was conducting his rental activities in a commercial manner.

The judge dismissed the taxpayer’s appeal and sided with CRA.

Next time when you are reporting multiple years of losses – whether it is rental or business, think again.

Next time when you are renting your properties to family members and reporting losses, think again.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

6 Simple ways a Canadian Real Estate Investor can create Freedom

Canadian real estate investors

As a Canadian real estate investor, whether you own your businesses or have a rental portfolio, systems and processes are the keys.

I had a rare and candid business conversation with my dad and Erwin one night.

He asked us about our numbers and how our businesses are structured.

He was fascinated that we could be away for two weeks while our businesses are still running as usual.

Family time in Hong Kong 🙂
Family time in Hong Kong 🙂

He, on the other hand, could not leave his businesses unattended for over a week.

He could take a weekend off here and there, but his business relies on him heavily.

I thank my team for piecing everything together while I was gone.

We’re not perfect. My team is growing, and it’s hard to build systems and processes around.

What worked for me when I was working by myself absolutely doesn’t work for a team of three.

What worked for a team of three won’t work for a team of five.

Systems and processes are the keys to success. We’re not perfect. We’re still in the middle of developing systems and processes and defining roles & responsibilities.

According to Jacko Willink, author of the book Extreme Ownership and former US Navy SEAL, structure and discipline allow freedom.

Freedom and flexibility are the reasons why I choose to own my business.

A business should be run without the owner present all the time.

I got extremely lucky this time. We aren’t perfect for sure. Clients were understanding, and my team is amazing.

My dad said that his business is different. He’s got a contractor business. It’s demanding.

Business culture in Hong Kong also doesn’t allow him the flexibility that we Canadians are enjoying.

Michael Gerber, the author of The E-myth Revisited, argued that every business could be systemized.

If you have gone to Disneyland, you would appreciate what Michael Gerber is saying.

We went to Hong Kong Disneyland twice with the kids. We watched a few shows twice. They were done by different actresses/actors and yet their script was mostly the same. They also act the same way, consistent with the cartoon characters.

I bet you that their scripts are the same as the ones in Florida and California.

We also took pictures with Iron Man. This Iron Man that we took pictures in Hong Kong Disneyland acts the same way as the one played by Robert Downy Jr. in the movie. I bet that the one in Florida would be the same!

How could they do that? Systems and processes!

Here are some tips a Canadian real estate investor can use to set up the systems for their rental portfolio:

  1. Maintain a list of basic information for the property and update it when there’s any change

This list of basic information can include the following:

  • Last roof replacement date, warranty information
  • List of appliances, brands, model number, purchase date, warranty information
  • Last electrical update, meter number
  • AC unit and furnace model number, last purchase date, warranty information – when inspecting your AC unit, if you notice any faults that you feel could snowball into a more serious issue then you may want to utilize the services of experts to come and assess the problem in the hopes of fixing it. See this website for a detailed list of the services on offer.
  • Hot water tank last model number, last purchase date, warranty information or rental information
  • Initial mortgage document

The best time to collect this information is when you first purchase the property. You would have done your home inspection, and everything is fresh! You can also make the repairs right after, be it with T.E. Spall & Son for water heater installation or any other contractor.

  1. Prepare a move-in and move-out checklist

One of the tenants inspired me to create a move-in checklist. During his first week of move-in, he had so much complaint about the property that I was determined to release him.

In your move-in and move-out checklist, make sure you inspect and test the following items:

  • Furnace and furnace filter
  • Air conditioning
  • Hot water (preferably test all taps)
  • Lights and light switches
  • All appliances including fridge, microwave, range, dishwasher, etc.
  • Gas fireplace
  • All window screen and drapery
  • Visual inspection of damage to the property, properly mark them down
  • Garage door remote/passcode
  • All keys and locks
  • Anything specific to your property you can add to the list

Have the inspection done at the time of move-in and move-out, signed off by both parties if there are further maintenance required by someone like Paul the Plumber, set the expectation on when and how these issues will be resolved.

  1. Provide a “cheat sheet” for new tenants

This can include things that the tenants would need to know and be aware of:

  • Property manager contact number or your own contact information
  • Your preferred way of communication (phone/email/text)
  • Your back up contact info, in case you’re not in town
  • Maintenance contact (I have one myself, and I often direct my client to my handyman for most of the service calls)
  • Garbage date (ideally garbage calendar if you have one)
  • What to expect of the tenants (such as snow removal and lawn care)
  • Utilities account info if tenants are responsible for paying for their own utilities
  • What to expect for utilities account reconciliation (how often you do it, how you communicate with the tenants, etc.)
  • How to pay you
  • Any rental equipment maintenance issue (i.e. hot water tank rental company – if they have a water leak, the rental company can come out immediately and get in contact with someone like Apollo Plumbing – plumbing repairs at the same time if necessary)
  • Any other items that you would need, set up the expectation for
  1. Have a maintenance checklist & reminder for each property

I use Google calendar to set up reminders for anything I need to do for my property on a regular basis – so once I set it, I won’t forget it.

Here’s the sample email reminder I pre-set for myself:

  • March Daylight Saving time change
    • set up lawn care contract
    • replace smoke alarm/CO2 detector battery
    • Schedule inspection time with tenants
    • Send an email to the tenant to change the furnace filter
  • July
    • Send an email to the tenant to change the furnace filter
  • November Daylight Saving time change
    • set up snow removal contract
    • replace smoke alarm/CO2 detector battery
    • Schedule inspection time with tenants
    • Send an email to the tenant to change the furnace filter
  • Black Friday
    • Purchase tenants Xmas gifts

During the inspection of the property, make sure you have a checklist to go through. The “move-in checklist above can be a great starting point. Adapt it/trim it down for a regular maintenance check.

  1. Set up individual bank account for easier tracking

I like it clean and easy. I prefer to set up one individual bank account for each property, especially since personal bank accounts cost nothing these days.

I deposit rent checks in the account. I pay all my bills related to the properties from the same bank account as well.

At any given point in time, I can simply check my bank account balance to see if my properties are doing okay.

At year-end when I do the bookkeeping, I can simply look at the transactions in this bank account to prepare my bookkeeping.

  1. Set up a pre-authorized payment

It’s surprising to find out that not everyone uses pre-authorized payment for property tax, insurance, anything you can set up on pre-authorized debit.

I do that even for rent collection.

If you have a few properties, time to collect rent, deposit rent and pay bills can add up fast. I set them up on auto-pilot to save time.

If you have a property manager helping you out, you probably do not need to do a lot of these checklists up. Be sure to manage your property manager though.

Systems and processes make it easier for a Canadian real estate investor to grow their rental portfolio faster and provide them with the freedom you want.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

How to Pay Less Tax as an Airbnb owner

It was a lot of fun doing a presentation on Airbnb. 

I spent half a day doing my own research confirming the HST impact on the sale of Airbnb and how Airbnb owners can pay less tax. 

Most importantly, I enjoyed doing the research and learning something new.

The host of the event, Davelle Morrison, from Bosley Real Estate, has two Airbnb rentals. 

What surprised me the most was that she owned one in Price Edward County, a place where one of my clients also owns an Airbnb rental.

She was telling the crowd that she provided nice salt and pepper, Keurig coffee machine and the Sand Bend Beach Pass in the past season and got a great review. 

One visitor commented how he wished she would provide olive oil in the past season.  She decided to add that to her list of items being provided.

How to pay less tax as an airbnb owner
Thanks, Davelle for a great event!  

The crowd laughed at this visitor’s comment, but you wouldn’t have known the big impact this small addition of olive oil would have on her tax situation. 😉 

In Canada, if you operate a hotel, you’re providing a service, not rental income. 

What it means is that if you own a hotel in a corporation, revenue from the hotel is considered active business income, taxed at a small business rate of 12.5%. 

This means that, instead of paying as high as 54% personal tax rate, your hotel income can be taxed as low as 12.5% in the corporation.  We, as accountants, have a lot of flexibility to lower your taxes for you.

Now, how’s a hotel different from a regular rental?

The hotel provides a list of services, such as laundry, towel, maid, cleaning, coffee, internet, linen, cribs, fridge, beverages, meals, etc.

They sound familiar, don’t they?

If your Airbnb is operated as if it is a hotel, and hotel income is considered as active business income, does this mean that your Airbnb income can be reported as active business income?

This can also mean that you can pay as little as 12.5% if you earn the Airbnb income in the corporation.


Of course, when you take out the money, you may trigger personal tax – something to discuss with a professional.

Before you get all excited about the low tax rate, always remember, with CRA, we need to document everything we do.

If you do provide these services, make sure you keep a copy of the Airbnb ad to what you provide.  Make sure you have communication, or even comments printed out/documented somewhere that they enjoy all these additional services you provide.

What if you don’t provide olive oil and Sand Bend Beach pass, can you still pay less tax? 

Well, a proper structure would help.  We recently helped our clients to structure his Airbnb rental and services so he can pay less tax and maximize his borrowing capacity.

If you’re confused, I am going to do the same presentation in an upcoming event in Mississauga. You can get tickets using this link.

If you’re not interested in Airbnb, my client, Steve Ford, and my good friends, Charles & Andy, are going to talk about their small infill development progress in St Catharines at the same event. 

Here’s a video of their project: 

The project is interesting – they are creating something out of nothing. 😉 They already locked up their second site for a second development.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant


Many real estate investors invest for the reason of providing a legacy to the next generation. 

They want to use the money they earn to finance their children’s education. 

They want financial freedom. 

They want to retire early.

If there’s money left over, they may even want to help their kids to buy their homes.

What if… the investment comes with a risk, a risk of being sued that could potentially affect your own home, your RRSP, and your savings…

One of the top reasons to incorporate is because of the extra layer of legal protection provided by the corporation.

Business lesson 101 here: Corporation is considered a separate legal entity. This means that it can be sued on its own.  If the corporation doesn’t have the money to pay for its liability, it could declare bankruptcy and closed off.

Shareholders’ personal assets would not be affected.

At least that’s the story a lot of business books taught us.

Having a corporation has its own benefits, and its downside as well. One of the biggest complaints is that the setup cost is high and the annual filing cost is high as well.

Some real estate investors would tell you that the setup cost and the extra filing cost are too much, they would rather buy a bigger insurance policy to have the extra protection.  

Good point, isn’t it?

How likely are you going to get sued from real estate investing? 

Or… to rephrase the question, how likely would you really need the extra layer of legal protection offered by the corporation?

Over 10 years ago, I managed three commercial plazas.  One of the commercial plazas has a huge parking lot. 

In a very cold Winter, I got a call from a lady claiming that she slipped and fell in this property.

We immediately called the snow plowing company, a father and son team.  They’ve been taking care of the property for over 10 years.  They kept a logbook whenever there’s snow.  They also documented whenever they completed snow plow in the area.

Turned out, there was no snow for the previous 10 days.  I immediately left a message with this lady who fell at the property.  She never called me back.

I always thought that slip and fall incidents were only a myth from the movie – it really could happen in real life.

Thankfully we had diligent documentation at that time.

Fast forward to 2018, a client came in for a mid-year consultation – we always encourage our clients to be proactive about tax planning.

Her tenant was burning marijuana oil in the basement unit of a triplex in Whitby. 

It blew up.

According to her neighbor who witnessed this “explosion”, the entire house got lifted an dropped back down. 

Thankfully, no one got hurt (the other tenants were not inside the house when this happened) and this tenant suffered minor injuries.

The house was deemed to be uninhabitable and she had to tear the entire house down.

The insurance company is footing the bill, thankfully.  My client, however, was still in shock.

Moral of her story?  She’s going to put all future real estate holding into a corporation. 

You may still think – oh well, this lady still got the insurance company to foot the bill.  I got insurance coverage too.  Is a corporation still necessary?

A few days ago, a client and I were having a chat about his 2018 personal tax year.

We discussed the usual, tax estimate, strategy for 2019, etc. and he asked me again about setting up a corporation. 

I’m a big proponent of the corporation – simply because of the flexibility it offers to real estate investors and business owners. 

But… in his situation, given that he only had one investment, it wasn’t worth while to set up a corporation for one property, yet.  

He then dropped the bomb – that he got sued on this joint venture investment.  He was not on the title on this property, but he owns 50% of the property as the real estate expert.

He was named in the law suit of a slip and fall accident on this property.  This injured person is suing for a 7-figure compensation.

Each property insurance would have a slip and fall component.  You would normally think that it is somewhat covered in it.

But because he wasn’t on the title, the insurance company would not cover his case. ☹️

Even with the JV partner who’s on the title, according to him, this insurance company is trying everything to get out of the case.  

Sometimes, we forget that insurance company has its policies.  If you miss one fine detail, you may not get covered. ☹️

Morale of the story?  You don’t know what you don’t know. 

Be extra cautious, be protective, be diligent.

Will corporation protect you from all these?

A big disclaimer here, I’m not a lawyer.  Consult a lawyer to get a better understanding before you proceed with anything. You may still get sued even if you own your investment through a corporation.

But it does provide an extra layer of protection. 

Be sure to consult a lawyer.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant


Have you ever heard of the term Fear of missing out (aka FOMO)?

FOMO is part of the reason why most of us are so addicted to social media. We’re worried that we’re missing out something, which for the most part, is nothing.

This is especially serious when it comes down to parenting.

Kids don’t come with a manual. 

Proud mommy moment: Robin was showing mommy what she could make with the magnetic building blocks at Family day celebration 

I try my best to parent my kids to the best of my ability.

When it comes down to academic and extra curricular activities, we have no clue. 

We talked to our neighbors who are both teachers.  The school that our kids go to is one of the best in the area according to them.

When my friends around me are all sending their kids to Montessori and private schools, I also have a bit of FOMO going on internally. 

Am I doing the right thing to my kids?

Are my kids missing out on something?

Some kids are sent to different tutoring programs, such as Kumon and Spirit of Math. 

When I was flipping through the binder from Spirit of Math, I thought I was looking at my Grade 13 OAC Finite questions! 

One of the questions was – what is the sum of all odd numbers under 20?

Another question was – how many different handshakes are there when there are 6 girls shaking each other’s hands?

These are the questions that were meant for a little girl who just turned 7 in January. 

It made me feel a bit inadequate myself, someone who graduated with a Math major from the University of Waterloo. I could barely do these math questions myself.

FOMO with my kids – if I don’t send my kids to these math tutoring, would my kids be missing out on the learning opportunity?

Worse yet – am I a bad parent if I don’t send them to these programs?

Sending them to these programs mean a 3 afternoons’ commitment.  This is on top of their Chinese school on Saturday and the soccer program on Tuesday. 

Sending them to these programs also means that I will be absent from work for these 3 afternoons.  (Well, but I’m a parent, I shouldn’t be selfish… ahhhh!)

These internal dialogues were on my mind for weeks, until I started listening to the book called Self-Driven Child: The Science and Sense of Giving Your Kids More Control by Ned Johnson and William Stixrud.

This doesn’t mean that the kids are in charge and there’s no discipline involved.  It just means that the kids are given more responsibility to control things that happen in their lives.

When you have control in your life, you are happy.  It’s true for kids, it’s true for adults. 

One of the items that the kids should take responsibility for is their academic and schooling.  Another idea is to detach our traditional view of success in school equates to success in life. 😊

This book made me feel better about my kids (together with my laziness to ship them around every where), but it will be a constant uphill battle.

Only parents can relate.

Now onto this week’s topic, what’s new for your 2018 tax return filing that you may find interesting:

  • No more public transit amount – it was terminated as of July 1 of 2017.  No credit can be claimed in 2018.
  • First time donor credit gets a “super credit” when they made their first donation – this credit has been removed. 
  • A new credit called Climate Action Incentive (CAI) is now available for specific provinces including Ontario.  It is introduced to rebate some proceeds from the Federal pollution pricing system to residents. 
  • Tax on split income is now in effect.  This means that for small business trying to split income with their adult children, you may be charged at the highest income tax rate for the person receiving the income.
  • Accelerated Business Investment – this essentially allows the taxpayer to claim more capital cost allowance at the beginning.  For example, for equipment (such as fridge, stove, AC that you purchased), you can normally claim 10% of the purchased cost in the first year of acquisition as a deduction.  Under the new rules, if the equipment was purchased after Nov 20, 2018, you can claim 30% in the first year.  So for those who acquired properties between Nov 20 to Dec 31, you may be eligible to claim a higher amount of capital cost allowance.
  • In Ontario, the tuition and education amount are no longer available.  It ended at the end of the 2017 taxation year.   This does not mean that you, as parents, don’t get to claim the tuition and education amount.

Just for the record, tax planning is done ahead of time, even before a property is purchased so we can position you in the most tax advantageous way.  

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

Canadian Real Estate Investors Vs. 2019 Federal Budget

Canadian Real Estate Investor

As Canadian Real Estate Investors, there are two things you need to pay attention to about 2019’s Federal budget.

Though, this year’s budget was a bit boring, compared to the last couple of years, here is the short and sweet summary of how this year’s budget could affect us:

Spend, spend and spend ☹️

  • All the new spending proposed in 2019’s budget will result in $22.8-billion spending over the next five years. 
  • Justin Trudeau’s government is projecting $19.8-billion deficit in fiscal 2019-2020 and $19.7-billion deficit the year after.
  • Numbers are meaningless without interpretation.  
    • Justin Trudeau pledged a balanced budget by 2019 when he was running for the job in 2015.  Once he’s in power, he switched his focus from balancing budget to spending. 
    • Budget is important for a government because…
      • Government is like every Canadian.  We earn our salary/business income. After paying the government, we’re left with what we can spend. 
      • If you spend more than you are left with, this means that you must come up with some $$$ from somewhere to cover the expense.
      • You can go to the bank to borrow, but you have to convince them that you have the ability to pay them back, plus interest. If you have a house, you often tap into your line of credit.
      • Most responsible Canadians would spend less in the coming months, so they can repay the debt, and the interest as quickly as possible.
      • Our government, on the other hand, runs a deficit.  That means they spend more than they earn. 
      • And they keep borrowing, because they have the power to. 
      • They’re in the same shoes as most Canadians, they have to pay interest on their debt.
      • But interest payments are due tomorrow, the year after, annually for many years.  So as the loan borrowed.
      • Our government’s revenue comes from tax. 
      • When we’re running a deficit, we’re borrowing money.  When we’re borrowing money, we’re using the tax revenue from the future to pay for today’s spending, because interest payments are due over the next number of years and the debt will be repaid in the future.
      • In another words, our government is borrowing from our future tax revenue to fund today’s spending.
      • This future tax revenue can be coming from our future earning ability and our kids’ future earning ability. 
      • So running a deficit also means that our kids and many more future generations are paying for the spending we’re incurring today.
    • And now you know why all news focus on “balance” the budget.  Even if Justin Trudeau is elected this fall, there’s no plan in sight to balance the budget.
    • This means that we will continue to borrow from our future to spend today. 

Sometimes, I wonder how governments can be so irresponsible at spending their money, not their money, our hard-earned tax dollars.  

First time home buyer

CMHC now lends you money to purchase your first home provided the following criteria is met:

  • Your household income is less than $120,000.  If you’re household of one (single), your income has to be below $120K to qualify.  If you’re married or have a common law partner, then the combined income between the two of you must be less than $120,000.
  • The purchase price of the property must be below $400K.
  • You can apply to get 5% to 10% of their mortgage via a shared equity program with Canadian Mortgage and Housing Corporation.
  • The amount you can get from CMHC also depends on whether you’re buying a new home or an old home.  New home, you can get 10%.  Old home, you can get 5% from CMHC.
  • If you have 5% downpayment to purchase a $400K brand new property, in the past, you would have borrowed $380K.  Under the new program, you can get $40,000 from CMHC and so your mortgage is now $340K. 
  • Less monthly payment for first time home buyer.
  • Because you’re now qualifying for $340K mortgage, you need less income to qualify, making it easier for you to purchase a home.
  • You will have to repay the $40K funded by CMHC. 

Canadian real estate investors can “borrow” from their Registered Retirement Saving Plans to purchase their home. The maximum you can borrow was $25,000 and you would have to repay it over 15 years.

To assist first time home buyer, the Liberals government increase the borrowing limit to $35K, effective immediately. 

Will these two measures boost the property prices where Canadian real estate investors invest?  This depends on the market you are in.  It will have some effect in areas that have housing prices less than $400K. 

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

Real Estate Investors Best Back-office Practices – Part 1 

Here’s the first half of the two-part series on the best practice Real estate investors can use to set up their back office to audit shield against CRA

But before I get into this, here’s a side note.

I saw this post a while ago on my FB feed.  A friend of mine wanted to “stop” Doug Ford to cut OSAP.  It’s old news now, cutting teachers is the new news. 

real estate investor

Most of us only read the news from its title/headline.  If you see the title of Doug Ford cutting OSAP, I personally would be offended. 

Doug is not really cutting entire OSAP, he’s only cutting grants that are made to kids who come from the wealthy background.  Hence, the title probably isn’t sexy enough, so cutting OSAP as the title works, and that’s what everyone saw.

For the record, I don’t agree with all his cuts, some are necessary as this one, some are controversial.

While our government is constantly under attack to make cuts and be more financially responsible, we as real estate investors have to earn every single deduction that we take.

1. Understanding the general deduction rule

In the Income Tax Act, it specifies that you can deduct expenses that you incur to earn business income or property income, subject to a bunch of exceptions.

This means that if you incur the expenses, such as mortgage interest, property taxes, utilities, etc. to earn property income, you are eligible to deduct the expenses.

Some expenses are not so obvious, such as buying your real estate agent lunch, connecting with other real estate investors via coffee, etc.

I always tell my clients to keep all your receipts and discuss with us at the end of the year when we file your taxes.

In CRA’s eyes, you need documentation to support your deductions.  No receipts, no deduction for sure. That’s low hanging fruit from them.

The minimum standard for deduction is that you need to keep the receipts, credit card statements and bank transactions don’t count.

Now that you have your receipts, have the conversation at year-end with your accountant to see if you can deduct the expenses or not.  ?

2. Paper system vs. electronic system

Let’s face it. Some receipts are printed on thin glossy paper.  They fade over time.   When I say they “fade over time”, it’s an understatement.

They fade pretty much immediately after they’re printed from the cash register.

CRA does allow storing receipts electronically, but the storage of your electronic receipts must be in Canada.  

If you save it in your back-up drive in your Miami vacation home, that probably won’t work.

A cloud-based system such as Dropbox may work, provided that the server must be in Canada. Cloud technologies may be a beneficial addition to businesses for a multitude of reasons. In the case of its implementation in Office software, visit here to see how it can extend your business’s SharePoint environment for the better.

If you’re not sure, a backup drive in your Canadian home would count.

If you opted for the paper system, no worries.

3. Folder system

Whether you are using paper or electronic system, I would suggest that real estate investors set up a folder for each property each year.

Keep all the receipts/invoices occurred during the year, such as insurance, property tax bills, mortgage statements, repairs & maintenance receipts, etc. in the folder.

If you claimed meals & entertainment expenses, make sure you keep them in this folder as well.

If you claimed home office expense, you can set up a separate folder for your home office.  Keep a copy of your floor plan there.

The more documentation you have, the easier it is in the future to audit shield against CRA.  

In addition to the annual folder system, I would also set up a “permanent folder” for each property. 

The permanent folder would have the following documentation:

  • Closing documents when you purchase the property
  • Refinancing documents
  • Any capitalized expenses that are used to increase the building cost
  • History of the work done to the house in a summarized format, such as:
    • Year of roof, contractor, warranty date, contact info of the contractor
    • Year of appliances, make and model, warranty information
    • Year of plumbing, contractor’s name, all related permit
    • Year of electrical last updated, contractor’s name, all related permit
    • Year of windows, contractor’s name, warranty, etc.
    • The list goes on…

This permanent folder helps keep the important documents to manage your property and potentially refinance your property, all at the same place.

4. One bank account for one property, if feasible

I prefer one bank account for one property.

This bank account already does part of the bookkeeping for me.

  • All rent related to this property goes in this account
  • All expenses related to this property comes out from the same account

At the end of each quarter, all I need to do is to go through all the transactions in the bank account to see if I am making money or not.

Half of the bookkeeping is already done for me.

I can easily see how much money I am making or lack thereof. 

I can make sure I take every single deduction that went through my bank account.

It’s getting long.  Let’s break it down to two posts and we will share with you the remaining in the next post.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

Quit your 9-5 with just two Rental properties

Quit Your 9-5

It was Erwin’s birthday the past weekend.  He just turned 40. His big 40th birthday reminded me that how young we were when we first met and how I quit my 9-5 and got into real estate investing in the first place.

We went out with a bunch of friends to this place that we could do archery, throw some knives and axes as well, it was so much fun! 

It was 2011.  I got a stable job making just shy of 6 figure.  I lived in a considerably big townhouse and drove a nice Mercedes.  

This is the Canadian dream that many people longed for. 

I almost felt that I made it, except I was living paycheck by paycheck, seeing no money left in the bank account.

Through Erwin, I learned that there was a world of opportunities outside of the Greater Toronto Area. 

I could literally buy a detached home in St Catharines for low $200K (maybe even cheaper).

I had no money in the bank account.  The only thing working for me at that time was my Etobicoke townhouse. So I spoke to my mortgage broker, I got my very first home equity line of credit set up.

I wanted to quit my 9-5 and I would like to have some stable cash flow coming in to cover my daily expenses before I resigned. 

When Erwin suggested that we could “partner up” and buy our first investment property together, I was all in.  All I did was to surf MLS daily.  I never went out to see the property myself until a month after closing.  

Technically, I was the money partner and I qualified for a mortgage.

At that time, we’d seen each other for a year or so.

We never officially signed an agreement.  In the back of my mind, the worst case scenario, this house would be mine even if we were to break up.  LOL. 😉

We put in some extra money to renovate, started advertising on Kijiji, and got our first rental set up.

I quit my 9-5, went out on my own full-time, thanks to Erwin and this student rental. 

I wasn’t eyeing the appreciation.  Before buying this property, I had no idea where St Catharines was.  It’s embarrassing.  I was buying it purely for the cash flow.

We had some usual hiccup along the way.  In the first year, one student ski board off our car port roof.  The property was flooded at one point, we got some insurance money.  The usual landlord stories, you know.

Benjamin Tall, Chief Economist for CIBC, has a quote – “if you think today’s prices are high now, wait until you see what they will be next year…”

That truly wasn’t the case for the first few years of investing.  We saw some appreciation, relatively minor in comparison to Hamilton and Toronto. 

Then 2017 hit and St Catharines market become a hot market!

The rest is history.

If you are one of the people who hesitate to get in the market waiting for the collapse, you’re timing the market.

Timing the market to make money is not easy.  I’d rather spend the time in the market owning a property and let the market takes care of itself. 

If you have not heard about how my client quits his 9-5 using his real estate holding yet, here’s a link to watch our quick conversation.  He quits his not so cushy shift work job last week so that he could volunteer at his son’s school.  It’s inspiring just seeing what he has done. 

Most importantly, you can take risky decisions because you know you have the properties to back you up! 

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

5 Lessons learned from Canadian Real Estate Tax season

Canadian real estate tax

It’s the end of 2019 Canadian real estate tax season. 

This is also the end of my 16th tax season.  I’ve learned a few things along these 16 years of doing taxes and hopefully, it helps you a bit too. 

1. Tax planning is done ahead of time, not on April 29

One client of ours would like to sit down to have a meeting to strategize on April 29 about his tax return. 

This is tough because of two reasons:  1) it’s arguably the busiest time of the year for accountants who file taxes; 2) we’re filing the previous year’s return, nothing much can be done on April 29 to change your tax position. ☹️

2. Documentation matters

One of our clients got audited on his rental loss from 2017 during the Canadian real estate tax season.

He rented out his investment property to his friend and this friend never paid him the full lease amount.

Worse yet, this friend never paid for the utilities.  The lease agreement specified that utilities are the tenants’ responsibilities.

My client legitimately lost a bunch of money on this property.

But the loss got denied.

He was not able to produce documentation supporting his loss.  He called his “friend” to chase for rent, but there was no paper trail, no email trail, nothing. 

He asked for his “friend” to pay the utilities over the phone, he didn’t have a paper trail.

Everything got disallowed, including the utilities that got paid directly out of his pocket.

The first lesson learned, do not rent your investment to “a friend”. 

The second lesson learned, keep documentation. Email, notice to collect rent, notice filed with Landlord Tenant Board, Small Claims Court submission, etc. must be collected and well documented. 

If you sent text messages, keep a screenshot of your text messages.

Documentation matters.  Documentation is a must to “earn” your deduction.

3. Bookkeeping should be done regularly

Bookkeeping should be done regularly.  It is a hassle, don’t get me wrong.  But if you do it regularly, you can notice the errors or at least measure the performance of your properties early.

You don’t have to work 60 hours “for your accountant” the week before the filing deadline.

If you do bookkeeping right (you should keep up your books every quarter as a minimum), things can be a lot smoother when you file your taxes.

It can be as painless as simply uploading the file.  Your tax return is done in the next week or so!

This also means that you have plenty of time to make payment to CRA if you have a large payable.

If you are wondering how to do your bookkeeping more efficiently and effectively using excel or other online software systems, we are going to host a couple of courses in June.  

Click this link to sign up on the waitlist. 

4. Large renovation and expenses do not necessarily mean tax refund

We have one client who spent over $150K on the renovation.  The project lasted for over 2 years.

We could not “deduct” this expense in the same way as you may think.

She wouldn’t see the effect of this $150K “write-off” until she sells this property years and years down the road.

This $150K renovation doesn’t automatically give her a huge tax refund.  It is added to the cost of the rental property.

When she sells, she can claim it as part of the cost against the sale proceeds.

Carrying costs such as mortgage interest, insurance, property taxes during this 2 year renovation period have to be added to the cost of the building.  Again, when she sells, she can claim it against the sale proceeds. 

It is not an immediate write-off.  It is deducted in the future when you sell.

5. If you have a balance payable, complete your return early!

If you are expecting a balance payable, make sure you submit your paperwork early to your accountant.

This guarantees that you have sufficient time to complete your return, file it on time, and avoid the late filing penalty.

Late filing penalty is calculated based on balance owing.  5% on balance owing when we submit the return 1 day late.

It can add up quickly if you have a large payable.

Hopefully, you will be more prepared for the next Canadian real estate tax season!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

Real Estate Investing: 5 Factors to Decide your Strategy

real estate investing

I am re-reading the legendary book Rich Dad Poor Dad now. This was the bible that got me started in real estate investing.

The idea is that I would only find properties that would generate cash flow, and the cash flow is supposed to cover all my expenses, so I don’t have to worry about taking care of my living expenses ever again.

We’ve heard about the stories. Buying a property in Florida for USD$30K, rent it out for $600 of rent, properties provide great cash flow, sounds perfect under the Rich Dad Poor Dad model.

The problem is, there’s no $30K property in Canada. Heck, there’re fewer and fewer $300K properties available, how would this cash flow concept work in Canada?

Meanwhile, you see all your friends making big money on pre-construction condos everywhere. How do they make all this money?

1. Get your priority straight

Is cash flow your priorities? If cash flow is your priorities, maybe buying a house is not the best fit for your priority.

There’re options available for you to invest in private lending, earning a decent amount of return and cash flow, with a minimum amount of work involved. But the upside is limited to the interest rate you are earning.

Is time a big factor? Buying a rental property is like running a business, it requires time and commitment, and sometimes dedication as well. A friend of mine managed to get a home loan from fellowshiphomeloans.com which meant she was able to get onto the property market really quickly. She started renting her house out and now she’s made a decent amount of profit from it all. It’s inspiring to know that there are lots of options to help with buying a house. Home loans are a great place to start in my opinion.

My mortgage broker told me that he doesn’t want to nor does he have the time to deal with the headache from managing his property. He opted for private lending.

Is maximizing your asset growth top of your priority? If you have very little savings to play with and you want to grow your income producing asset base as quickly as possible, the fastest way to grow is by using leverage.

Of course, I would always encourage you to buy secure assets that can surely give you a good return. Those looking for a new property to add to their real estate portfolio may want to consider the homes for sale in the state of North Carolina which are proving particularly popular in neighborhoods like those of Apex. See here to learn about the properties currently on the market there and see if there’s something that takes your fancy – https://findnctrianglehomes.com/neighborhoods/apex/villages-of-apex/

Using leverage means that it eats in your cash flow. You’re trading the cash flow In the short-run in exchange to grow your asset base as quickly as possible.

Getting your priorities straight is the first step in selecting a real estate investing strategy that works for you.

2. Understanding your real estate investing options and return on investment (grief)

Now that you know what your goal is, then you can analyze different types of investment options.

For the purpose of our audience, I am only going to refer to various types of real estate investing strategies.

Whether you’re buying a condo, a single-family home, student rental, multi-units or 6-plex, you’re making money on mortgage paydown and appreciation. Whether you’re buying a property at Union Park or buying a property in Quail Creek, you need to make sure that you have everything in place to do so.

Mortgage paydown and appreciation alone can give you over 30% return in certain circumstances.

The higher the return, chances are, the more grief you are going to get from the property.

For example, student rental generally provides the highest amount of cash flow. Rent usually covers all expenses plus a few hundred dollars left in your bank account.

But, dealing with student requests may not be the favourite thing to do on a Saturday evening family time. Sometimes, the annual turnover can also be viewed as a hassle for many people.

My best friend bought a commercial property for $300K a couple of years ago. It was a nice property in a nice town. When she first got her property, part of the roof was in very bad shape that she and her husband wore a mask to see the property. Investing into such a property is a risk, but sometimes a risk that is necessary. She may have found a less distressed Commercial Property with companies like Prideview Group who have many deals available, but the property she ended up purchasing ended up working for her regardless.

She’s poured in 7 figures into the property and now, 2 years later, it’s worth double of her investment.

But throughout these two years of restoring and renovating, her husband had to leave home, worked in this town most of the week, and she and her kids only got to see her husband twice a week.

Investing 7 figures into this property also means that she’s financially tight.

They made 7 figures in 2 years from this deal. From a number perspective, anyone would tell you that it’s a great investment.

But there’re many other things that are beyond the numbers. That’s what I meant by return on grief.

Understanding the investment strategies available (and the amount of work involved) and your priority helps you to choose the right one that fits your goal.

Of course, you can also invest in high dividend yield stock – which probably gives you 3% to 4% return. Low return, but no hassle. Maybe that 3% to 4% return isn’t sufficient to grow your retirement fund.

Finding the balance based on your priority is the key.

3. Understand your financing options

If you have a million dollars sitting in the bank, your investment options can be quite different from having access to a million dollars line of credit.

Having access to a million dollars through the line of credit means that every investment that you make, there’s an interest cost associated with it.

This will lower your cash flow from the investment. Sometimes, you may even have a negative cash flow investment.

Does that mean you’re not going to invest in anything at all? Hell no!

My goal is to maximize the long-term wealth I am building. Borrowing from my existing line of credit to purchase and invest will make my cash flow smaller, but I know that over the long run, I am going to be ahead, much more ahead.

Cash flow is a tricky thing. Most real estate investing in Canada does not provide immediate cash flow. But knowing your goal and priority is the key.

4. Have a plan

You may have negative cash flow initially. Map it out.

Prepare a forecast for the next few years of investment. Yes, you may have negative cash flow first year and second year. But you can increase the rent (by the Ontario rental increase guideline), lower the expense (to a certain extent), and even extend the mortgage amortization period to the maximum after a couple of years.

The forecast allows you to paint a true picture of your financial situation.

Maybe you have a large negative cash flow for a few years, like my best friend’s distressed commercial plaza, but you are able to pull out all your money from refinancing when the projects are done and have cash flow.

With the forecast, you know where the end game is and how your property will go and grow financially.

5. You may get CRA to pay for part of the loss, but tax loss is still a real loss

If you have negative cash flow from a property, you may have a true net loss on your income tax return.

If you have a net loss on your personal income tax return, it can be offset against your employment income. You may even get a refund at the end of the year.

But just because you are getting a refund at the end of the year, it does not mean that having a loss is a good thing.

Understanding that the loss position may give you a tax refund, but there’s always a true after-tax loss.

Don’t rely on the government to subsidize your loss.

The key here is to understand your own situation (how urgent you need to build your asset), your priority, financing options to make a proper plan for yourself.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant & Wealth Hacker