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7 BOOKKEEPING MISTAKES A REAL ESTATE AGENT (AND ALL TAXPAYERS) SHOULD AVOID

7 bookkeeping mistakes

Many people asked me how I did it – writing blog posts every single week for the last 3.5 years, accumulating over 150 blog posts today.  Trust me, it hasn’t been easy.

I look everywhere for materials that can be relevant to my followers, so I can provide valuable information for them.

One of my favourite source of material is the recent court cases – YIU-CHO NGAI and HER MAJESTY THE QUEEN.

Earlier this week, I stumbled across this court case relating to a real estate broker in Toronto. He’s disputing in court about certain deductions he took in 2005 and 2006 that Canada Revenue Agency disallowed.

The court case ended January 26, 2018. ☹️

It’s over a decade ago and he finally got a ruling from the judge last month!

1. Cash gifts won’t cut it

The taxpayer, Mr Ngai, claimed deductions with respect to cash gifts he made to his clients and referral source against his realtor income.If you are thinking of giving cash gifts to anyone, think again!

He could only provide names of the people who received the gifts but other than that he couldn’t provide any evidence to prove his claim.

He didn’t invite recipients of these cash gifts to corroborate in court.

He couldn’t even provide cash withdrawal support from his bank.  In theory, he would have got the cash gift from somewhere, likely his bank account, to gift them to the referral source.

Lessons learned?  Do not give cash gifts.  If you are giving a gift, make sure you have it properly documented.  From the bank withdrawal, to the name of the person who received it, contact number and the address.

If you want to make sure you get the deduction, get an invoice or receipt, tie it to a specific deal that you are working on.

If you are unsure you can get a receipt, you may even want to avoid cash gifts altogether.

2. Documentation matters

Yep. You’re right. We are in 2018. We are talking about a case related to the taxation years of 2005 and 2006.I graduated from University of Waterloo with my Master of Accountancy in 2006 and wrote my Chartered Accountant Uniform Final Exam that year!

That’s a LONG TIME AGO!

How are you supposed to remember everything that happened that far back? You can’t!

That’s why documentation matters.

In the court case, Mr. Ngai, the taxpayer had stated that a Louis Vuitton designer purse was given to a client’s wife as a gift for purchasing an industrial building with him. He also made an inconsistent comment that the purse was given to thank the client to let him use their BMW for business purposes.

The judge disallowed the deduction, on the basis that Mr. Ngai provided conflicting reasonings for the deduction.

Lessons learned?  Write down what the gifts are for specifically when you are spending the money!  Don’t wait until 10 years later.  Write it down directly on the receipts.  You may even want to take one step further.  Write down how this is related to earning your commission income/rental income!  This will help you in court 10 years down the road!

3. Follow KISS principle

For those of you who don’t know this principle, it means Keep It Simple and Stupid.A taxpayer is entitled to claim any deductions that he incurs to earn the specific source of income, subject to a bunch of exceptions.

The easier it is for you to tie a specific expense to income, the easier it is for the judge/CRA to allow the deduction.

For example, if you buy a Louis Vuitton designer purse for a client who just closed a property that’s worth $1million, it is worthwhile for you to write down on the receipt that this is for Mr. XYZ’s wife and Mr. XYZ just closed a deal on ABC street.

When you get audited by CRA, you already establish how the expense is related to the income earned.

I am not saying that by writing down the name and the deal, you are able to deduct a Louis Vuitton designer purse.  But making it simple and stupid surely make your position a lot stronger.

4. Corroboration matters

In this court case, the taxpayer didn’t invite any witness to substantiate his claim.The judge even offered to hold off the case to allow the taxpayer to invite some of the people who he claimed to provide cash gifts to stand in court.

Mr. Ngai turned down the opportunity citing cultural differences.

Going back to the cash gift example above, Mr. Ngai couldn’t provide any paper documentation as to how he got the cash to issue payment to the referral source.

Should Mr. Ngai asked some of these recipients to appear in court, he likely would have got the deduction allowed.  Even a written statement from these recipients would have made the case stronger for Mr. Ngai.

On the flip side, I do understand why Mr. Ngai is reluctant to call these recipients to court.  If they were to appear in court, they probably would be questioned as to whether they reported the gifts in their income tax return.  What if they didn’t?

Lessons learned?  Make sure that when you are providing gifts to referral source, you have them properly documented. Certain gifts are tax-free from the recipient’s point of view, but certain “gifts” such as rebates of commission can be taxable, depending on what you are buying.

Talk to your accountant to recognize the risk of deducting cash gifts without proper documentation.  Maybe it’s not worth it to take the risk?  Maybe getting a receipt from them is sufficient.

5. Gifts to a clients’ son’s wedding likely can’t be deductible

Mr. Ngai also deducted cash gifts for a wedding that he attended.The wedding gifts $1,000 was written as a cheque.  It was the wedding of the son of an important business contact.

The judge cited two previous court cases before they made the decision to disallow it.

In the judge’s point of view after reviewing the two court cases, a wedding is considered a social event, not a business event.  Just because there could be an element that the taxpayer could hand out business cards, “(b)ut it could not be argued (except under possibly the most extreme circumstances that are not easily evident to me) that going for a cup of coffee, mowing the lawn, or attending the wedding was for the “purpose of gaining or producing income from the salvage business”.  (comment from the court case Ace Salvage)

Lessons learned?  If you are attending a social event, costs of wine, wedding gifts, etc. cannot be deductible.

6. Referral fees are deductible

I mentioned in previous blog posts that referral fees could be deductible.Technically speaking, referral fees are tax deductible.  But remember the general guideline, reasonable expenses are deductible if you incur them to earn the specific income.

It’s worthwhile to note that the Real Estate Council of Ontario may not allow you, as a real estate professional, to pay referral fees to anyone outside of the deal itself. But that’s beyond the scope of a tax court case.

Mr. Ngai was able to deduct referral fees paid to various referral sources, with proper documentation provided.

Lessons learned?  Write down the name of the referral, write down the deal that the referral fees are related to and ideally mark it on top of the cheque, also keep a copy of the cheque for deduction.

7. Rebates are also deductible

Many realtors give a rebate to their clients, in the form of cash, cheque, gift cards, or an exhaust fan in this court case!Seller or buyer rebates are fully deductible with proper documentation provided.

Mr. Ngai was required to provide the listing documents (MLS Listing) to the court for him to get the deduction that he made on a $1,500 rebate to one of his clients.

Mr. Ngai also bought an exhaust fan for one of his other clients after closing.  The court treated this expense as a buyer rebate.  He was able to establish in court that the buyer would not purchase the house because of the exhaust fan and Mr. Ngai agreed to pay for the replacement of this exhaust fan to complete the deal.

Lessons learned? Documentation matters.  Follow the KISS principle above.

Hopefully, all of us can take away something from Mr. Ngai’s case.  

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Real Estate Investment Tips for Canadian Investors

3 Investment Tips Every Real Estate Investor Can Benefit From

I’ve learned a few real estate investment tips from my mum that I would like to share with you, whether you’re working in property development finance in Melbourne, or if you’re based up here in chilly Canada!

My mom is my superhero. She’s inspired me to be a real estate investor and entrepreneur. Thanks to her, I had little fear when I bought my first condo. It was a real boost to the confidence I had at the time, and she continues to be a great supporter of my efforts.

So, here are 3 real estate investment tips every real estate investor can benefit from:

    1. Cash rebate received on new mortgage and renewal

In Canada, when you sign up for a new mortgage after going to someone like Mortgages For Less for the best rates, or when you renew a mortgage, you simply sign, and that’s the end of the story.

In Hong Kong, the banks are so competitive that they will offer you incentives/rebates if you sign up.

For example, my mom would get a 1% rebate on the mortgage amount, essentially lowering her effective interest rate to just above 1%. (Rates in Hong Kong are slightly lower than ours.)

One of her property’s mortgage renewal just came up. Her bank offered the same rebate again!

In Canada, some bank still offers this type of rebate. However, the mortgage rate will go up.

From a tax perspective, this type of rebate is taxable in the investors’ hands. The only way for you to know whether or not you can get a rebate is to look into your mortgage before renewal. If you want to do this, see when your renewal time is coming and check your mortgage.

    2. No capital gain tax in Hong Kong (and many other countries)

We often talk about tax when you sell your properties.

My mom still owns a rental property in Canada, and I explained to her how she would be taxed when she sells the property eventually.

She’s a bit shocked to find out that she needs to pay tax. There’s no such thing as the capital gain tax in Hong Kong, and in many other countries such as New Zealand and Switzerland.

According to Fraser Institute, zero tax on capital gain increases savings and discourages entrepreneurs/investors from making more investments.

Mom dressing up at Pirate Show

Imagine Canada has no capital gain tax? Imagine what it will do to our property pricing? Just imagine the type of economic growth we will get?

Mom thought that because she had one property only, she could be exempted from paying capital gain tax.

That’s a myth!

She would still need to report the sale of her rental property as an investment, pay capital gain tax on it. I went through the quick calculation I have here to prepare her for the amount she needs to pay.

    3. A will is necessary, even if you own one property.

My grandparents were farmers. They were ranked bottom under the communist form of China. This meant that they received minimal resources from the government.

Thankfully, my mom and one of my aunts decided to “move to” Hong Kong, which was a British colony back then.

They both worked hard and saved some money.

Eventually, they together provided the money for my grandparents to buy a place closer to the border.

Fast forward to 20 years later today, this same condo unit is old and a bit out of shape. But this same unit is in the centre of the town. Rumor is that it will be taken back by the Chinese government for redevelopment.

Instead of buying you out, the Chinese government will give you a unit in the brand-new building when the redevelopment has finished. They will also reimburse you for the rent you incur during this inconvenience. Crazy, isn’t it?

Rumor is that the new unit will be worth a lot more than the old one.

When there’s money to be made, there’s conflict inflicted. One of my aunts wanted to make sure that the property will be split up properly when my grandparents pass away.

This also stirred up the pot causing the rest of the siblings to ask for some. ? My mom is one of 7 children.

It was an uncomfortable conversation to have, but they finally reached a conclusion how this fortune will be split up.

CN Tower With Mom

They will sign a piece of paper specifying the arrangement. In Canadian terms, it’s the will.

Erwin and I are in the process of drafting up our wills as well. Certain conversations are difficult to have, but you still need to have them to clear things up.

Without the will and the conversations ahead to explain why you allocate your asset the way it is, this can trigger conflict among siblings and family members.

Be sure to set this up ahead of time. 

I hope you found my 3 real estate investment tips useful!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

5 Lessons learned from $600 million unpaid Real Estate taxes

UNPAID TAXES

Canada Revenue Agency recently released its latest statistics on their effort cracking down on unreported tax liability in the real estate sector (unpaid real estate taxes).

We have been following this data since 2015 when it was first introduced.

I figured that it’s a good time to remind all real estate investors, flippers, land developers about a few quick facts about unpaid real estate taxes.

5 Quick Facts…

1. Property flipping is considered business income. It is legally allowed, but you are required to report it accordingly. Most mistakes are made when the sale is reported as capital gain.


2. Selling pre-construction condos/homes before closing is called an assignment. In the past, assignors’ names were not readily accessible by CRA. CRA has since obtained court orders successfully to require builders to the assignors and assignee’s information. You cannot get away from not reporting the income. Big Brother is always watching!


3. Assignment deals are subject to HST. Assignment deals are also considered flipping in the previous point and must be recorded as income, 100% taxable. You may think you can make a killing in selling assignment deals; there may be very little left after HST and business income tax.


4. When you flip a house, it usually involves renovation. If you have renovated substantially, you will have HST exposure. This means that when you sell, you must consider the HST impact on the sale price. One reader of my blog didn’t include HST in his calculation and was shocked to find out how much he must give up.


5. Tearing down an existing house and building new ones are considered selling new homes. Even though you don’t have to pay HST on the purchase of the existing home, you must charge HST on the sale of the new homes. The entire projection of profit can be substantially different.

Make sure you speak to a qualified accountant with a real estate background to consult on your financial matters.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

Setting up a new Corporation? Take these 7 steps

7 Steps You Must Take When Setting Up a New Corporation

Setting up a new corporation has many benefits but can also be complicated. Here are 7 steps you need to take to simplify this process.

1. Open a bank account:

A corporation is a separate legal entity. When you conduct business in your corporation’s name, the corporation earns money, not you personally.

If you receive money in your personal bank accounts, shareholder benefits might have been conferred to you instead.

In simple terms, you will have to pay personal taxes in your name.

And your corporation may still have to pay taxes on this earned income!

Double the taxes!

The best way to go around this is to ensure all corporate income earned is deposited directly into the bank account.

2. Open a credit card, if that’s an option:

When you first set up a corporation, it’s often advisable to have a credit card as well.

Credit cards are used for the day to day business expense incurred to earn the income.

Sometimes, the bank may not allow a brand-new corporation to have its own credit card.

A dedicated credit card in your name can be sufficient.

The idea is that only corporate business expenses can go through this credit card, making accounting, bookkeeping and reconciliation a lot easier.

It also helps to establish the deductibility of fees and interest on this credit card.

3. Purchase shares:

Many business owners simply go online to set up the corporation themselves.

Shares are often set up as a journal entry at year-end by the accountant.

The truth is, to have the corporation established, a share must be purchased. (Trust me, a few court cases have mentioned the validity of the corporation before!)

To establish that, the shareholder should deposit a cheque to subscribe for the shares at the beginning.

4. Register for your HST account

You may be in the residential rental business – most residential rental companies are not subject to HST, and you may not be required to register for HST.

If you are a builder building new homes, your business is subject to HST. Registering for HST earlier guarantees that you get the benefits of getting a refund from the HST you paid.

If you are a flipper, depending on whether you are renovating substantially or not, you may have an HST exposure still.

If you are a real estate brokerage, you don’t really have a choice but to register for HST. Chances are, you won’t even get paid if you are not registered for HST.

If you have HST exposure, be sure to register for an HST account early to avoid any future surprise.

5. Select an accounting software and all related apps:

Whether you have a real estate investment business, realtor business, flipping houses or building houses, you would need to select an accounting software initially.

Or alternatively hire a company for your accounting needs, from payroll to making sure there are never any errors on your bank statements.

In the marketplace, there are tons of apps that keep everything smooth and straightforward for you.

For example, if you’re handling many customers then it is important to get a powerful CMS system that suits your needs. Two of the main ones to compare when making this choice is freshdesk vs zendesk, as they are major players in the market and each can help with certain niches.

Apps for real estate professionals:

General contractors – specific apps are available for progress billings.

Regular business owners – I suggest using credit card collection, which makes collection much more manageable.

Rental investors – I’m personally using an app for collecting rent and making payments to my subcontractors at $1 each. The app syncs with my accounting software, performing my accounts payable, and receivable function automatically and seamlessly.

I looked into this app after a friend of mine recommended that I look into a way to manage my rent collection and my accounts. She stated that she used a Xero accountant, a financial advisor who was adept at using the Xero accounting system, which is a cloud-based account software for small businesses.

There are also apps out there helping you to track your mileage and fetching bills and bank statements for you.

It would be advisable to also get yourself some documentation management software, this will help you get everything on your computer organised and anything that you have as a physical copy can be scanned into it too, this will reduce paper in your organisation.

Look at software on FilecenterDMS.com to see how it can help you.

Be sure to speak to your accountant regarding the apps available that suit your specific need.

6. Select a year-end for your corporation

As an individual, we’re so accustomed to having December 31 as a year-end. Calendar year-end means our year-end.

We are required to file our personal tax return on April 30 if you’re not self-employed or by June 15 if you’re self-employed.

One year-end is December 31, which is one filing deadline.

Your corporation is a separate legal entity. Your corporation has the flexibility to select its year-end. And it does not have to be December 31!

Sometimes, a year-end of January 1 can be advisable for tax deferral purposes. Sometimes, a July 31 year-end may be more appropriate.

The filing deadline for a Canadian Controlled Private Corporation (for the majority of my audience here) is six months after year-end. Corporate taxes, however, are due only three months after year-end.

HST filing requirements can be different, depending on the filing frequency requirement.

7. Make money and talk to your accountant early

After spending so much money on the initial setup, it’s time to make some money!

Tax planning should be accomplished ahead of time and it is also highly personal.

The strategy should start before setting up the corporation, with your goal in mind, the proper corporate structure should be set up.

Once you start earning income, you should have a conversation with your accountant on how much money you should set aside in preparation for tax owing.

Believe it or not, making money is essential, but keeping a portion for the taxman can avoid much grief in the long run.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

Taxation of Rental income: How to pay 13.5% Small Business Tax

taxation of rental income

Taxation of Rental income is not the same as how regular income is taxed.

But before I go into more details, did you see this headline – “Liberal government writes off $1.1B US loan, plus interest, docs show” on MSN.com?

Federal government wrote off a loan made to Chrysler during the 2009 global economic meltdown.

I believe in making progress in life: Failure is fine, as long as we learn from it and never make the same mistake again.

It sucks to lose $1.1B, but it doesn’t mean that we can’t learn a thing or two from this loss.

I’m a small business owner and real estate investor. Billion seems to be a big number to grasp.

To give you some perspective, Toronto Transit Commission (TTC) subway extension to York University costs about $3.2 billion. The federal government only contributed $697million; the rest was funded by the province, the city of Toronto and York region. This $1.1B could have been used to build 1/3 of our subway line[i].

The cost to build UP Express, which provides train service connecting Pearson airport to Union Station downtown, cost $456 million to build[ii].

This $1.1B loan can allow us to build two UP Express.

In 2012, the automotive section employed 115,000 persons in Canada as per Statistics Canada[iii]. Compared to the 2007 to 2009 employment level, a total of 43,500 jobs were lost.

Could we have spent this $1.1B in better places making a greater impact on our lives?

Should we have been so willingly giving away our hard-earned Canadian dollars to bail out big corporations?

Could we have created a program to re-educate these 158,500 auto-workers to work in a different industry instead?

I’m not a politician.  Politicians are difficult business.

As an entrepreneur, I’ve learned that reflection is part of the key to success. Hopefully, our Federal government learned from this mistake, instead of purposely hiding the write off from the public, and not to make the same mistake again.

Now, back to this week’s topic…

Taxation of Rental Income in the Corporation.

In Ontario, small businesses can pay as little as 13.5% corporation tax.  If you earn $100,000, you would only need to pay $13,500 tax.

With proper planning and structure, small business owners can pay personal taxes to close to nil when they withdraw the money from the corporation.

If you were to earn the same amount in your personal name, you would have to pay close to $35K tax.

Unfortunately, Income Tax Act (ITA) and CRA do not look at rental income the same way as regular income.

Rental income, together with dividend income, interest income and royalty income, are all considered Specified Investment Business income (SIB).  They’re taxed differently in the corporation.

SIB is taxed at 50% with 30% refundable upon the distribution of taxable dividend.  If you want to find out more about how this works, please refer to this blog post.

Many investors ask, ‘is there a way to get away from paying 50% taxes?

Yes, the key is to hire more than 5 full-time employees.  Most of us know, it would take a lot to build up a portfolio that would require more than 5 full time employees.

(For the record, if you hire more than 5 full time employees, you would pay 13.5% tax instead.)

Once in a while, I would also take over real estate investor clients’ and their prior year tax returns were erroneously claiming small business deduction rate at 13.5%.

From time to time, I would see taxpayers challenging this “more than 5 full time employees” exception.

Check out this example:

In Huntly Investments Ltd. V. The Queen, the taxpayer claimed a small business deduction on rental income received from residential properties.

The taxpayer owned and leased 5 buildings in downtown Vancouver. One of them is a 40-unit building, and the other four were adjacent to each other and had 40 dwellings combined.

This taxpayer didn’t have 5 full time employees.

Instead, the taxpayer used arm’s length property management company and services provided by other related corporations (which are owned mostly within the same family) to manage the rental portfolio.

The taxpayer challenged that the tax court and CRA cannot simply use the definition of “more than 5 full time employees” to determine whether the rental business should be considered a SIB.  She argued that business owners could outsource the work, and have other associated companies providing the service, rather than hiring.

I, as an accountant, 100% agree with that!

Rather, tax court should determine the services required to run the operation would have needed the taxpayer acted alone.  From there, they could determine the number of full-time employees required to provide the services on a reasonable basis.

The judge went into prior court cases to determine the definition of “full time employees” and how several “part time employees” cannot be “added” together as one full time employee.

The judge also went into depth in analyzing the services provided by the associated companies and found that the taxpayer did not substantiate why and how she needed a chief executive officer, an executive assistant, a chief financial officer and a full-time accountant if the associated companies did not provide their services.

These services would have been required if the taxpayer started the redevelopment proposal during the taxation years in question.

The judge concluded that the regular day to day rental operation would not have required these many employees.

The judge sided with CRA, concluded that the taxpayer did not require more than 5 full time employees to run the operation.

As such, the taxpayer cannot claim the small business tax rate. ☹️

How do we do this properly?

If you don’t have more than five full time employees providing services to your business, but use related companies to provide services, the key to success is to document, document and document!

Job description, list of services provided, # of hours these staff work in your rental business.  You may even want a timesheet showing that these staffs are working consistently in the rental business (this can include redevelopment!).

Claiming a small business tax rate on your rental property isn’t a walk in the park.  Be prepared for the challenge from CRA.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

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.

What?!!!!!!

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

GROW REAL ESTATE PORTFOLIO AND GET ASSET PROTECTION WITHOUT LOSING SLEEP AT NIGHT

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

DO YOU RECOGNIZE THESE SIX TAX CHANGES FOR 2018?

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