REAL ESTATE AGENTS, FEDERAL BUDGET & TAXES
The January 27, 2009 Harper Conservative federal budget committed $35 billion (Cdn.) to stimulate the Canadian economy vs. trillions in the U.S. and Harper is WAY slow in spending any money. The Conservatives will copy-cat any U.S. initiatives and try to ride on the coat-tails of the massive U.S. spending hoping for a recovery in the Canadian economy. This is a failure of leadership
Economic stimulus provisions are so lacking in direction that we may, with `shovel-ready’ projects, end up with a pattern of spending for spending’s sake. There is a mishmash of subsidies with few tax incentives. The budget punishes Premier Danny Williams of Newfoundland for his successful “Anybody but Harper” platform in the 2008 federal election. Federal transfers to the provinces have been juggled to appease Premier McGuinty and to win more Conservative seats in Ontario in the next federal election. Harper ruined his party in Quebec with his mistaken 2008 federal campaign policies on arts cuts and tougher youth crime legislation and with the anti-Quebec tone adopted to smear the failed coalition of the Liberal, N.D.P. and the B.Q. parties. The budget is weak policies mixed with partisanship giving us a budget lacking in boldness and direction and spending too little too slowly.
THE FEW RELEVANT BUDGET HIGHLIGHTS
1. Computers and software purchases will be fully deductible if made after January 27, 2009 up to January 31, 2011.
2. Personal and spousal/married equivalency - - single parent - - tax credits will rise by $720 to $10.320 in 2009. The threshold for the lowest two tax brackets will go up sizably for 2009 taxes by $2,841 and $5,683 respectively with only indexed increases for the top brackets. (See Chart on right) The age credit jumps by $1,000.
3. The new renovation tax credit will save up to $1,350 in federal taxes with a credit of 15% on renovation expenses of over $1,000 and up to $10,000 including PST and GST on taxpayers’ homes. This covers labour, materials, professional fees and related costs for renovations up to January 31, 2010. It covers internal and external renovations and repairs including painting, light and fan fixtures; flooring including carpeting; building additions including garages, sheds and fencing; roofing, driveways and paving; windows including covering attached to window frames; new sod and landscaping; in-ground and above-ground pools; security systems and associated costs for permits, professional fees, equipment rentals and “incidental costs”. It does not cover furniture, appliances and electronics, tools, cleaning, maintenance contracts and financing costs. Get going.
4. FIRST TIME HOME BUYERS. Who are defined as not having owned a home in the 4 prior years are getting 2 breaks. There will be a “First-Time Buyer’s Credit” of $5,000 saving $750 at the 15% federal rate on the purchase of a home after January 27, 2009. Only one credit may be claimed per spousal couple. Secondly, after January 27, 2009, the Home Buyers Plan (HBP) maximum RRSP tax-free withdrawal for first-time buyers is rising from $20,000 to $25,000 or $50,000 cash for a couple. Pre-existing breaks include a $2,000 rebate of Ontario Land Transfer Tax on the purchase of both new homes and resale homes. A fourth break is a $3,725 exemption on the new Toronto Land Transfer Tax started on February 1, 2008. First-time buyers will pay only 2% on the cost over $400,000. With low interest rates, there will be a LOT of first-time buyers in 2009.
2008 PERSONAL TAX RETURN AND TAX ISSUES
1.The 2008 budget created the Tax-Free Savings Account (TFSA) for 2009. The non-deductible annual cap is $5,000 contributed to TFSA with tax-free growth. Unused contribution room can be carried forward indefinitely. TFSAs are really only suitable for seniors, those in mortgage-free homes who have used up all their RRSP eligibility and those who have $25,000 in their RRSPs and who are saving to buy a first home. Any growth and withdrawals are tax-free.
2. The $2,000 pension credit is available to those under 65 drawing a private pension or getting a pension split from a spouse and, at 65 years of age, on RRIF payments and even foreign pensions.
3.The 2007 introduction of pension-splitting of up to 50% of a taxpayer’s private pension to their spouse offers huge tax savings. A recipient of a private pension under 65 years of age can split only $2,000 to a spouse who has no pension qualifying for the credit so that spouse could use the $2,000 pension credit. You can split up to 50% of pension amounts and RRIF withdrawals to a spouse 65 years old whether formally married, common-law, same-sex etc.
4. The pension-splitting provides tax savings AND a chance to reduce or avoid the claw-back on Old Age Security benefits. Tax planning focuses on the combined Federal/Ontario tax brackets. For 2008, the rates are 21.05% on the first $37,835; about 33% up to $75.769; about 43.16% from $75,769 to $123,184 and 46.4% on taxable income over $123,184. Very top-heavy. Pensioners 65 and older collecting the standard Old Age Security of $6,082 for 2008 face a claw-back on the OAS once their net income reaches $64,718. [ See Box Below ] OAS benefits are clawed back at a rate of 15% on net income over $64,718 and are fully clawed back at $104,456 of net income. Splitting up to 50% to a spouse can: a) drop the income down to the spouse’s lower tax brackets; b) drop part or all of it out of the `claw-back zone’ if the transferor gets net income down to $64,718 and thus avoid the 15% claw-back; and, c) set up the spouse for the $2,000 pension credit. Extremely generous.
5. Interest is charged on deficient installment payments and on personal tax and GST balances unpaid at April 30th. For tax returns, late-filing penalties are 5% if 1 day late plus 1% per month for 12 months to a maximum of 17% penalties. If filing late again within 3 years, the penalty is 10% if 1 day late plus 2% per month for 20 months to a maximum of 50%. Self-employed taxpayers and their spouses have until June 15th each year to file as do annual GST filers. Those who will file late can approximate personal taxes and GST balances and make `top up’ payments to the CRA by their respective filing deadlines. Penalties apply only to any remaining tax and GST balances after such payments.
TAX PLANNING AND TAX ISSUES
1. 2009 will be a good year to buy rental properties. Buy jointly with your spouse to split net rental income and the gain on sale. Take appliance depreciation first, then IF you are in one of the two top tax brackets at 43.16% or 46.4%, claim brick depreciation to reduce your net rental income to NIL. This defers taxes and, despite recapturing depreciation on sale, you will pay the taxes with dollars devalued by inflation. Low interest rates will continue to drive the purchase of homes and rental properties.
2 It is a disaster to incorporate to buy rental properties. Read “Rental Properties” under “Personal Taxation” on our website to see why. Rental properties are better sheltered from taxation in personal tax returns as shown above in the previous paragraph. .
3. In 2009, a big issue will be terminal losses on the sale of rental properties especially in the case of condominiums. The slump in real estate in values will result in deals signed in 2006 and 2007 for rental condominiums closing in 2009 at a purchase price way under current values. The “terminal loss” treatment on sale cushions the blow from a sale at a substantial loss. Each brick asset over $50,000 must be put in its own depreciation class. A terminal loss results when net proceeds are less than the “Undepreciated Cost”. If a rental condominium turns into a bad investment, you can do a `tax-driven sale’, cut your losses and get big tax savings. You can claim a loss on operating revenues AND a fully-deductible terminal loss on the difference between your cost and the proceeds of sale less real estate commissions and legal costs. The total rental loss `washes through’ the T776 Rental Statement and is fully deductible against all other income in the year of sale. Those in the top tax brackets above $75,769 and $123,184 in 2008 will save 43.16% and 46.4% respectively on the loss. Some comfort if caught in a bad market.
CANADA REVENUE AGENCY (CRA) TAX AUDITS
1. For 2009, all Canada Revenue Agency (CRA) District Taxation Offices have set up “real estate agent audit teams”. Audits could double or triple. Note that late-filed returns are much more likely to be audited. Taxpayers must submit receipts and vouchers for expenses categorized by type and totalled on tapes or spreadsheets.
2. The CRA disallows expenses if they are deemed to be: “insufficiently documented”; “not clearly connected to business”; “personal in nature”; “excessive” in proportion and thus “unreasonable”. Auditors target to disallow 25% - 40% of expenses.
3. CRA auditors will request an automobile logbook and attempt to disallow 20-25% of business driving if a self-employed taxpayer does not provide one. The 1991 Qureshi decision of the Federal Tax Court of Canada said that the record-keeping provision of the ITA, section 230(1), was never intended to create the “onerous burden” of maintaining an automobile log book. Agents can claim 90% or higher as business driving if they can give a detailed description of driving habits such as no cottage, no golf, no skiing, minimal social activity, multiple cars in the family, 7-day work weeks etc. Go 90% and higher and don’t blink. Business driving IS on a 24/7 basis.
4. Realty agents get a home-office expense if their home is their “primary place of business” under s. 18(12) (a) (i) of the Income Tax Act. This is true even if the have segregated space at their broker’s office. They qualify if the majority of business activity is conducted in the home. It is a “usage test”. In the GTA, agents became home-based once they began being billed for and set up the MLS service in their home. If agents use their home for MLS access, keeping their sales records, doing their banking, drafting offers, booking appointments, doing correspondence, have their computers, desks, filing cabinets etc. at home then their home is “their primary place of business”. You can deduct for areas used exclusively for business and do the calculation on either a square-footage basis or room-by-room basis not counting bathrooms. We have a discussion of all real estate expense headings on our website.
5. Business dinners and events including travel dinners and the cost of attending events are limited to 50% deductibility and the 2006 Stapley decision brought gift certificates for dinners or events under this limitation. Enter all grocery and drinking expenses for open houses under this heading. They are subject to the 50% limitation.
6. Purchases over $500 for computers, software, equipment and furniture, must be treated as capital expenditures and entered in the proper class. Such purchases under $500 including taxes can be entered under "Office Supplies" as fully deductible. 7. Private health premiums - - for the entire family -- have been fully deductible in a self-employed business statement since 1998.
7. Private health premiums - - for the entire family -- have been fully deductible in a self-employed business statement since 1998.
8. Self-employed taxpayers using their spouse as assistants MUST have the spouse on payroll and withhold taxes and CPP premiums but not EI premiums. You must pay the spouse on a fair-market-value basis and pay them by cheque on such as a monthly basis, and remit the taxes and CPP premiums using your Business Number to the CRA by the 15th of the next month. You must also submit a T4 slip and “T4 Slip Summary” to the CRA by the end of February of the next year, Your children should be paid for services rendered on an FMV basis with detailed invoices describing the service(s) rendered and payment made by cheque. The children will get their first $9,600 of such income in 2008 tax-free as “Casual Labour” at Line 104 of their T1 personal tax return.
9. The CRA can only reassess within 3 years of the date of an assessment. The practice is to audit the most recent filing and one year back. Expect a big increase in audits for 2009. Our website sets out how to maintain better record-keeping to track expenses and keep better records to assure better results on an audit. Deposit all commissions into a business account and pay all expenses from the business account including all home expenses. Keep all credit card slips and monthly statements. Set up any lines-of-credit on the business account and do not pay ANY personal expenses from the account. Use one credit card exclusively for business and a second separate card for personal expenses. Our website has more points.
10. Clients of residential real estate agents will need guidance on the new property tax appeal process. Agents need a good understanding to maintain goodwill with their clients. The easy answer is to refer them to the detailed discussion on our website. Only lawyers, paralegals and fully-accredited real estate appraisers can represent owners in dealings with the Municipal Property Assessment Corp. (MPAC) and in formal appeals to the Assessment Review Board (ARB). Those who wanted to appeal residential assessments but who missed the March 31st deadline for filing a Request for Reconsideration (RFR) to MPAC - - a pre-condition for a formal appeal to ARB - - can appeal in 2010 by submitting an RFR by March 31, 2010. With the phase-in of tax increases, a successful appeal in 2010 will still save the extra 90% of increased residential taxes for the 2010, 2011 and 2012 municipal tax years.
The MPAC methodology for property assessments is much different than an agent’s traditional sales comparison analysis. For appeals, you can use sales over a 2-year period or more and MPAC adopts a “homogenous neighbourhood” approach catching properties up to 6-8 blocks apart within a defined neighbourhood. The new emphasis is on “consistency of assessments” with the onus now on MPAC to prove the accuracy of the assessment. A caution!! You will need to demand the “quality class” for the owner’s property AND for all selected properties to ensure that your properties will qualify as “comparable properties” to show sales under the assessed value and, secondly, to argue for a reduction in assessment to make your assessment consistent with assessments of comparable properties. The “quality class’ along with inside square footage, is one of the two most important factors in comparing properties and MPAC is not providing that information. You will also need to demand more detailed information on comparable properties. The “Your Property Profile” report on the appealed property gives about 30 items of information while the information on up to 24 requested other properties given in the report “My Neighbourhood Properties of Interest” gives information on about only 8 or 9 features of your selected properties. Getting “quality classes” and more details on selected comparable properties is necessary to identify properties that will assist in an appeal and meet the test of being accepted as “comparable properties” in dealings with MPAC and to use as evidence at a formal ARB hearing. Full information on our website. William Howse B.A., LL.B. Barrister & Solicitor (President of Taxperts Corp.)
Mr. Howse gives a 3-hour seminar on “Taxation and Residential Real Estate” for 3 RECO credits. We are hoping to have a 1-hour credit course on CRA Audits by September. Our firm prepares specializes in self-employed tax returns and CRA audits and appeals. Expense spreadsheets are available for free on our website. Taxperts Property Services Ltd. is taking clients for Toronto residential property tax appeals.