Tag Archives: Gross Income

The buy or rent debate goes on

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Buying a home undoubtedly is one of the biggest decisions and purchases that most people ever make in their lives.

According to a poll this summer sponsored by Genworth Financial Mortgage Insurance Company and the Canadian Association of Credit Counselling Services, there has been a significant increase in the number of people in Canada planning to buy their first home this year – 11 per cent in 2011 compared to six per cent in 2010.

The debate about whether it is better to buy a home or rent has been around for a long time, and a detailed analysis of the pros and cons for each argument is well beyond the scope of a column of this length.

However, in the current low interest rate environment in this country, it’s interesting to look at some of the issues and factors that can go into making that important decision.

The first obviously is how much you can afford to pay. To answer this you need to prepare a detailed monthly household budget. Some of the regular housing costs include mortgage payments, property taxes, utilities such as heat, hydro and water, condominium fees if applicable, and insurance.

Most banks have easy-to-use mortgage tools to help you establish your financial situation and determine how much house you can afford and the maximum price you should be considering. You should do this research before you start house hunting because you don’t want to fall in love with and end up purchasing a home that you can’t afford.

As a rule, most mortgage companies will only allow your housing costs to equal a third of your gross income and if your total debt servicing costs – housing costs plus all of your other monthly debt payments – exceed 40 per cent of your gross income you may not quality for a mortgage.

How important is it for you to own a home? Some people might argue this is the most important question to ask yourself.

Like many other things in life, home ownership is a matter of choice. If it is important to you, you may want to have another look at your budget and re-prioritize your spending. If you really want a home you may have to give up going to movies, dining out, vacations or other discretionary spending for a few years to afford it.

You also need to look at your employment situation. If your employment is not stable, you probably shouldn’t be considering buying your own home because home ownership requires regular payments listed above, and missing them can result in some dire consequences.

How often you expect to move is another consideration. If you expect to be moving every few years then purchasing might not be the best option for you.

Buying and selling a home is expensive. It involves real estate commissions and legal fees, not to mention costs to move furniture and redecorate your new abode. By moving you might end up actually losing the money you may have made on your purchase.

If you decide to buy a home, are you still able to save some money each month? It’s a good idea to tuck some money away for unknown emergency costs that can hit homeowners that normally renters would not face such as furnace or roof repairs or purchases.

You need to have some wiggle room in your budget. If you’re stretched so tight that there’s no room for any savings, you’re probably stretching your budget too far and should reconsider the decision to purchase.

New home owners can take advantage of some government programs to help them.

The Home Buyers Plan (HBP), for example, allows you to withdraw $25,000 from your registered retirement savings plan (RRSP) to put toward the purchase of a home. When you withdraw the money, your RRSP issuer will not withhold tax on the amount you take out. However, if you are considering purchasing a home this year make sure your RRSP contributions have been in your RRSP account for at least 90 days before you can withdraw them under the HBP.

There are many factors that go into the decision to purchase a home instead of renting one. As in most things, doing your homework and seeking professional advice can help you make the decision that is right for you.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

http://www.winnipegfreepress.com/business/finance/the-buy-or-rent-debate-goes-on–131547148.html

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Non-Resident Taxation For Owners of Canadian Real Estate

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Residential rental property is an excellent investment and can produce long-term, stable income. It has to be bought wisely, and managed with care, but as long as it’s in a desirable area it will always be rented.

Canada is a safe place to own rental property. Canadian citizenship is not a requirement for owning property in Canada. All you need to do to buy property in Canada is have valid identification, and be able to afford it.

However, if you are not a Canadian resident for income tax purposes, you will have to pay non-resident tax.

First things first. “Canadian resident for income tax purposes” is a taxation status, not an immigration status. Anyone who files a tax return on their personal income in Canada is likely a Canadian resident for income tax purposes. It’s possible for a person to actually live in another country and still be a resident of Canada for tax purposes. However, most offshore investors in Canadian real estate pay personal taxes where they actually reside. The result is that they are also non-residents in the eyes of the Canadian Revenue Agency (CRA), so long as they receive income from Canadian property.

This status requires that tax remittances be made to the CRA. The rate is 25% of gross income. When the tax year is over you can file a tax return and get a tax refund, if the tax due is less than what you remitted. The problem is a cash flow one. Even if you own the property free and clear, you still have maintenance costs, insurance, property taxes, condo fees and perhaps utility bills to pay. A 25% bite of your gross restricts things a little. But what about if you have a mortgage (a wise thing with investment properties, after all)? If you’ve structured your property to be break even, cash flow wise, you’ll have to dig into your pocket to pay the non-resident remittances.

There is a solution. If you retain a Canadian who is willing to sign a specific CRA undertaking you can reduce the remittance from 25% of gross to 25% of net. If you break even, or even loss money on the property you can still remit 25% of the net, because if the net is zero, or a loss, the 25% is zero, and all that gets filed is paperwork. The following year you file your tax return, and then pay what is due and owing (if anything).

The key requirement is a Canadian willing to sign the undertaking, because the undertaking has teeth. The undertaking states that, should the non-resident not file a tax return and pay any tax owing, CRA may collect any tax owing from the person who signed the undertaking. Clearly, there is a risk there for the person signing the undertaking.

That said, some people will do it, especially certain full service property managers, like me. Because I work with many off shore investors, and because I collect their rent, pay their bills and oversee their non-resident taxation matters I am able to sign the undertaking and ensure that the tax returns are filed. That allows me to offer my client the option to remit 25% of net, rather than 25% of gross. When you take the effect of the leverage afforded by a mortgage and factor that into the return on the property, you can see that the amount of money we’re talking about far exceeds the simple difference between the 25% gross and 25% net.

The system has a few other simple requirements. Paperwork (except in the initial year) must be filed before the tax year begins, and a reasonably accurate estimate of income and expenses must be submitted. During the tax year itself the remittances must be made, and then, before June 30 of the year following the tax year a tax return must be filed. All of these things can be done for the client by a professional property manager.

http://www.stockmarketsreview.com/realestate/2011/02/23/non-resident-taxation-for-owners-of-canadian-real-estate/

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New Tax Rules Tax Rulings

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That way the IRS can deduct more taxes from my paycheck throughout the year so i can get more money back at the end of the year. it’s kinda like a savings account you could say. Makes good sense to me. But with every new year comes a new set of tax laws. this year the “AMT” or alternative minimum tax was passed and this is going to affect many middle income families. Under the regular IRS rules, you start with your gross income and subtract deductions like state taxes you paid, and exemptions like child credits. Eventually, you arrive at your taxable income. Under AMT rules, you still start with your gross income, but many of the usual deductions and exemptions are disallowed. Suddenly, your taxable income is alot higher. Some key breaks are lost so here’s a list of them. state and local income taxes and property taxes, unreimbursed business expenses, child-tax credits, tax-preparation fees, legal fees, home-equity loan interest just to name a few. The original idea behind this tax was to prevent people with very high incomes from using special tax benefits to pay little or no tax. But for various reasons the AMT reaches more people each year, including some people who don’t have very high income. I have a professional tax consultant do my taxes every year because it has just become so complicated i can’t afford to make mistakes so i recommend this same advice to most people out there unless you can stay on top of the ever changing tax laws

http://www.afatherslifeonline.com/2008/01/new-year-brings-new-tax-laws.html

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