The following is a guest post by Gord Davis, a professional Mortgage Agent.  Gord specializes in finding creative solutions to difficult financing problems.

1 Get independent advice on your financial options.

As independent mortgage brokers and mortgage agents, we’re not tied to any one lender or range of products.  Our goal is to help you successfully finance your home or property. We’ll start by getting to know you and your homeownership goals. We’ll make a recommendation, drawing from available mortgage products that match your needs, and we will decide together on what’s right for you.

2 Save time with one-stop shopping.

It could take weeks for you to organize appointments with competing mortgage lenders — and we know you’d probably rather spend your time house-hunting! We work directly with dozens of lenders, and can quickly narrow down a list of those that suit you best. It makes comparison-shopping fast, easy, and convenient.

3 We negotiate on your behalf.

Many people are uncertain or uncomfortable negotiating mortgages directly with their bank.  Brokers negotiate mortgages each and every day on behalf of Canadian homebuyers.  You can count on our market knowledge to secure competitive rates and terms that benefit you.

4 More choice means more competitive rates.

We have access to a network of major lenders in Canada, so your options are extensive. In addition to traditional lenders, we also know what’s being offered by credit unions, trust companies, and other sources. And we can help you take care of other requirements before your closing date, such as sourcing mortgage default insurance if your down payment is less than 20% of the purchase price.

5 Ensure that you’re getting the best rates and terms.

Even if you’ve already been pre-approved for a mortgage by your bank or another financial institution, you’re not obliged to stop shopping!  Let us investigate to see if there is an alternative to better suit your needs.

6 Get access to special deals and add-ons.

Many financial institutions would love to have you as a client, which is why they often offer incentives to attract creditworthy customers.  These can include retail points programs, discounts

on appliances, shopping clubs, and more. We do the math on which offers might be worth your attention when it comes to financing or mortgage insurance — so you get the perks you deserve.

7 Things move quickly!

Our job isn’t done until your closing date goes smoothly. We’ll help ensure your mortgage transaction takes place on time and to your satisfaction.

8 Get expert advice.

When it comes to mortgages, rates, and the housing market, we’ll speak to you in plain language. We can explain the various mortgage terms and conditions so you can choose confidently.

9 No cost to you.

There’s absolutely no charge for our services on typical residential mortgage transactions. How can we afford to do that? Like many other professional services, such as insurance, mortgage brokers are generally paid a finder’s fee when we introduce trustworthy, dependable customers to a financial institution. These fees are quite standard and nearly industry-wide so that the focus remains on you, the customer.

10 Ongoing support and consultation.

Even once your mortgage is signed and paperwork is complete, we are here if you need any advice on closing details or even future referral needs. We are happy to be of assistance when you need it.

The following is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info visit Cherry’s website at: http://cccpa.ca/

Many investors ask me how they can invest their money within their Registered Retirement Saving Plans (RRSPs) in real estate without collapsing the plans and incur a large amount of tax liability. (This article applies to Registered Education Saving Plans and Registered Retirement Income Funds as well.)

So, other than buying public company stocks that are in real estate, are there any other ways to invest your RRSPs in real properties?

Unfortunately you cannot hold real properties in RRSPs.

It’s just not one of the qualified investments allowed by the government.

Mortgage, however, is one of the qualified investments in RRSPs. Instead of investing directly in real estate, you can lend money out and use real estate as the underlying collateral to guarantee your investment. In return, you get a fixed interest payment on a periodic basis.

An investor is allowed to lend money to himself, anyone related to him (children, siblings, parents) or a third party.   There are different rules based on who you lend the money too.

Let’s use an example to explain. An investor has $300K cash in his RRSP account and would like to use it to invest in real estate.

Say he is buying a property for $300K and has $60K as downpayment (money is outside of the RRSP plan). He can either borrow the remaining $240K from his RRSP or he can borrow directly from a financial institution.

If he does decide to borrow the money from his RRSP, this mortgage must be administered by an approved lender under the National Housing Act, and insured. The amount of interest rate and terms must reflect regular commercial practice.

In other words, the investor has to put the RRSP in a self-directed RRSP account at an approved lender, such as Olympia Trust, pays for the CMHC (or any private insurer) insurance and the mortgage must carry similar terms and interest rate as what he would otherwise get from a regular bank.

Say the investor sets up everything properly at 3% interest rate. He is then paying interest to his RRSP on the $240K. Interest earned within his RRSP is not taxable until money is being withdrawn from the plan. Interest incurred on his property is deductible if it is a rental property.

But, is it really a wise idea to borrow against your own RRSP and invest in your own real estate portfolio?

The investor can lend the money to his friend, who’s considered as an arm’s length party, or any other third party. CMHC insurance is not required and the terms and interest rate do not need to be compatible with a regular bank. And it does not have to be administered by an approved lender under the National Housing Act.

The same investor can charge an interest rate at whatever he and his friend (or the third party) agree to. Usually it is higher than a traditional first mortgage offered by the bank. In some cases, if the investor lends the money as a second mortgage, he can get interest rate from 8% to 15% return. Similarly, the interest income earned within the RRSP is tax sheltered and will only be taxed at the investor’s hand when he withdraws the money from the plan.

If the investor borrows money against his RRSP to invest in his real estate property, because of the restrictions (interest rate has to be compatible to regular commercial mortgage) imposed by the government, returns within the RRSP is restricted.

Also, the investor is essentially investing 100% into this property. The risk is higher. (If the property has any issues, he is 100% invested in it.) Not only does he jeopardize his 20% downpayment, but also his RRSP money.

Ultimately, the decision should be driven by the return and the risk involved.

Until next time, happy real estate investing.

Cherry Chan, Your Real Estate Accountant

The above is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info or to contact Cherry, visit her website at: http://cccpa.ca/

The following is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info visit Cherry’s website at: http://cccpa.ca/

In my previous blog post “Rent to Own Taxation (Part 1)“, I shared with you the (3) three streams of income from a typical rent-to-own arrangement and the criteria to determine whether the rent-to-own investment strategy is considered as business or capital in nature.  I also shared with you that if the rent-to-own investment strategy is considered as business, the investor is required to report all three streams of income as income.

In this blog post, I will continue to explain to you the tax implication if the rent-to-own arrangement is instead considered to be capital in nature.

Stream 1. Non-refundable down payment

In a typical rent-to-own arrangement, the tenant buyer puts a non-refundable deposit down (a minimum of 5% of the purchase price at Ownership Solutions) in exchange for the option to purchase the house at an agreed price at the end of the term, usually 2 to 3 years (most commonly 3 years at Ownership Solutions).

If the agreement does not specify that such down payment is used for the purchase of the option right, the investor is required to report it as income as the amount is non-refundable.

However, if the agreement specifies that the non-refundable deposit is to be used towards the purchase of the property at the end of the term, the Income Tax Act (ITA) allows the investor to report it as capital gain in the year he receives the money.

In most rent-to-own option agreements I have worked with, they clearly specify that the down payment is to be used to pay for the purchase. Therefore it’s most likely the investor can report it as a capital gain in the year he receives this down payment.

Stream 2: Rent and rent credit

During the term of the rent-to-own arrangement, the tenant buyer is required to pay rent.  A portion of this rent is then credited toward the ultimate purchase price as agreed on in the option agreement.

For the regular portion of the rent payment, the investor is required to report it as rental income.

As for the amount of rent credit, if the agreement specifies that it is used to maintain the option right and credited towards the future purchase, similar to the non-refundable deposit, the amount can be reported as a capital gain.  Otherwise, the rent credit should be reported as income in the same year.

The investor should be careful with respect of drafting up the agreement specifically to the rent credit.  One rent-to-own expert had expressed his concern that if the rent credit was not part of the lease agreement, the landlord investor may not be able to go after this amount in case of tenant default.

Stream 3: Purchase option at the end

If the tenant buyer decides not to exercise his option, all the reporting has been completed the year the money is received.  Nothing further is required.

If the tenant buyer proceeds with the purchase, the investor is required to do the following:

1. For the years the investor has reported the non-refundable deposit and rent credit as capital gains, the investor is required to file an amended return to reduce the capital gain to zero.
2. In the year the tenant buyer exercises the option to purchase the house, the investor is required to report the sum of non-refundable down payment, the rent credit, together with the actual cash proceeds from the sale as the sale price, less the cost of the acquisition of the house as capital gain.

That’s all you really need to know about rent-to-own taxation. You should be able to determine whether your rent-to-own transactions are a business or capital in nature, and understand how to report each of the three types of income received during the transaction.

If you have any questions about rent-to-own taxation or require further clarification, please contact me (Cherry) directly.

The above is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info or to contact Cherry, visit her website at: http://cccpa.ca/

The following is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info visit Cherry’s website at: http://cccpa.ca/

A rent-to-own program is a win-win program for both the investor/landlord and the tenant/buyer.  It allows the investors to generate cash flow from a single family rental and provides the opportunity for otherwise unqualified buyers to purchase their homes over a period of time.

In a typical rent-to-own arrangement, there are (3) three streams of income.

1. Firstly, the tenant buyer pays a down payment in exchange for the option to purchase the property at the end of the contract.  Usually the term of the contract is two to three years.
2. Secondly, the tenant buyer also pays rent during this contract.  A portion of the rent is used to contribute to the purchase price at the end.  This is called rent credit.
3. Thirdly, at the end of the option contract, the tenant can choose to purchase the property at the preset purchase price.

As investors, how do we report the income from the rent to own arrangement?

This depends on your personal tax situation.  If rent-to-own is considered as a business, all three streams of income are required to be reported as income.  If the rent-to-own investment is capital in nature, these three streams of income are reported differently.

Let’s first look at how Canada Revenue Agency (CRA) determines whether the rent-to-own investment is a business or not.  CRA looks at the following criteria when they consider whether to classify the rent-to-own investment as business or capital in nature.

1. Is the rent-to-own transaction similar to the landlord’s “normal course of business”?
   • If the landlord is a full-time landlord without any other employment income, then the rent-to-own transaction is more likely to be treated as similar to the landlord’s normal course of business.
   • On the other hand, if the landlord has other full-time employment, it is more difficult for CRA to argue that the rent-to-own transaction is similar to the landlord’s normal course of business.
   • Be cautioned that one single factor can not be relied upon to conclude that the rent-to-own transaction is not to be considered as business income.
2. How frequently does the landlord invest in rent-to-own deals?
   • The more rent-to-own deals the landlord has, the more likely that the CRA considers it as a business.
3. Is this rent-to-own transaction an “adventure or concern in the nature of trade”?
   • An adventure or concern in the nature of trade is something a landlord habitually does that is capable of producing a profit, irrespective of the landlord’s own occupation.
   • There are 3 factors that CRA consider when determining whether the rent-to-own transaction is an adventure or concern in the nature of trade:
     • i.     Whether the landlord dealt with the property acquired by him in the same way as a dealer in such property
       • We need to compare the landlord’s conduct with what a dealer’s conduct would be for the rent-to-own deals.  The following factors are usually considered to determine whether the landlord’s conduct consistent with a dealer’s conduct –
         • If there is evidence of efforts, such as advertising, that were made to find or attract purchasers or that a sale took place within a short period of time, it is more likely CRA considers the landlord as a dealer.
         • The more renovations or extra steps that the landlord does to increase the marketability of the rent-to-own property, the more likely CRA considers him as a dealer.
         • If the landlord is a real estate agent or mortgage agent that has a commercial background in a similar business, the more likely CRA considers him as a dealer.
     • ii.     Whether the nature and quantity of the property excludes the possibility of generating income from the property other than selling it.
       • In a rent-to-own transaction, the nature of the property allows the landlord to rent it out to the tenants and hence supports the transaction as being capital in nature.
     • iii.     Whether the landlord’s intention is consistent with other evidence pointing to a trading motivation
       • The landlord’s intention to sell the property at a profit alone cannot be used by itself to determine whether he was involved in the adventure or concern in the nature of trade.  If one of the other above factors clearly shows that the landlord is engaged in the adventure or concern in the nature of trade, his intention can be viewed as corroborative evidence.
       • The investor’s intention can change over the period of time and can have more than one intention.  If the investor’s intention is to hold the rent-to-own investment as an investment (capital in nature), CRA also looks at the secondary intention if the investor is unable to fulfill the first intention.

Admittedly the criteria used by CRA to determine whether your rent-to-own investment is business or capital isn’t black and white.  As investors, you should definitely consult your professional advisor about your personal situation to make a reasonable and supported conclusion.

If you conclude that your rent-to-own investment is considered as a business, you are required to report the down payment, the rent and rent credit, and the ultimate sale of the building as income the year the proceeds are received for each of these components.

In the next post “Rent to Own Taxation (Part 2)“, I will discuss the tax implication when rent-to-own investment is considered as capital in nature.

The above is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info or to contact Cherry, visit her website at: http://cccpa.ca/