Taxation for Real Estate Investors Course Speaker Allan Madan, CA Tel:

Ownership Structures Individual Corporate Partnership Co-ownership Trust Allan Madan, CA

Ownership - Individual Advantages Simple (T1 return) Can use losses against other sources of income Disadvantages Unlimited liability Difficulty in obtaining financing Allan Madan, CA

Corporation Advantages Simple for multiple owners Flexibility in transferring ownership interests Limited liability protection Disadvantages Slightly extra tax in Ontario, compared to individual Loss trapped inside corporation Bonus restrictions per CRA (Specified Investment Business) Allan Madan, CA

Small BusinessGeneral IncomeActive up toBusinessInvestment $400,000Income British Columbia14.5%30.0%45.7% Alberta Saskatchewan Manitoba / /46.7 Ontario Québec New Brunswick Nova Scotia Prince Edward Island14.2/ Newfoundland Northwest Territories Nunavut Yukon

Corporation - Continued To discourage individuals from deferring tax by placing their investments in private holding companies – high corporate level Individual pays same amount of tax on investment income, whether individual earns income personally or through a corporation Allan Madan, CA

Corporation - Continued Four Step Approach to taxation of investment income earned by a Corporation: 1. Corporation is taxed on its investment income at the full federal corporate tax rate 2. When the corporation pays a dividend, it receives a partial refund for taxes it previously paid on that income 3. When the dividend is paid to an individual, the dividend is included in the individual's income 4. The individual claims a dividend tax credit Allan Madan, CA

Partnership Advantages Losses and profits flow through to partners (T5013’s) Can select year end and defer tax – e.g. Jan 31 year end Flexibility in adding and removing partners LLP’s Disadvantages Joint liability in general partnerships At risk rules limit write-offs to initial investment (llp) Allan Madan, CA

Tax Depreciation October 2007 Budget – Tax Depreciation Buildings (commercial) – 6 % Buildings (residential) – 4% Buildings used in manufacturing – 10% Allan Madan, CA

Other Tax Deductions General Test – “Incurred for the purpose of earning income from property” Reasonable Typical expenditures include: Maintenance and repairs Insurance Utilities Accounting and legal Condo fees Capital expenditures – tax depreciation Allan Madan, CA

Sale of Property – Income vs. Capital Capital Gain – 50% Taxable Income – 100% Taxable Example: Sale Price of $500,000 Cost of $100,000 Tax Rate is 40% Capital Gain - $80,000 in tax Income - $160,000 in tax Allan Madan, CA

Sale or Property – Income versus Capital Factors affecting determination: Relation to your business E.g. developers Number and frequency of transactions undertaken E.g. history / pattern of flipping properties Time Period Held E.g. Short versus long-term investor Factor motivating sale E.g. Unsolicited third party offer Intention E.g. vacant land, then immediately rezone Allan Madan, CA

Specified Investment Business Primary purpose is to earn investment income (e.g. rents) Fewer than 6 full time employees Disadvantages No small business deduction – high rate of tax Bonus to owner must be reasonable Allan Madan, CA

Financing Interest Deductibility There must be a legal obligation to pay interest Borrowed funds must be used for purpose of earning income What do the banks want? Historical financial statements – CA Cash-flow forecast Statement of Net Worth Appraisal Debt should be inside corporation Allan Madan, CA

Financial Reporting & Tax Compliance Accurate financial reporting is key! Say no! to spreadsheets; QuickBooks Maintain separate bank account and credit card Bookkeeper Notice to Reader Financial Statements Proposed Adjusting Journal Entries Corporate Tax Return (T2) Personal Tax Return (T1) Allan Madan, CA

US Tax Buy real estate personally then file Federal level If the real estate is purchased in a state where there is individual tax levied, then you will also need to file a non-resident State Tax Return Possible to buy real-estate in the US through a US corporation Allan Madan, CA

Tax Planning Tips Family Trust Split income among family members Future growth in property accrues to children / spouse Home Loan Use corporation’s funds to purchase home, through loan – prescribed interest rates, repaid Principle Residence Exemption More than one residence (e.g. cottage and home) Inter-corporate loans – real estate purchase Allan Madan, CA