1. Blindsided: The Tax Trap Catching Unwary Real Estate Investors
TAX TIPS AND TRAPS
Blindsided: The Tax Trap Catching Unwary Real Estate Investors

2. Copyright 2018 Real File CPA Professional Corporation
Any dissemination or use of this material without written consent of Real File CPA is strictly prohibited.
This presentation contains general tax information only, it is not meant to be used without first conferring with a tax professional about how the concepts and strategies contemplated apply to a given individual, company, or situation.

3. TAX TRAP #1 -- HOUSE FLIPPING
$400k
$100k
$650k
CAPITAL GAIN = $150k!

4. TAXES PAYABLE
Taxable Capital Gains and Allowable Capital Losses 38 For the purposes of this Act, (a) subject to paragraphs (a.1) to (a.3), a taxpayer’s taxable capital gain for a taxation year from the disposition of any property is ½ of the taxpayer’s capital gain for the year from the disposition of the property;

5. TAXES PAYABLE $400k $100k $650k CAPITAL GAIN = $150k!
50% Inclusion = $75k is taxable
Income Tax = $37,500
$112,500 After Tax Profit

6. EXCEPT!
Income vs. Capital Distinction Friesen v The Queen 1995 (SCC) Justice Major: “The Income Tax Act has established a system with two distinct categories of property – inventory, which creates business income or loss, and capital property, which creates capital gain or loss.” It is a question of fact, whether or not a property is acquired and used on account of income or capital.

7. TAXES PAYABLE – PERSONAL NAME
$400k
$100k
$650k
BUSINESS INCOME= $150k
100% Inclusion = $150k is taxable
Income Tax = $75,000
$75,000 After Tax Profit

8. TAX TRAP #2 – New Condo Flips
100% taxable as business income
Repay the GST Rebate (if any)
PLUS! GST on Profits
PLUS! Penalties of up to 50% of taxes payable.

9. TAXES PAYABLE – CONDO FLIP
Assume: Purchase Price: $400,000 Sale Price: $500,000 = $100,000 Profit Income Tax = $50,000 HST (13%) = $13,000 Total $63,000 Plus: Repay the HST Rebate - $24,000 Plus Gross Negligence Penalty (50%) = $25,000 (if applied) Total Payable = $112,000!

10. CAN ANYTHING BE DONE?

11. .

12. TAX TRAP # 3 – THE WRONG ADVISORS

13. All The Reasons You Shouldn’t Incorporate
It’s Too Expensive to Set-up and Maintain
Banks don’t like them/can’t get a mortgage
Harder to refinance/take out equity
Higher Taxes for real estate investors
Annual filings are complicated
You don’t really need liability protection
Better to wait and see/do it later

14. TAXES PAYABLE – CORPORATION
$400k
$100k
$650k
BUSINESS INCOME= $150k
100% Inclusion = $150k is taxable
Small Business Tax Rate 15% = $22,500
$127,500 After Tax Profit

15. TAXES PAYABLE – PERSONAL NAME
$400k
$100k
$650k
BUSINESS INCOME= $150k
100% Inclusion = $150k is taxable
Income Tax = $75,000
$75,000 After Tax Profit

16. TAXES PAYABLE IF CAPITAL GAIN
$400k
$100k
$650k
CAPITAL GAIN = $150k!
50% Inclusion = $75k is taxable
Income Tax = $37,500
$112,500 After Tax Profit

17. TAXES PAYABLE – CORPORATION
$400k
$100k
$650k
BUSINESS INCOME= $150k
100% Inclusion = $150k is taxable
Small Business Tax Rate 14% = $21,000
$129,000 After Tax Profit

18. Questions/Comments?