Real Estate or Investments?

One of the age-old financial quandaries asked of financial advisors is “shall I invest in property or funds?”. Predictably, the answer is not at all straightforward and depends on many factors, including your own financial style, personality and circumstances. Let’s take a look at the pros and cons of each choice to help you to be better informed about which could be the most lucrative option for you:

Benefits of investing in funds

It’s all too easy to go along with the generally-accepted myth that investing in property is a sure-fire way to secure your financial future. After all, house prices have appreciated in general terms for several years now and have become a very popular way for young people to invest for the future – this could also be, in part, down to the fact that their parents have benefited from the property booms of the past and made their own money this way, therefore presume the same will work for their children.

It’s fair to say, then, that investing the stock market is a much less common and popular way for people to invest their money. Despite market crashes, long term fund ownership is hands down the greatest creator of wealth in history and high quality funds generally not only increase their profits every year but also pay out increased cash dividends too.

Other advantages of fund ownership include the fact that you can diversify your portfolio easily, borrow against your funds easily and also benefit from the fact that funds are much more liquid than real estate, giving you maximum financial flexibility.

So, why do fewer people invest in funds than real estate?

It could be due to the two market crashes that have occurred since 2000, making people wary of getting involved in what they perhaps see as a complex and inherently risky way to make money. Many fail to take the long-term view of funds and the fact that, to financially benefit in the best way, you need to ride the highs and lows for a number of years to get a good return on your initial investment.

Another reason could be the fact that many people underestimate the real cost of home ownership. Additional costs such as maintenance, insurance and mortgage interest must be factored into investment calculations but are often not, making property a seemingly more attractive investment option.

Drawbacks of investing in funds

You really have to be in this game for the long term to see your money grow consistently and many people don’t have the discipline or patience to hold their nerve and keep their money in the same place for a prolonged period. This can often result in cashing in one’s funds too early and missing out on long term benefits. Similarly, because the prices of funds can fluctuate so much, many are too nervous about investing and don’t see the opportunities to purchase more funds at reduced prices to benefit them in the long term.

Benefits of investing in real estate

Many individuals in their twenties and thirties who are just starting out thinking about how best to secure their financial future feel more comfortable with investing in property and the notion of “owning one’s own home” – likely brought about by their parents’ influence, as discussed above. They perhaps feel more confident in the process, terminology and philosophy of real estate and believe that they are more likely to succeed in this area.

Another benefit could be the fact that, by purchasing a property, you feel that you own something tangible, as opposed to the money invested in funds and shares which could be said to exist only online or on paper.

Finally, many take comfort from the fact that it is potentially harder to be defrauded in relation to real estate as there are so many varied, physical checks that one can perform to verify the facts, such as property inspections, tenant background checks etc, whereas with funds, a lot of trust has to be given to the management company or auditors.

Drawbacks of investing in real estate

There are a number of hidden costs to real estate, particularly if your property is unoccupied for a period of time and you are still liable to pay taxes, maintenance etc. It’s also true that the maintenance of a property can be a time consuming as well as an expensive business, due to the requirement to deal with routine as well as emergency issues.

What’s more, it’s true that the actual value of real estate hardly ever increases in inflation-adjusted terms, therefore the returns can be healthy but the true value of the property doesn’t actually change. It’s due to this that many feel that investing in funds is a much more solid and lucrative way to receive good returns.

Talk to us, we can help you determine what works best for you.

 

 

2019 Federal Budget

2019 Federal Budget

The 2019 budget is titled “Investing in the Middle Class. Here are the highlights from the 2019 Federal Budget.

We’ve put together the key measures for:

  • Individuals and Families

  • Business Owners and Executives

  • Retirement and Retirees

  • Farmers and Fishers

Individuals & Families

Home Buyers’ Plan

Currently, the Home Buyers’ Plan allows first time home buyers to withdraw $25,000 from their Registered Retirement Savings Plan (RRSP), the budget proposes an increase this to $35,000.

First Time Home Buyer Incentive

The Incentive is to provide eligible first-time home buyers with shared equity funding of 5% or 10% of their home purchase price through Canada Mortgage and Housing Corporation (CMHC).

To be eligible:

  • Household income is less than $120,000.

  • There is a cap of no more than 4 times the applicant’s annual income where the mortgage value plus the CMHC loan doesn’t exceed $480,000.

The buyer must pay back CMHC when the property is sold, however details about the dollar amount payable is unclear. There will be further details released later this year.

Canada Training Benefit

A refundable training tax credit to provide up to half eligible tuition and fees associated with training. Eligible individuals will accumulate $250 per year in a notional account to a maximum of $5,000 over a lifetime.

Canadian Drug Agency

National Pharmacare program to help provinces and territories on bulk drug purchases and negotiate better prices for prescription medicine. According to the budget, the goal is to make “prescription drugs affordable for all Canadians.”

Registered Disability Savings Plan (RDSP)

The budget proposes to remove the limitation on the period that a RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit. (DTC) and the requirement for medical certification for the DTC in the future in order for the plan to remain open.

This is a positive change for individuals in the disability community and the proposed measures will apply after 2020.

Business Owners and Executives

Intergenerational Business Transfer

The government will continue consultations with farmers, fishes and other business owners throughout 2019 to develop new proposals to facilitate the intergenerational transfers of businesses.

Employee Stock Options

The introduction of a $200,000 annual cap on employee stock option grants (based on Fair market value) that may receive preferential tax treatment for employees of “large, long-established, mature firms.” More details will be released before this summer.

Retirement and Retirees

Additional types of Annuities under Registered Plans

For certain registered plans, two new types of annuities will be introduced to address longevity risk and providing flexibility: Advanced Life Deferred Annuity and Variable Payment Life Annuity.

This will allow retirees to keep more savings tax-free until later in retirement.

Advanced Life Deferred Annuity (ALDA): An annuity whose commencement can be deferred until age 85. It limits the amount that would be subject to the RRIF minimum, and it also pushes off the time period to just short of age 85.

Variable Payment Life Annuity (VPLA): Permit Pooled Retirement Pension Plans (PRPP) and defined contribution Registered Retirement Plans (RPP) to provide a VPLA to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.

Farmers and Fishers

Small Business Deduction

Farming/Fishing will be entitled to claim a small business deduction on income from sales to any arm’s length purchaser. Producers will be able to market their grain and livestock to the purchaser that makes the most business sense without worrying about potential income tax issues. This measure will apply retroactive to any taxation years that began after March 21, 2016.

To learn how the budget affects you, please don’t hesitate to contact us.

Passive Investment Income Limit

Morneau’s federal budget announced earlier this year informed us how the government will treat passive income in a Canadian Controlled Private Corporation. (CCPC) The government’s main concern was that under the current rules a “tax deferral advantage” exists since tax on active business income is usually lower than the top personal marginal tax rate. Therefore if the corporate funds were invested for a long period of time, shareholders might end up with more after-tax amount than if it was invested personally.

 

Limiting Access to the Small Business Tax Rate

A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000 (also known as the adjusted aggregate investment income). This new regulation will go hand in hand with the current business limit reduction for taxable capital.

 

The time to act is now, since these changes will be effective January 1, 2019, a discussion and plan should be prioritized now, since 2018 will be the “prior year” of 2019. To avoid the reduction of income eligible for the small business tax rate, business owners need to minimize or keep the amount below $50,000 of the “adjusted aggregate investment income” (AAII) in 2018. 

 

We’ve listed some solutions on how to do this:

 

1)   Corporate Owned Insurance: Exempt life insurance does not produce passive investment income unless there is a disposition. Put a portion of the corporation’s passive investments into a life insurance policy and reduce passive investment income and limit the erosion of the small business limit. Insurance concepts:

●     Insured retirement program: Provide additional retirement funding through transferring excess corporate funds into whole life or universal life insurance. The funds inside the policy grow “tax free” to create significant cash value. At some point when there is a need for cash, the policy is pledged as collateral for a bank loan. The bank loan doesn’t need to be repaid until the life insured dies and the death benefit is used to repay the loan. Any remaining death benefit is paid out.

●     Estate bond: Transfer corporate wealth to the future generation by utilizing whole life or universal life insurance. Essentially replace taxable investment with life insurance, increase funds for a future generation upon death, reduce tax and create a strategy to move funds out of the corporation tax free (through the Capital Dividend Account.)

●     Corporate held Critical Illness with Return of Premium: Purchase corporate owned critical illness, since it doesn’t produce any investment income.

 

2)   Pay enough salary/dividends to maximize RRSP and TFSA Contributions: A salary of $145,722 will allow the max 2018 RRSP contribution is $26,230 (18% of $145,722). Make sure you also pay enough salary/dividend to maximize your annual $5,500 TFSA contribution.

3)   Individual Pension Plan (IPP): The corporation contributes to the IPP and income earned in the IPP doesn’t belong to the corporation. This should only be considered when the AAII is over $50,000.

4)   Deferred Capital Gains: Capital gains are 50% taxable and are only 50% included in the AAII.

 

Talk to us, we can help you figure out the best solution for your unique situation.

 

Alberta Budget 2018

The 2018 budget for Alberta focuses on the diversification of its post-recession economy, with the aim of creating more stability and less vulnerability to future fluctuations in oil prices. Here are some of the highlights:

Corporate

Interactive Digital Media Tax Credit

Alberta intends to bring in a new Interactive Digital Media Tax Credit with a maximum funding of $20 million per year, which aims to offer eligible companies with a benefit of 25% of eligible labour costs. This benefit relates to costs incurred after April 1, 2018 and is aiming to better support the interactive digital media sector in the province.

Alberta Investor Tax Credit

The 2018 budget extends the existing Alberta Investor Tax Credit until 2012-22. The existing program offers a 30% tax credit to both individuals and corporations who commit to making equity investments in eligible Alberta businesses, such as those involved in research, development, digital animation and various others.

Diversity & Inclusion Credit

Relating to the Interactive Digital Media Tax Credit and Alberta Investor Tax Credit, the budget notes a 5% diversity and inclusion credit enhancement which could be claimed if the company offers employment to an individual from an under-represented group.

Capital Investment Tax Credit

The budget announces that the Capital Investment Tax Credit, a 10% non-refundable tax credit of up to $5 million for a corporation’s eligible capital expenditures on manufacturing, processing and tourism infrastructure, will also be extended until 2021-22.

Personal

Alberta Child Benefit

The 2018 budget details increases to these benefits for families with 1, 2, 3 and 4 plus children, as well as increasing the phase-out threshold for family net income from $41,786 to $42,287.

Alberta Family Employment Tax Credit

Increases have also been announced in the budget to offer more benefits for working families who have income from employment of more than $2,760 per year. The phase-out threshold has been extended from a family net income of $41,786 to $42,287, as well as increases to the benefit amounts for each family size.

Cannabis Tax

The budget covers the agreement made by Alberta to adhere to a structured tax framework with the Canadian government for a period of two years after the legalization of cannabis for recreational purposes. Specifically, either $1 per gram or 10% of the producer price (whichever is greater) will be collected and the province will receive 75% of this tax room, both to be collected by the federal government. In addition, an additional tax of a maximum of 10% of the retail price may also be collected by the province.

Education Property Tax

A freeze has been set on education property tax collection, but the current rates have increased as follows:

·      From $2.48 to $2.56 per $1,000 or equalized assessment for residential/farmland property.

From $3.64 to £3.76 for non-residential property