Hello real estate investors in Hamilton Ontario!!
What a fabulous week to be an owner of real estate in Hamilton!!! Â Did you see CMHC’s outlook for the Hamilton real estate market? If no, then we haven’t been spending enough time together because I won’t shut up about it ever since we attended the CMHC Hamilton Outlook conference two weeks ago 😀
If you missed the CMHC conference, that’s unfortunate because reading their conclusions is one thing, understanding the economic fundamentals that lead to the conclusions is another – hence the reason we went through the charts and graphs fromÂ AbdulÂ K. Kargbo, M.A.(Econ),Â Senior Market Analyst from the CMHC at the last Mr Hamilton’s Inner Circle meeting. Â Sorry if you missed it! Register for the next so you don’t miss out again! Â What’s great about the information from the CMHC is that they are the government. Â They don’t care if you buy, sell or invest in real estate. Their content is unbiased and well researched, hence why I always make it to their conferences every year for the last five years.
For those of you who have been attending REIN or following my blog for a while, well you
already knew Hamilton was a top place in Ontario AND in Canada for investment. To my clients and all you other investors who capitalized on Don’s advice, give yourselves a pat on the back. Send the CMHC article to your loved ones and joint venture partners. Â You are not only a sophisticated investor butÂ you are a successful investor. Â If you’ve held your properties for a while now, you should be speaking to your mortgage professional about re-financing in order to raise capital for another down payment on another property as Hamilton remains a top place for investment.
Refinancing and buying more property is how you compound your returns. If you do not understand compound interest/returns then read here. I’ll do a blog on the subject at a future date but, know this, the power of compounded returns is the reason we started investing for Robin at such an early age.
The following is a guest post from my Chartered Accountant, Cherry Chan, CPA, CAÂ where she answers the top question from real estate investors:
Top 3 reasons why investorsÂ should incorporate
Many real estate investors often ask me whether they should incorporate to hold their real estate portfolio.Â The answer is personal to the real estate investorâ€™s financial situation and long term goals.Â Many people are often hesitant to use corporations because of the immediate setup cost and annual filing costs.Â Very few recognize the benefits of incorporating completely outweigh the setup cost and annual filing fees.Â Here are the top three reasons why you should incorporate to hold your real estate portfolio
A corporation is considered a separate legal entity in the eyes of law.Â This means that the corporation can own properties in their own names and borrow money in their own names. You, as a director of the corporation, have limited liability to these debts.Â Â If you are sued by a tenantÂ for millions of dollars and you do NOT have theÂ cash to pay it off, your corporation can declare bankruptcy.Â The creditors cannot go after your personal assets.
On the other hand, if you own your rental portfolio personally where your name is on title, these tenants or creditors can go after your personal assets, such as your principal residence, mutual funds, Registered Retirement Savings Plan account, etc.Â Â In the extreme case, it may even cause you to declare bankruptcy.
If you would like to protect your personal assets, your future, and your familyâ€™s well being, incorporation is a great way to provide that protection to you.
Tax planning opportunity to save you thousands inÂ taxes
Rental income is considered passive income in the Income Tax Act.Â They are being taxed at 46.17% in the corporation.Â If you need to rely on the rental income for your daily expenses, corporations may NOTÂ be the right way to go.
On the flip side, if you donâ€™t need the rental income for daily expenses, corporations offer you tax planning opportunities.Â Of the 46.17% taxes paid in the corporation, 26.67% is refundable to the corporation when a taxable dividend is declared.Â Essentially you pay roughly 20% tax on these rental income.
The corporation can declare a dividend to you the year you decide to quit your job and travel around the world.Â The corporation can also declare a dividend to your adult children who go to post secondary school.Â In 2014, an adult child who pays $7,000 tuition can receive up to $44,733 taxable dividend without triggering any taxes (other than the Ontario Health Premium).
You can even treat the corporation as your saving account.Â Keep the cash there, until you are ready to retire.Â Only take cash out when you have relatively small income from other sources.
If you were to own the properties personally, with the highest marginal tax rates at close to 50%, you pay half to the government on any rental income.Â None of which is refundable.Â A tax dollarÂ paid is a tax dollarÂ paid.Â No flexibility.Â No income splitting.Â And no tax planning!
Save faster and create a bigger portfolio in a shorter period of time
If your long term goal is to buy a lot of properties, there are corporation structures available that allow you to save faster within the corporations.
Through the proper corporation structure and agreement, a portion of the passive rental income becomes active business income, which is taxed at 15.5% in the corporation, instead of 46.17%.
Using the highest marginal tax rate in Ontario close to 50%, you use your after tax money of 50% to save and purchase your next rental property.Â Using the proper corporate structure, a portion of the rental income is taxed at 15.5% and hence you are saving using 84.5% after tax money.Â Close to 35% difference in tax!
If you are small business owners who operates in a corporation structure, you can use your after tax money at 84.5% to invest in the properties.Â The effect for small business owners is multiplied.
Like I mentioned earlier, many investors do not realize the benefits and flexibility of owning your real estate portfolio in a corporation.Â For the small annual cost of filing, you get limited liability protection, flexibility for income splitting or deferral, and it can potentially allow you to save efficiently and achieve your big goals much faster.
Thank you Cherry! I personally love to save and I have no problem paying taxes because I love this country of Canada so much BUTÂ I only want to pay what I have to pay and not a dollar more. Â FYI – we invest within a corporation and all of my clients with the largest portfolios do as well. Â Corporations are definitely NOT for everyone but if you are, you owe it to yourself toÂ NOT overpay onÂ your taxes.
Your next steps should be to speak to your accountant whether or not corporations are right for you. Â Here’s the contact information forÂ mine:
Cherry ChanÂ CPA, CA, MAcc, 416.826.8881, cherry(at)cherrychan.ca
You can sign up for Cherry’sÂ blog here: www.cccpa.ca
Till next time – Happy Hamilton Investing Everyone!
Erwin |Â MrHamilton.ca
PS:Â If you are just starting out investing, start by investing in yourself by getting training byÂ Clicking here for FREE Training on “How to Invest in Nice Homes in Nice Areas”
Click on the below to follow me on Facebook or Twitter