Canadian Real Estate Vs. the World

Lately there has been much discussion about the level of foreign investment in Canadian real estate. The first question tends to be is Canadian real estate sustainable? There are a lot of components that add up to make a nation like Canada such an investment hot spot for foreigners. The first of the components starts with our world accreditation.

It’s no surprise that there is talk of foreign investor interests when Canada houses world-class cities like Toronto, Vancouver and Calgary. Our nation routinely ranks among the world’s best places to live, particularly with respect to quality of life. Not to mention our various accolades for customer service, economic freedom and fostering the wellbeing of our seniors.

Toronto alone has received recognition for being named the world’s most tax competitive major city, one of the top destinations of global job seekers, and one of the most influential cities on the planet. Keeping all these accomplishments in mind, let's compare how the price of property in Toronto stacks up against other world cities.

Consider for example, that according to Knight Frank’s 2014 Wealth Report, $1 million will get you 25.2m2 of living space in London and 20.6 m2 in Hong Kong. In New York, Sydney and Paris you would fare a little better at 40.2m2, 41.2m2 and 41.7m2 respectively.

While we may have tied with Los Angeles as one of the world’s most influential cities, here in Toronto you can generally buy more than the 64.3m2 of living space that is available for $1 million in Los Angeles.

The Greater Toronto Area is home to some of the highest quality of life standards in the world, and greater affordability. We’re fortunate to have historically low interest rates and a job market that is on the upswing. Combined, these characteristics point to the fact that investing in property in the GTA will continue to represent a smart long term investment strategy.

For more information on making the transition to your next property, if commercial property is what interests you, contact me at 1-416-782-8882.

Accounting when flipping real estate investments

The tax rules surrounding flipping properties, unlike rent-to-owns, as described in a previous article, are slightly more straightforward. But, using the proper structure is still critical. Think of this as a short primer on those rules, and how they may affect your taxes as you plan your real estate investment business.

Accounting for flips held in a corporation

Generally speaking, if you are in the business of acquiring properties, renovating them and selling them for a profit, you are earning “active” business income. Whether profit from a flipped property is treated as business income or a capital gain ultimately always comes down to intention – what was your original plan, what you documented, what actually happened? But that’s a whole other article! For this explanation we are going to talk about the active side. If you will be taxed as if you received income, you will be taxed on 100% of your profits vs. 50% of your profits for capital gains.
Similar to the point mentioned for RTOs, any property you hold while it is being renovated, or is currently for sale is considered an inventory item, and not a depreciable capital asset.
The cost base of your property increases as you renovate it. Major renovations, small repairs, cosmetic updates, utilities paid at the property while being worked on, all get capitalized. These items are capitalized because you are getting your “inventory” ready for sale.
Tax
At the time of sale your business income will be your proceeds of sale, less your updated cost base of the property. This active income is taxed as business income. Assuming that you qualify for the lower rate of tax in Ontario, this will be 15.5%, or 14% in Alberta, for example. A limited amount of “soft” costs may be deducted for tax purposes each year as well, such as some property taxes, utilities, etc..

I don’t have a corporation…my flip is personally held

Alright, sounds simple enough – flips are considered taxable income (not capital gains). Again, more tax planning needs to happen here as your business income combined with other sources of income earned personally will increase your total tax payable – especially if you climb up into a higher tax bracket.
Posted on: September 8th, 2015 by Real Estate Accountants BDO Canada