Taxes, Taxes and More taxes
A recent court case in Ontario shed some light on the need to understand the taxes your rental property is subject to.
A landlord in Ontario who had rented their property as a long term rental elected to change it to short term rental. This type of rental often brings in larger monthly revenues, when the economy is good and people are travelling. The landlord elected to sell the property after it had been operating as a short term rental. What the landlord failed to understand and the courts upheld is that the short term rental changed the use of the property to a commercial enterprise meaning the sale of the property was subject to HST. When selling a residential property that is lived in by a long term renter it is considered a “home” and is not subject to the HST tax. In this case the amount of tax charged to the owner is higher than the amount of revenue the owner earned while renting the property as a short term and long term rental.
When being a landlord, understanding the taxes one must pay is very important to understanding if you are able to make a profit on your rental property. We recommend you speak with a tax professional when owning a rental property.
One of the most common missed taxes is the non resident tax. When an owner lives out of the country they are required to submit to the government no resident taxes. As an agent for the landlord we are required to submit this before we give any funds to the owner. We use the NR4 method which is 25% of the gross rent sent to the government upon collection of the rent.
If you are not sure what taxes you are required to pay for your rental property we recommend that you speak witha tax accountant to ensure you are making the proper contributions.
Need help managing your investment properties. Cartref Properties can assist you, call today to discuss your needs. You can find more information about us at: www.cartrefproperties.com
BC Election Results
The provincial Election has finally completed and the NDP government has remained in office although with many fewer seats. What does this mean to managing your rental? Absolutely nothing.
The governments are always changing Locally, Provincially and Federally. If you are a landlord and are looking for the government to change the laws in your favour to make your business more profitable it might not be the right business for you. All governments change the laws to fit the current conditions of what the general population is requesting. Good businesses adjust and adapt to the market. They don’t wait for the government to change so the laws are favourable to them. If they do that then when the government changes again and changes the laws back to being unfavourable, which often happens, they will be in the same place they are now.
There are many changes that have affected the rental market, some are implemented by Federal governments and some by Provincial governments.
The NDP changed the strata act to allow all strata corporations to have rentals in them which was intended to increase the supply in the market during a time when the market was tight for rental properties. They also restricted short term rentals for the same intended reason to create more housing supply. These are two issues that have helped add more products to the market.
The bank of Canada increased interest rates, not a provincial government initiative to stem the tide of inflation. This eventually slowed the house selling market which was the largest factor affecting rental prices increases.
We don’t know what the, or any government will do in their term in office as they often are reacting to the current market conditions.
How do you protect yourself as a landlord?. Understanding the laws affecting renting and managing your rental property is important. If you are unsure what laws affect your property and how to manage a rental property you may be better off hiring a licensed property manager.
Need help managing your investment properties. Cartref Properties can assist you, call today to discuss your needs. You can find more information about us at: www.cartrefproperties.com
What Housing Crisis?
Met with a friend for lunch yesterday and we were discussing the housing market, in particular the rental market. After I explained the current market conditions, he said so why do they keep saying we have a housing crisis?
I replied that’s a great question?
What has changed the market conditions. Since 2021 when we were renting properties the majority of people who came to our viewings, were indicating the reason the were moving was due to the property they live in has been sold or is being sold. What this means is they “need” to move. In late 2022 and early 2023 we started to hear more people communicate to us that they were “just looking”? The unit they were in was not up for sale and therefore they were not in a need to move. This one simple issue changes the market conditions quickly.
When potential renters are not in need of moving they have the option to say no to the property and take their time to look for the best value. The majority of people who are attending our viewing today are “looking” to move to a better property then they are in now. Better means different things to each person. Many people who are looking for a larger place than they currently reside at may be the same size and or close to their current rent. They may be looking to improve on the quality of the property they live in at the moment. Moving to a newer building that has better amenities than where they are now. Many employers are pushing for more time in the office and some people are looking to move closer to their work. With the adjustment in prices this allows them to move closer and the same and or similar prices.
What does this mean to the current rental market?. Currently there is an over supply of product meaning there are more units for rent then there are people looking. More supply than demand. This is causing the rental prices to decrease on a monthly basis.
For landlords this means you neeed to be more diligent when selecting your tenants. Landlords don’t like their property to be vacant and in situations like this will often rush into the first person who applies for their property. We have met potential tenants on a Saturday who advised us on Sunday they looked at another place after seeing ours and have signed with the other location. We find it hard for the landlord to do the proper due diligence on the tenant in a short period of time and on the weekend and in the future this may turn into a negative tenancy due to rushing the tenant selection process. After a tenant moves into your property it can be difficult to have that person removed from your property.
Landlords need to ensure their property is clean, items are repaired and in working condition. Sometimes a slow down in the market is a good time to take the unit off the market and renovate the unit, or upgrade the appliances to make it more attractive to potential renters.
Eventually the market will shift again and there will be less product and more demand creating a more stable market. Patient is a virtue, especially as a landlord.
Need help managing your investment properties. Cartref Properties can assist you, call today to discuss your needs. You can find more information about us at: www.cartrefproperties.com
Collecting Rent and Security Deposits
BCFSA, the governing body who licenses property managers in BC recently froze a property management company’s trust accounts. The reasoning for this was the company was unable to produce required financial records for the previous year.
We recently discussed managing a property for a potential client who indicated they had not received a statement of their account from their property manager for multiple months.
When a rental property management company collects rents and security (damage) deposits it is required for these funds to be held in a Trust account on behalf of the owner of the funds. There are multiple ways a property management company can hold these funds, they can create a separate account for each client or they can use pooled trust accounts.
Cartref Properties uses pooled trust accounts to hold the rent and deposit funds we collect. What this means is we have one trust account for rent collected from all our properties and one trust account for security/damage, pet deposits. The security/pet deposit funds belong to the tenant until released by them or by an order from the RTB at the end of the tenancy. Any interest earned on these funds is owed to the tenant when vacating the property. To determine the amount owed we use the RTB interest calculator on the RTB website. The interest paid in the trust account currently is not paying the full amount owed to the tenants upon vacating. If interest rates continue to decrease the amount of interest owed may change in the near future.
The pooled rent trust account earns interest though is not paid to the owners, or tenants, instead these funds are paid to the Real Estate Foundation. This foundation is set up to help people who may feel their funds were misappropriated by the management company and can apply to have their funds refunded to them.
The benefit of the pooled trust accounts is that the financial institution doesn’t charge bank fees on these accounts. If we set up individual accounts for each client then there would be bank fees charged to the account along with the interest paid, and we find the fees are often larger than the interest earned.
Cartref Properties works with a Credit Union (Coast Capital Savings) in BC to hold our clients funds in Trust. Part of the requirement for holding the funds is to report annually the funds in trust with FDIC to have them ensured in the credit union.
For all the above reasons Cartref Properties provides a detailed account of each client’s funds received, held and disbursed from the trust accounts to ensure our clients have an accurate account of their funds. If your property management company is not providing you with a monthly statement of your account they are not meeting their obligations as a licensed professional.
Need help managing your investment properties. Cartref Properties can assist you, call today to discuss your needs. You can find more information about us at: www.cartrefproperties.com
BC NDP housing plan, is it a good plan?
The NDP plan is to offer to help people who may not be able to get into the housing market. The plan is to be the bank and offer a mortgage for 40% of the property price. This would be paid back when the property is sold and the increased value is achieved. Is the NDP suggesting they are becoming real estate speculators? The NDP suggests that the down payment and monthly payments will be lower. How will this help people buying a house?.
Lower payments for housing doesn’t lead to home ownership. It only leads to longer payments to pay off debt. If the government is lending 40% of the funds they are then becoming the bank and will only see the full payment of these funds when the house is paid off. This will happen when the homeowner pays off the mortgage, in Canada less than 50% of homeowners fully pay off their mortgage before they sell their property. The NDP says the government loan will be paid when the home is sold and the government will receive 40% of the increased value of the property.
They are speculating that the home’s value will have increased at the time the homeowner chooses to sell the property. In general housing increases in value, though there are times when people need to sell the property at a time when the market is less than or has not increased since they purchased the property. Today is a good example of that, people who bought in the peak of covid and for some reason are being required to sell now are seeing losses on their purchases. Selling of a house incurs many different costs during the process. Under this plan when the home sells, will the NDP take their 40% first, then the homeowner will lose a larger portion of the home’s equity if it is sold at a lower level. What happens if the value has decreased and the homeowner owes the government will the government share in the loss or will the owner be required to pay the full 40% back?
After the property is sold by the original purchaser, will the property then re-entered into the regular housing market. If this is the case and the homeowner is leaving this location with only 60% of the equity or less it may still be difficult for the homeowner to buy in the regular housing market. They will need to save up the additional 40% or qualify for the larger amount of a new mortgage while they are trying to pay off the other home.
The program is suggested to be for first time home owners and people who are currently renting. This leaves a large segment of the population that can’t afford housing and could benefit from a program like this excluded from participating. People like single parents who are divorced and struggling to afford housing.
Will this program bring housing prices down or stabalize the housing market long term.
For a program like this to be beneficial it will need to be an annual program for many years to affect the housing market, and as governments change programs of this type are often cancelled and will disappear. These new houses will provide homeownership for some segments of the population for a short period of time and eventually these products will all end up back in the regular housing market. Will people who buy these homes be allowed to rent them out?
A better solution would be to annually build more purpose built rental housing and co-operative housing. The federal government subsidised the building of rental housing in the sixties and many of those budildings are still operating in today’s market. When the rental housing market is stable, so is the housing market. Many markets in Canada have used only one type of housing which is homeownership to meet the needs of their population.
We have created a culture that has convinced young people that the first thing they need to do is buy property. People used to buy a home for their family to live in, now they buy a property that has the best resale value. Investing in the development of more rental homes across the country allows for people to migrate to new locations easier for work as they don’t need to make a large commitment and expenditure. With purpose built rental properties the product never leaves the rental market. During covid home sales were excessive and a number of properties that were part of the rental market left reducing the rental stock and significantly putting upward pressure on rental prices.
If the government wants to help with ownership I would be more infavour of them helping to build more cooperative type housing as well. This type of housing is non market housing which aslo creates a stable living environment for people at less cost of ownership. This plan sounds like a comparison to the co-op programs except that the homes can be sold and re-enter the housing market. Cooperative housing like rental housing doesn’t change its status.
There are many other things governments can try to keep housing costs affordable, including making it more difficult for invenstors to puchase multiple properties. Eliminate corporations from buying single family homes enmasse. Reducing the cost of living generally so people can afford to buy a home and many other things in life.
Need help managing your investment properties. Cartref Properties can assist you, call today to discuss your needs. You can find more information about us at: www.cartrefproperties.com