How to plan for a pre-buy during a cash shortfall—advice from chartered professional accountants in Vancouver
Vancouver, BC -- (ReleaseWire) -- 04/26/2019 -- The mortgage rate has gone up, OSFI rules are in full enforcement, and a slew of ownership taxes on real estate have drastically reduced the demand for presale condos. Getting a mortgage has become a challenge, but the accountants at Mew + Company have some advice on dealing with the liquidity crunch. For more, go to: https://www.mewco.ca/blog/a-liquidity-crunch-in-vancouver/
A couple years back, the professionals at Mew Chartered Accountants in Vancouver published a blog cautioning presale buyers to prepare for making payments. After all, once construction is completed, full payment of the balance on the property was required to close the deal. Therefore, qualifying for the mortgage at that future time required some income reporting planning.
Back then, waiting for the construction completion date in order to close the deal was not necessarily part of the final game plan. Presale flipping was the intention of many investors.
However, the reality of the current mortgage process is that even high net worth individuals with successful businesses are being asked by the major banks to terminate their fancy car lease, close out the unused line of credit, and contribute a bigger down payment in order to qualify for the mortgage.
From a tax planning standpoint, paying larger remuneration over the years leading up to the completion date will maximize the down payment. This will also support the applicant's ability to qualify for the mortgage. Despite TOSI being in place to prevent income splitting with "noncontributing" family members, fair wages for work performed is still allowed by the income tax act. Again, income splitting should be carefully planned and executed well before the actual closing date of the condo.
Another option is paying out the eligible dividends balance available and extracting the capital dividend account ("CDA") balance. Eligible dividends will result in lower personal taxes and the CDA can be extracted tax free. The balance of the CDA can be reduced by future realized capital losses, so it may be wise to incur the nominal professional fees to extract the available balance sooner rather than later.
Provided that the condo is not for personal use but for rent to a third party at fair value, the third option is to have the Opco or the Holdco buy the condo with corporate retained earnings. (The principal residence exemption will not apply as the corporation owns this asset.) For many business owners, the funds and the cash flows are in the corporation.
There could be a little bit more complexity involved when a corporation applies for a mortgage, but this obstacle can be overcome. A more pressing issue is that the net rental income falls under the new passive income limit that comes into effect in 2019.
If there are liquid assets and positive cash flow, a tax efficient plan to purchase the condo is possible. To learn more about tax effective strategies for purchasing a property, either as a home or for investment, contact the Chartered Professional Accountants at Mew + Company at 604-688-9198.
About Mew + Company
Mew + Company, Vancouver, is an ideal solution to the taxation problem. With a simple philosophy of building long-lasting customer relationships, the company has been serving corporate clients in a variety of fields—including restaurants, real estate, retail, and the service industry. Investing in their specialist services will undoubtedly be fruitful for all kinds of clients.
To learn more about Mew + Company and discuss their services, log on to https://mewco.ca/
Lilly Woo, CPA, CA, CFE, CFP
Mew + Company Chartered Professional Accountants
604 688 9198
Company Website: https://www.mewco.ca
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