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(Un)common Knowledge: For Tenants and Homeowners

Homeowners vs. Tenants

Know your rights and you should win in any confrontation without fail(?).

My belief is that you can be always be in the right, along with your intentions, but your execution can be still wrong.  What I’m trying to say is, the sensitive nature of tenant and landlord negotiations makes for greater possibility of things going awry because neither party wants to give up anything in the name of principles.  Collaborating with the opposite party, sharing information, understanding each other’s needs and motives, I believe, will always help you come to terms together faster and happier, and ultimately, create a much more favourable situation where both parties make very minimal compromises.

  1. Know your rights.
  2. Have paperwork signed by both parties to back you.
  3. Be crystal clear with the other party at the onset of signing contracts to prevent headaches in the future (it’s worth it).

For Homeowners

  1. Credit Checks.  Run a credit check on applicants through Equifax (www.equifax.ca) or TransUnion Canada (www.tuc.ca) can clear up any questionable credit deficiencies or delinquent payments.  Perhaps the prospective tenant may not even know he/she had outstanding payments, and so, you inadvertently discovered a possibility why the credit is below average.  It’s a great way to confidently confirm the applicant’s trustworthiness.  Since credit checks will cost you, always reserve credit checks for a short list of the most qualified applicants.
  2. Rental History.   Just like an employment referral call, a rental history check is just a call to a previous homeowner, which can reveal how long this tenant was at a previous address and reason for leaving.  A tenant who left on poor terms with the previous landlord can easily be discovered and may create problems for you in the future.  Try to learn more about the previous situation.  Ask open-ended questions and wait for a full response.  It’s probably the cheapest way to get the most credible responses in the quickest fashion.  Just pick up the phone and ask questions!  Some provinces even have private companies that can provide background checking services.  For example, Rent Check in Ontario, and B.C. Apartment Owners and Managers Association are reputable associations that provide services to its members.
  3. Employment History.  It never hurts to ask about your prospect about his/her employment history.  Tenants with several jobs may not be the best bet, but remember to execute a credit check and ask about their rental history.  But don’t rely only on their employment history alone to make a decision.
  4. Personal References.  New residents who are not from the city may not have many local personal references to offer.  Although it may not be the only way to learn more about your prospect, it’s always good to speak with two or three of the applicant’s supposed close friends to see whether the tenant is all he/she claims to be.
Tip #1:  There are some questions you just can’t ask.  Check with your lawyer about provincial legislation or personal privacy legislation if you have any questions on your list that may be too sensitive to ask.
Tip #2: A property owner has full discretion regarding who choose the tenant to be.  However, it is not advisable to give reasons for declining to rent to a particular tenant.

For Tenants

Let’s just say the good news is that most provinces and territories have some form of tenancy act to protect you!  It’s absolutely critical you familiarize yourself with provisions of the legislation in your province and territory – https://www.cmhc-schl.gc.ca/en/co/reho/index.cfm.

Always view the relationship as one that’s reciprocal.  A landlord has a right to collect rent from a tenant, but of course, not until the tenant has received a signed copy of the lease agreement.  Providing the lease agreement is the landlord’s responsibility.  To start, there are a few rights for you to remember:

  1. Right to know.  The tenant has a right to know the name of the landlord who owns and operates the rental property, how to communicate with the landlord, and so forth.
  2. Right of refusal.  A landlord has the right to limit or refuse subletting or assignment of a rental suite.  Most of the time, the rental agreement would include subletting terms .
  3. Right to privacy.  Tenants have the right to quiet enjoyment of the premises.  If the landlord requires entry for whatever reason, at least 24 hours’ notice must be given.  A shorter period is possible, depending on the situation (ie. emergencies) or the relationship you have with your landlord.

Key provisions of most legislation in Canada will include the following:

  1.  Tenants must give at least 30 days’ notice prior to vacating a suite; the landlord must give at least 3 months’ notice when asking a tenant to vacate a suite.
  2.  Landlords will, to the best of their abilities, make themselves available in the event of significant issues.
  3.  Landlords are responsible for maintaining the property that’s habitable and in good repair.
  4.  Tenants are responsible for paying for the repair of any damage made to the property caused by themselves.
  5.  Tenants are responsible for the conduct of guests and anyone who sublets their suite.

When in doubt, trust your lawyer.  Suggestions and definitions here may change over time, so don’t rely on the content as much as the reasoning behind why you should take these steps to protect your estate.

Always feel free to contact me if you have real estate related inquiries.

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Real Estate Considerations: Your Estate

Afterlife: Protecting Your Estate.

Happy New Year to my loyal reader(s?)!

Making New Year’s resolution is a commonality among most people, and it usually starts at the onset of the year. We look forward to a great year, and so, the very act of this kind of foresight usually means setting goals and planning ahead.  There’s no better way to start your year than to plan on how you are going to protect your estate.  Right.. not really.  But if you’re still reading, means you’re at least a touch interested in how this works.

There’s a saying from somewhere.. The evil that men do lives after you.  There must be once in your life where you might’ve thought, “What will happen to my possessions after I die?”.  We all hope to protect our estate from any claims people bring against us after our passing.  In the same light, I would ask, what would you do to best manage your estate after death?

Planning Ahead

  1. Writing a will.  The absence of a will means your major beneficiaries could possibility be the provincial and federal government tax departments.  Potentially, other beneficiaries are determined by a provincial government formula for family members, which may not properly reflect your wishes in any way.  To start, you’ll need two documents during your lifetime.  One is an enduring power of attorney that gives the legal right to one or more designated persons to manage your financial and legal executions if you are incapable of making your own decisions or lack the mental ability to do so (e.g. when you suffer from a recent head injury).  The second document is a living will or representation agreement or health care proxy.  Different provinces will ascribed different names, but serves the same function.  This document essentially designate your wishes for health care needs, possibly assigns a person to act on your behalf, and set out your wishes if you suffer from a life threatening condition.  (Edit Mar 24, 2017: Living wills may no longer be binding.  Talk to your lawyer about the ramifications of a recent change.)
  2. Having a shareholder’s agreement with a buy-sell clause.  This allows you to buy out the other’s interested in certain situations, in the way it’s been set out in the terms of the agreement, while the individual is alive or from her estate.  This applies when you own a business with other partners.  This is critically important because if you don’t have it, there is no formula that exists to resolve issues that might be anticipated, leading to legal issues that would need to be resolved in litigation.  A not-so-good case scenario is to hire a lawyer which involves money, delay, and frustration.
  3. Designate beneficiaries.  Take, for example, insurance policies, RRSPs, RRIFs, and some non-registered investments.  These investment products allow the proceeds to bypass your will and hence your estate.  The advantage?  Creditors can claim only from assets in your estate, and the funds aforementioned are out of reach.  Also, designating beneficiaries allow you to save on provincial probate tax.  Any insurance proceeds are tax-free to the recipient.  However, if the proceeds go to your estate first before reaching the intended recipient, those funds would be included in the probate fees.
  4. Create a trust.  Setting up a living trust while you are alive enables the content of the trust to bypass your will, and in turn, your estate.  A testamentary trust, setup via your will, takes effect on your death.  These trusts can remove assets from your estate and away from creditors.   If you set up a trust before you die, a living trust, it bypasses your will completely and therefore is not covered by probate tax.   However, if you setup a trust by way of your will, you create a level of risk.  If your will is challenged by some third party who wants the judge to vary the will in their favour, your trust may be subject to review.

As always, trust your lawyer.  I am the realtor who understands the intricacies and need for all parties in a real estate transaction to bring comfort and clarify in your investment decisions.  Suggestions and definitions here may change over time, so don’t rely on the content as much as the reasoning behind why you should take these steps to protect your estate.

Hope this post has been helpful to some degree.

Always feel free to contact me if you have real estate related inquiries.

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Real Estate Considerations: Incorporation Part 2

Why Ownership Selection is Important

Any form of investment bears a level of risk.  Risk, I learned back from working for an auditing firm, is any uncertainty that will have impact (positive or negative) to your business.  Sometimes, risk manifests itself in a way that causes personal liability.  When real estate transactions involving such a high volume of cash changing hands, you as an investor and party to that transaction want to tread very carefully.  It just so happens that in the real world, the higher the dollar value of an investment, the greater the chance you can have claims made against you.

To start, written agreements can help you circumvent most of the foreseeable claims, and of course, having a capable real estate agent can help you with this when writing a Contract of Purchase and Sale.  More importantly, your choice of ownership structure is also important.  There is a handful of strategies I will introduce here to help reduce your personal exposure to claims that could easily eat into your profit margin, Return on Investment, and Rate of Return.

Corporations, undoubtedly, can help protect you from these claims in an increasingly litigious environment.  A corporation, as a separate legal entity controlled by but independent of it’s individual shareholders, acts on its own legal behalf and bears responsibility for its actions.

Strategies

Seek a lawyer for this part:

Taking advantage of the protection that personal liability corporations offer is easy.  For example, always sign business documents as an authorized signatory of the corporation of which you’re a part.  A clear statement that are you acting as a representative of the corporation rather than in your own personal capacity will help ensure the corporation, and not you, bears the brunt of any claims.

Similarly, if you make loans to your corporation, become a secured creditor.  The corporation’s director may bear some liability.  Be cognizant that if you’re a director of your corporation, you are liable for:

  • Corporate tax
  • Sales taxes
  • Provincial employment standards legislation
  • Builder’s liens

To protect yourself as a director of a corporation, consider not owning personal assets such as cars or real estate.  You can transfer these assets to your spouse to limit what claimants can seek from you.

To minimize your risk, one strategy is to lessen your involvement in your business as a director.  Another strategy is to reduce the number of possessions you hold in your personal name, such as property.

All these strategies you will require advance customized legal and tax advice.  As always, seek the right professionals first and build a strong relationship with them at the onset so you will have your interests protected.  My job as your realtor is protect your real estate related interests so you can reach your financial objectives with comfort, confidence, and clarity.

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Real Estate Scenario #1: Parents in Control, Children with Ownership

This scenario was taken from “Real Estate Investing for Canadians for Dummies” by Douglas Gray, Peter Mitham.  This scenario depicts how you can maintain ownership and still produce a win-win situation for your children and your family.  Thought it would be useful to share:

Creative ownership arrangements aren’t as dubious as creative accounting!

Take, for example, the case of Duane and Madelyn, a professional couple in Red Deer whose three children were on track to start university in Edmonton within two years of each other. Because the kids would have to leave home, Duane and Madelyn decided to buy a property a 15-minute walk from the university and renovate a portion for rental purposes. They planned to rent out the basement while their children and their friends (who would pay a nominal rent) would enjoy the run of the main floor. The total amount of rental revenue from the property paid the operating expenses of the house, such as the mortgage and related interest, property taxes, utilities, maintenance, and insurance. And $1,500 was left over for Duane and Madelyn to put toward their retirement.

To make the deal work, Duane and Madelyn sought expert legal advice. They decided to put the house in the names of their three children, and received three key documents from their kids in return. One was a declaration of trust stating that the children were holding the property in trust for their parents and would, upon their parents’ request, transfer title back to the parents. The document also stated that any rental income in excess of operating expenses belonged to the parents. The parents also obtained a transfer of title document signed by the children, which the parents kept unfiled. The third document was a letter from the children assuring Duane and Madelyn that the property would remain free of all financial encumbrances, such as another mortgage, line of credit, or judgment filed against it for a debt.

The agreement gave Duane and Madelyn full control over the property, but also ensured that their kids had a place to live. When their children graduated, they could arrange to sell the property and allow the children to retain the net proceeds without any capital gains tax as the property was the children’s principal residence. This could pay off most, if not all, their student loans. However, if the parents needed the money, or the children turned out to be prodigal, Duane and Madelyn could exercise the trust declaration and file the transfer document giving them full ownership. They could sell it, and pay any capital gains tax as an investment property, after getting tax advice on the best tax strategies.

I truly believe one of the two main functions of a professional Realtor is helping you build relationships and make the right connections.  Take into account not just the business and investing experience of the Realtor you work with, but also the perspective of other professionals that come from age, life experience, and long-term goals.

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Real Estate Considerations: Incorporation (limited company)

A corporation is a business that operates as a legal entity but is separate from its owner or owners.  Corporations must file annual reports, submit tax returns, and pay taxes.

A corporate structure, as opposed to partnership and sole proprietorship, has many tax benefits.  With a sole proprietorship, you must declare and pay taxes on all your income in the taxation year you’ve earned income.  Corporations pay a corporate tax in the year money is earned which benefits from a reduced tax rate up to potentially $500,000 if the corporation has three employees or less and other criteria are met.  You don’t pay any personal tax until you take money out of your company, and knowing this, you can optimize your real estate planning options.  Your accountant can delve more into how you can capture benefits based on your unique situation.

WARNING: Although you do benefit from reduced taxes for your taxable income from a real estate corporation, passive recurring income from real estate assets may be subject to a different tax rate.  Again, consult with your accountant to plan the most tax-advantageous arrangement if you incorporate.

A corporate entity will be required to abide by strict reporting rules set forth by provincial law where the company incorporates, but the advantage to you, as a shareholder, is that the company accepts full responsibility for all claims made against it.  Unless you sign a personal guarantee accepting all claims against the corporation, claims are limited to the corporation’s assets.

Taxes are a significant consideration as you choose an ownership structure for your real estate investments.  Ownership of properties through a legal corporate entity may open up various tax advantages.  Since the company operating your properties files its own taxes, you can claim only the income flowing to you as a shareholder in the business.  Business related expenses of the corporation are not available for shareholders to claim.

As a shareholder, you want to always ensure that a shareholder’s agreement and buy-sell clause are signed before entering into any deal that requires putting money to a corporation.  These documents pertain to dealing with management and dissolution of the company if anything goes south.  It also contains possible issues and scenarios related to your participation in the corporation.  A lawyer can help you examine whether the agreements are a fit to your overall objectives.

As always, seek independent legal, accounting, and other professional advice related to your real estate transaction.  Experts will help you navigate this journey and help you avoid unforeseen problems.  Of course, have a realtor on your side to ensure you find the right home all the while connecting you to the right people every step of the way.

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Real Estate Considerations: Taxes

In this world, nothing can be said to be certain, except death and taxes.  ~Benjamin Franklin

Taxes are inevitable.  Instead of brooding over dollars lost, we can better spend our energy on how to better optimize our investment portfolio that are less susceptible to taxes.  Real estate offers certain tax benefits for you as a shrewd investor, especially when you develop an investment strategy with taxes in mind.

Taxes erode the return on investments that yield a fixed return, such as bank accounts (interest payments), bonds (coupons), and Guaranteed Investment Certificates (GIC return).  Of course, your Tax-Free savings account is free from all that.  Stocks and other equities put your principal at risk, and it’s also exposed to capital gains tax.

Real estate investments are subject to a reduced tax rate.  Tax advantages range from tax-free capital gains on principal residence properties to savings as high as 50% on taxes levied on capital gains from investment properties.  You’ll also be able to deduct investment expenses and write off any depreciation in the assessed property value.

Take a moment to read our extensive list of Tax Rebates and Grants for first-time home-buyers in our FAQ section.