...in order to invest in property or other income-producing assets
Still, the experts are divided on whether tackling the mortgage
should always be the top priority. If you have control of your RRSP and are getting a tax refund that you can then apply to your mort- gage, going fi rst for the RRSP might be the better route. “If you consider the question from an aſt er-tax perspective, the majority of people would benefi t more from investing in their RRSPs,” says George Dube, a partner at BDO in Kitchener-Waterloo, Ont. “If your mortgage interest rate is low, you can make a better rate of return on your RRSPs,” he says. Mortgages are a “one-way street” where funds can’t be re-
claimed unless you refinance or sell, adds Calla. “Putting your money into a mortgage can be a mistake if you could be generat- ing additional income for yourself [through an RRSP] or if you’re going to need money down the road for something else,” she says. On the fl ip side, Toronto-based fi nancial expert Gordon Pape,
publisher of the Internet Wealth Builder and Income Investor news- letters, says a key factor to consider is after-tax return over the longer term. While the initial tax return on an RRSP may be high, consider the rate of return on subsequent years and how that compares with having paid down a mortgage. “From a pure safety perspective, there is nothing better than paying off that mortgage even if the interest rate is low because you’ll guarantee that return with no risk,” he says.
How much tax do I pay on capital gains? Whenever you sell property (other than your principal resi- dence) for more than its original cost, your profi ts are taxable. But contrary to popular belief, you’re not always taxed on all of the gain. Cherry Chan, a Toronto-based CPA specializing in real estate, says she encounters a lot of confusion among clients when it comes to taxes owed on profi ts from real estate transac- tions. “They think all the profi t they make is taxed but there are many criteria to consider, such as intention of sale, profession and duration of ownership,” she says. If you are a contractor fl ipping a property, for example, the
profi t would be 100% taxable, but if you’re planning to rent the property, it’s half that. Capital gains can also be offset with capital losses from other investments. And if you sell a piece of property for capital gain, but don’t expect to receive the funds right away because of the financing arrangements, you can sometimes defer the gain.
Should I invest in REITs? Real estate investment trusts (REITs) provide an opportunity to invest in a portfolio of large-scale, income-producing properties (e.g., apartments, warehouses, shopping malls). They typically off er high distribution yields. REITs in Canada tend to have longer-term leases and less
tenant turnover. While this means steady cash fl ow with less tenant disruption, some experts say it provides fewer opportu- nities for landlords to raise rents. REITs are also sensitive to interest rates. As Pape explains, “People may be avoiding REITs because interest rates are going higher, making it more costly for the operators who will likely have to refi nance at a higher rate when their loans come due.” When investing in REITs, Pape advises diversifying not only
in diff erent segments of the market (residential, offi ce, retail, industrial, etc.) but also in diff erent geographical areas, includ- ing the US or Europe. It’s also important to understand the tax advantages for each investment, he adds. “Every REIT has a dif- ferent set of parameters when it comes to calculating taxable implications each year,” he says.
Do I have enough money to invest in the market? Before you make the plunge into property ownership, experts say you should know how big an impact it will have on you fi nancially. “It’s about making sure you understand all the costs associated with owning a property (such as property insurance and monthly maintenance) and fi guring out if you’re going to be cash-flow positive or way under water,” says CPA Terry Hawes, based in Port Moody, BC. “I tell my clients they need to be able to sleep at night and I’ve walked away from a deal myself for that very reason.” Chan says real estate is a great investment if you follow the
rules. “Make sure the fundamental economics are there: buy in the right area and operate it properly and your asset will appreci- ate,” she says. “If you’re bleeding every month and aren’t comfort- able putting extra into the property every time there is an addi- tional expense, buy something safer that’s not eating up your regular savings.” It also helps to seek advice from advisers who are investing
in the market themselves so they can draw from their own experiences.
NOVEMBER 2017 | CPA MAGAZINE | 31
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