Just two years back, when buying condo presales was the rage of investing free cash in Vancouver, I wrote a short blog cautioning investors to begin preparation years ahead for the closing date of the deal. When the condo completes, full payment of the balance on the condo is required to close the deal; hence qualifying for the mortgage at that future time required some income reporting planning.
Back then, waiting for construction completion date to close the deal was not necessarily part of the final game plan. Presale flipping was the intention for many investors.
Fast forward to the future which has finally arrived. Mortgage rate has gone up, OSFI rules are in full enforcement, and a slew of ownership taxes on real estate have managed to drastically reduce the demand for presale condos.
PLAN ON PAYING FOR THAT CONDO ON COMPLETION DATE.
This requires a mortgage. A successful mortgage application requires adequate down payment and adequate future cash flow to pay down the mortgage.
The reality of the current mortgage process is even high net worth individuals with successful business are being asked by the major banks to terminate the fancy car lease, close out the unused line of credit, and contribute a bigger down payment to qualify for the mortgage.
From tax planning stand point, paying larger remuneration over the years leading up to the completion date will reduce taxes and hence maximize the down payment. This will also support the applicant’s ability to pay down the mortgage. Despite TOSI in place to prevent income splitting with “non contributing” 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 when a corporation applies for a mortgage but this obstacle can be overcome. A more pressing issue is the net rental income falls under the new passive income limit that come into effect in 2019.
If there are liquid assets and positive cash flow, a tax efficient plan to purchase the condo is possible.
Small Business Tax Consultants in Vancouver
Contact Mew & Company for further business tax consulting needs at 604-688-9198.