McMurraysBestHomes.com Newsletter Blog

Are home prices peaking?

2008-01-28T07:16:00.000-07:00

Even the banks agree that prices in some cities are now inflated.

By Duncan Hood, (MoneySense)

January 25, 2008

Even banks are admitting that after a decade of unthrottled expansion, Canada's real estate boom may finally be losing steam.

The average price of a home in Canada recently topped $310,000, a gain of 60% in real terms in just nine years. Canadians haven't witnessed a boom like this since just after World War II -- and it's clearly not sustainable. If prices continued to rise at their current rate, the average house would fetch $10 million by 2037. Since that doesn't seem plausible, the big question is not whether the current boom will stop, but when.

The answer depends on what city you live in. A recent report from Scotiabank notes that each market has to be evaluated on its own merits.

Toronto, for instance, has seen a big rise in home prices over the past decade, but it's happened fairly gradually, with prices going up by about 4% a year. The steady trend suggests that current prices are sustainable, at least for the short term. In comparison, the increases in Vancouver, Saskatoon, Calgary and Edmonton have been far larger and more sudden. "There is growing evidence of overvaluation in home prices in some parts of the country," writes Adrienne Warren, a senior economist at Scotiabank. She adds that she anticipates a "cooling in both housing demand and price appreciation in the months ahead" across Canada.

In a similar vein, a new report from Royal Bank proclaims that housing affordability has recently "suffered one of its largest and most broadly based quarterly deteriorations" since the mid-1990s. "Conditions from Manitoba eastward are not a cause for concern," writes Derek Holt, RBC assistant chief economist, "but conditions in Saskatchewan, Alberta and British Columbia warrant caution."

William Strange, a professor of urban economics and real estate at the University of Toronto, says the key factor for real estate forecasters to look at is affordability, which measures the percentage of our incomes that we spend on our homes. Affordability is vital, because when residents can no longer afford local homes, prices stop rising.

A lack of affordability led to the 1990 housing bust in Toronto. At that time, the average Torontonian with a detached bungalow was spending just over 60% of his income on housing. Right now, Torontonians are spending about 45% of their incomes on housing. In Vancouver, owners of detached bungalows spend an incredible 71% of their incomes on housing, while in Calgary they spend 45%, and in Edmonton 42%.

Given the dismal track record of real estate prognosticators, Strange is reluctant to offer any predictions, but he does say that Calgary and Vancouver look to be on the most wobbly ground. "In Calgary, there's tons of land that they can build on, so one would think that the price of building new housing would be a ceiling on how high prices can go. That's a market I would worry about."

It's hard to say how the boom will end, but history shows that after a big price run, homes can decline in value for a decade. So how can you protect yourself? Simple, says Strange. Buy a house that you can comfortably afford using a traditional mortgage. "Buy a house you like in a neighborhood you like and stay there," he says. "Then no matter what the market does, you'll do alright."

Real estate anxiety is sweeping the country. But what's really going on in the housing market?

2008-01-28T07:13:00.000-07:00

By Jason Kirby

A few years ago, Trauzzi, 24, had been drawn to the Prairie town for work and grew to love it. He met his fiancée there. And he vowed that after finishing college in his hometown of Winnipeg, the couple would return and buy their first home there. We saw it as a great place for fresh starts, he says.

But when the couple moved back to Saskatoon earlier this year, Trauzzi scarcely recognized the place. The housing market was ablaze with bidding wars, double-digit monthly price gains and frenzied speculation. Modest bungalows that had sold for $187,000 in the fall of 2006 were by spring changing hands again for $280,000, without so much as a fresh coat of paint. It was insane. Trauzzi, a service technician, felt there was no way he could afford those kinds of prices for a starter home. So after just nine months, he fled back to Winnipeg where he bought a home earlier this month for slightly more than $120,000. Not a moment too soon. Even the Peg is quickly becoming unrecognizable thanks to real estate fervour. I could easily turn around and sell my house for five or 10 grand more than I paid for it, he says, with a note of astonishment in his voice. I don't know if there's a bubble that's going to burst or not, but if there is something that's going to happen, it's going to happen right across the country.

Trauzzi isn't alone in feeling anxious about the housing market. Across the country, the B-word is on the lips of Canadians. First-time buyers are wondering whether they'll ever be able to afford their own place. Some wonder if they should buy now, or wait in hopes that prices will fall. Those who've already bought worry that they've paid too much - and will wind up overextended if interest rates jump - or that they'll never be able to move up to something bigger. Even house-rich Canadians whose equity has soared in the frenzy fret that they can't take advantage of their position - where could they afford to buy if they sold now? And what if you're counting on your house to finance your retirement, and its value plummets? At the same time many fear the carnage in the U.S. housing market will make a collapse here inevitable. So with one eye on soaring prices here, and the other on the troubles south of the border, you can't really blame Canadians for feeling like they're living on the edge of a cliff.

Yet step back from the real estate listings for a moment and things start to take on a different hue. Yes, prices in Canada have risen dramatically in the last few years, but those gains are nothing compared to what's been experienced in other countries, or even here, in years gone by. What's more, thanks to continued low interest rates and new types of longer-term mortgages, housing affordability in some big cities remains decent compared to what we've seen in past booms. In fact, the evidence suggests that in Canada, if anything, we're not at the top of the market and there's still room for house prices to move higher in certain parts of the country.

There's no question the housing market has been on a wild ride. The average Canadian family has seen the value of their home jump more than 10 per cent a year for three years in a row. Prices overall are up 60 per cent in the last five years. But national averages never tell the full story. While prices in cities like Ottawa and Montreal have grown slowly, house prices in Toronto are up about 86 per cent over the last decade to an average of $394,000, while the average home in Vancouver, at $570,000, has jumped 73 per cent since 2003 alone. In Oilberta, the average Calgary home has doubled in just four years to $432,000.

To buy at those prices, Canadians have had to pile on mounds of new debt. Between 2000 and 2006 the total amount of outstanding residential mortgages ballooned by 62 per cent to $694 billion, according to the Canada Mortgage and Housing Corporation, and many expect that figure will top $800 billion this year. It used to be said you couldn't talk to a Vancouverite for more than five minutes before the topic of real estate came up. Now that applies to just about everybody.

But as Canada booms, America's housing pain hangs over the party like a dark cloud. Across the U.S., house prices declined between the second and third quarters for the first time in 13 years. In specific markets in Michigan, Ohio, Florida and California, home prices fell as much as five per cent. There are some who predict - or is it pray? - the drop is just a brief pause before bidding wars erupt once again. But they are increasingly in the minority. Moody's, the debt rating agency, predicts U.S. prices will fall by 15 per cent over the next two years as the market softens. Once-hot urban centres in California and Florida could even tank by more than 30 per cent. In the United States, they basically went from double-digit price growth to an outright price correction in about six months, says Craig Alexander, deputy chief economist at TD Bank. That's a classic bubble bursting.

What's driven things in the U.S. was a parlous mix of overheated financial markets, a culture of debt accumulation, and a heaping dose of pure speculation. The problems began a few years ago when Americans with poor credit and no cash for down payments were lured into the housing market by lenders offering subprime mortgages. Lenders had many tactics, but the most popular involved offering adjustable-rate mortgages with absurdly low initial payments. Many buyers jumped in, only to run into trouble once rates were cranked up. Borrowers eventually began to default on their mortgages. As many as two million Americans may lose their homes and pull the rug from beneath the housing market. As Mark Zandi, an economist at Moody's, said recently: This is the most severe housing recession since the post-World War II period.

No one would dare claim the U.S. meltdown doesn't pose at least some threat to the Canadian economy and, hence, house prices here. Our two economies are closely linked. If America falls into a deep recession, it could bring global economic growth to a standstill. But that's by no means inevitable. Emerging markets are still strong, and that's driven commodity prices. With its bounty of minerals and resources, Canada has seen record low unemployment. Even in Ontario, where manufacturing has been hard hit by the high loonie, the province has added jobs over the last year. The situation bodes well for continued strength in the housing market, assuming employment remains strong.

But the biggest difference behind the situation in Canada and the U.S. has to do with fundamental differences in the two markets. At the peak of the U.S. housing market, sketchy subprime loans accounted for more than 30 per cent of all American mortgages from 2004 to 2006. In Canada, they never made up more than five per cent of the mortgage business. That's largely due to the buttoned-down style of Canadian financial firms and borrowers. But it's also because Canada's big banks control so much of the lending market. Absent the aggressive competition America's financial services sector is famous for, there just never was the urge up here to pursue the riskiest slices of the market.

Instead, the main driver of our boom has been this country's firmer economic fundamentals, say analysts. There are speculators in the market - there always are. But a tight labour market has led to rising incomes, allowing people who never thought of owning a home to claim a plot of land for their very own. I can understand the concerns people have about the Canadian housing market, says Alexander. But I think what's driven things here is fundamentally different so the risks are far less. Adds real estate analyst Frank Clayton: There is no bubble.

Those who lived through the last one know all too well what it's like to watch helplessly as your home sinks in value. Hans van Monsjou, who has owned his house in Mississauga, Ont., for 22 years, saw prices soar in the bubble of the late 1980s. Then the market turned. Over the next few years, his home shed about one-quarter of its value. Fortunately for van Monsjou, who works for a financial firm, he bought at a good price and never slipped into the red. But like many Torontonians, he saw foreclosure signs spring up all around him.

One real estate cycle later, and van Monsjou's home has bounced back. At $750,000, its worth nearly 70 per cent more than at the last peak. And once again he's feeling a bit jittery. Van Monsjou doesn't expect a major collapse, because mortgage rates are well below the double-digit figures that marked the last boom. But he does think Canadians are putting too much faith in the economy remaining strong. There may be a false sense of security, he says. We may be living off the last fumes here.

When the last bubbles burst in the 1980s, it brought many Canadians to their knees financially. In 1989, house prices in Toronto dropped 41 per cent and took more than a decade to recover. Vancouver fared even worse in the early 1980s. In just three years, house prices in the city were chopped in half. With interest rates running into the double digits, owners simply couldn't handle rising mortgage payments when their homes had lost so much value.

But this boom is decidedly different than the last one. Folks in Toronto, for instance, may feel like prices are getting out of hand, but compared to the late 1980s, this round of gains is more modest. Back then, house prices shot up 175 per cent in the five years leading up to the market peak, according to figures from the Toronto Real Estate Board. This time around, Toronto homes have climbed just 40 per cent over the past half-decade.

A better way to gauge the tenor of housing markets from one era to the next is to look at housing affordability. In simple terms, it measures the share of an average family's household income that is required to service the mortgage on an average priced home, and captures changes in earnings strength and interest rates. By that measure, several markets remain relatively affordable compared to more manic days gone by (see chart). In Toronto, mortgages eat up 27 per cent of household income, according to research firm Altus Clayton, down from a peak of 40.4 per cent in 1990. In Calgary, families pay more to maintain their mortgages than in 1989, at 27.9 per cent, but have yet to reach the heights of the 1981 boom, when it took 31.1 per cent. Even when you factor property taxes and utilities into the equation, as RBC Economics does with its affordability analysis, the Canadian market overall is still more affordable than at past peaks. In some cities, like Saskatoon and Calgary, houses are less affordable than in 1989, though those heights were never as pronounced as in Toronto, which still looks affordable.

Financial planners suggest a mortgage should never take up more than 32 per cent of a household's gross income, so clearly many Canadians are pushing their limits. But the saving grace has been low interest rates. Five-year fixed mortgages can still be had for around 5.99 per cent. Economists believe rates in Canada will remain quite low through 2008 and into 2009 due to continued uncertainty in the global economy.

But low rates only partly explain why experts don't believe the market is about to collapse. Canadians have warmed to a new breed of mortgage. In the past, the longest a homebuyer could take to pay off a mortgage was 25 years. In the last year, lenders have begun offering loans that can be stretched over four decades, which lowers monthly payments. For instance, a $300,000 mortgage amortized over 25 years at six per cent would result in monthly payments of $1,919. The same mortgage, over 40 years, will leave an extra $284 in your pocket each month. This comes at a steep price: borrowers fork over a lot more in interest payments in the long run.That same $300,000 mortgage over 25 years would ring up $275,825 in interest charges. Over 40 years, the interest charges would amount to $480,000.

Economists say 40-year mortgages have breathed new life into Canada's housing market, which had begun to show signs of slowing. Suddenly thousands of people who had been squeezed out of the market are able to afford their own home. That's good on many levels - home ownership brings a sense of pride and acts as forced savings. Critics, meanwhile, argue these new mortgage products pour gasoline on an already raging fire.

Adding to the notion that there's still life in the market is the fact that Canada has lagged in the global housing race. According to The Economist magazine's house-price indicator, which tracks two dozen countries, Canada has seen relatively modest gains. Between 1997 and 2007, house prices here rose 78 per cent. That may seem steep, until you consider the stratospheric gains in other countries, such as the U.S. (165 per cent), Spain (190 per cent), Britain (213 per cent), and Ireland (240 per cent).

The fact is house prices, even in some of Canada's hottest markets, almost look like a bargain. Each year Demographia, a real estate research firm, ranks more than 150 cities in North America, Europe, Australia and New Zealand on their affordability. Toronto and Calgary, for instance, are tied for 71st, well below New York and London, but also well back of Melbourne, Dublin and Boston, too. In fact, Vancouver and Victoria are the only Canadian cities to rank among the top 25 least affordable, at 13th and 23rd respectively. The evidence would suggest a city like Calgary is still much cheaper than most Western cities, even though it's growing exceptionally fast, says David Seymour, a policy analyst for the Frontier Centre for Public Policy. He can speak from personal experience. Seymour recently moved to Saskatoon from New Zealand. He says a $180,000 home in the Prairie city would easily fetch in excess of $1 million in Auckland. Sure, the weather and scenery aren't what Kiwis are used to, but that doesn't fully explain the discrepancy in prices. Canadians really don't know how lucky they are in terms of housing affordability, with the exception of Vancouver, he says.

On the contrary, Canadians are convinced prices here are out of control. An Angus Reid poll conducted earlier this year found two-thirds of people fret that houses in their neighbourhoods are overvalued and becoming more so. Why are Canadians so sure house prices have reached untenable heights, when by several measures many markets in the country remain affordable? A big part of it has to do with optics. A host of shiny new condominiums have been unveiled recently, and the sight of buyers lined up for days to snap up units is enough to unnerve anyone. That was the case last month in Toronto, when units in the high-profile 1 Bloor project went on sale, and fights broke out among real estate agents lined up for a piece of the action. When grown men and women start acting like kids in a candy shop, the housing market must be out of whack.

Some are convinced the end is nigh. The housing bubble's imminent demise is a regular topic on Garth Turner's blog. The Liberal MP and author argues baby boomers fuelled a housing bubble of Biblical proportions that is about to crash down. Of course, Turner has predicted prices were set to fall for several years now, and instead they've done the exact opposite. The thing about making predictions in a market as cyclical as housing is that eventually you'll be proven right.

But there's no denying hot markets in the West are cooling. Take Edmonton, for instance. After 15 years of meagre gains, housing prices exploded over the last two years. For the first half of this year alone, prices jumped 40 per cent. Just as quickly they've pulled back. Last month, the average residential property price fell 6.5 per cent from October to $325,060, according to realtors. Perhaps sensing trouble afoot, one developer last month turned to gimmicks - buy a semi-detached show home and get a Volkswagen Golf at no extra cost.

Are these signs of a bubble bursting? Falling house prices are always a cause for concern. And if the market decided the good days were over, and rushed to sell, a collapse could be self-fulfilling.

Many Canadians are trying to decide whether to keep playing along or wait for things to cool off. Eric Giesbrecht, a personal chef in Calgary, was one of them. He and his wife, both in their 30s, would like to have children, but their townhouse-style home isn't suitable. Yet even though their existing home has surged in value, finding a place with a yard would mean a lateral move into a small house far from downtown. Three months ago, Giesbrecht gave up and stopped searching. If we were a bit more risky, or just greedy, we could take the equity we have here and jump into some place that costs $600,000, he says. But everybody seems to be tightening up the strings and cutting off spending. If prices drop you're already maxed out before you go in. It's a stranglehold.

But just because everyone's worried doesn't mean there's a bubble about to burst. TD's Alexander points to the slow market in central Canada between mid-2004 and 2006, which followed a period of frantic price increase. He thinks Western Canada will follow the same path, with more modest single-digit growth next year. Bubble's burst, they don't decelerate over several years, he says. When you see prices cool over a period of several years, it gives you some confidence that you never had a bubble to begin with.

At least that's what they're hoping back in Saskatoon. Last December, Meghan Rauckman, a single mom, signed up to buy into a planned townhouse development, only to learn in April the developer had pulled out. A lawsuit is underway, but in the meantime house prices soared. Rauckman eventually bought a smaller home, but at $80,000 more than what she'd originally planned. Watching prices skyrocket, and hearing all this talk of bubbles in the market, has only added to the strain. If my place dropped in price, and I couldn't afford to make payments and had to sell, I know I'm going to lose money, she says. That's really added to the stress.

No one ever said buying a house was easy - or worry-free. But as the real estate boom rages on, homeowners have little choice but to cross their fingers and hope for the best. Not all booms become bubbles, but when they do, watch out for the pop.

2008 Rogers Publishing Limited All rights reserved.

What will it take to clear our indoor air?

2008-01-25T09:57:00.000-07:00

by Dan Leahul

Energy efficiency doesn’t necessarily mean your house is green. It has to ensure the health of the people living there. This is the last of a four part series that explores just how unhealthy many North Americans’ homes are because of indoor air quality and what you can do to improve this growing pollution problem.

The ultimate solution for improved indoor air quality (IAQ) in today’s homes is much like another hot-button issue, global warming, where science and politics are often at odds.

The World Health Organization has corralled enough evidence over the years from building, health and social scientists around the world to suggest our indoor environments contribute directly and immediately to one’s physical and mental health.

In order to improve standard IAQ qualifications and overall environments of new and existing homes, cooperation is essential, roles need to be redefined within the industry and our houses need to be treated as living systems, said Robert Bean with healthyheating.com.

“Heating, ventilation and air conditioning, along with interior design, should be redefined as part of the health care industry and removed from the grasp of a construction business, which is primarily regulated by how it puts parts together instead of how it influences the physical and mental health of the occupant,” he said.

The majority of the population has sufficiently strong defense to deal with most indoor environments, but based on the recent discoveries in epigenetic research, it seems scientists do not know conclusively what the long-term effects are of poor indoor ventilation and air quality.

“The health care profession was talking about these issues hundreds of years ago and still the battle continues,” said Bean. “It reminds me of these words from William McDonough, FAIA in his Being Less Bad Is Not Being Good presentation: ‘We need to realize that it took us 5,000 years to put wheels on our luggage. We’re not that smart’.”

Unfortunately for the average homeowner, minimum ventilation standards is not the sole IAQ solution, since diluation of indoor air with outdoor air will not rid their home from the invasion of chemicals, toxins and contaminates.

“IAQ requires a team effort involving government, developers and building professionals and related trades under guidance from the health care industry,” said Bean. “It means a homeowner orientation before they get the keys to the new home including a cookbook description of the homes ingredients and how to manage these potential problems.”

Next year, Canada’s LEED (Leadership in Energy and Environmental Design) for Housing program is expected to make a splash and will provide some motivation for the changes needed.

For the time being, for the average homeowner improving IAQ starts with identifying the problem.

Most health effects are useful indicators on IAQ problems, especially if they appear after a person moves into a new residence, remodels or refurnishes a home or treats a home with pesticides.

The U.S. Environmental Protection Agency (EPA) recommends discussing any symptoms with your doctor or local health department to see if they are caused by the IAQ of the home.

Additionally, seeking consultation from a board-certified allergist or an occupational medicine specialist is also recommended.

Usually the most effective way to improve IAQ is to eliminate individual sources of pollution or to reduce their emissions, says the EPA.

Some sources, like those containing asbestos, can be sealed or enclosed; others, like gas stoves, can be adjusted to decrease the amount of emissions.

In many cases, source control is also a more cost-efficient approach to protecting indoor air quality than increasing ventilation because increasing ventilation can increase energy costs.

Specific sources of indoor air pollution in your home are listed later in this section.

Another approach to lowering the concentrations of indoor air pollutants in your home is to increase the amount of outdoor air coming indoors.

Most home heating and cooling systems, including forced air heating systems, do not mechanically bring fresh air into the house.

Opening windows and doors, operating window or attic fans, when the weather permits, or running a window air conditioner with the vent control open increases the outdoor ventilation rat

Local bathroom or kitchen fans that exhaust outdoors remove contaminants directly from the room where the fan is located and also increase the outdoor air ventilation rate.

It is particularly important to take as many of these steps as possible while you are involved in short-term activities that can generate high levels of pollutants.

For example, painting, paint stripping, heating with kerosene heaters, cooking, or engaging in maintenance and hobby activities such as welding, soldering, or sanding.

Lastly, homeowners can also purchase an air cleaning unit in an effort to improve IAQ.

There are many types and sizes of air cleaners on the market, ranging from relatively inexpensive table-top models to sophisticated and expensive whole-house systems.

Some air cleaners are highly effective at particle removal, while others, including most table-top models, are much less so.

Air cleaners are generally not designed to remove gaseous pollutants. However, for most indoor air quality problems in the home, source control is the most effective solution, said the EPA.

For those seeking more information, southern Alberta is home to some of North America’s best IAQ specialists like U of C educator and practitioner, Professor Tang Lee or Canmore based Karen Rollins, an ASHRAE Distinguished Lecturer.

Dr. Lee offers through the university’s Continuing Education program, certificate courses for those who want this specialized knowledge.

In addition, The Heating, Refrigeration and Air Conditioning Institute of Canada will also be launching their IAQ Awareness Course in Alberta and across the provinces for mechanical and related building professionals in the spring/summer of 2008.

According to Bean, there is almost too much information available on the topic however, for those who want to dig deeper he suggests reading, “The Medical Perspective on Environmental Sensitivities” by Margaret E. Sears, written for The Canadian Human Rights Commission in May 2007.

—Dan Leahul is the Calgary Real Estate News resident reporter.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Steps to take after you pre-qualify

2008-01-25T09:54:00.000-07:00

By Sharon Essington

After you have thoroughly discussed your financial situation with your mortgage expert, provided supporting documents and determined your mortgage strategy, the shopping can begin.

The pre-qualification criteria should be very clear to both yourself and your REALTOR® at this point in time, but if there is any confusion, be sure to clarify to avoid misunderstandings and potential frustrations down the road.

Now is the time to get engaged and find that perfect home. With so many options to choose from in Calgary, selection should not be an issue.

Once the property has been located you will make an offer to purchase, through your REALTOR®, to the seller’s REALTOR®. It is very important that you include a financing condition on the offer to purchase allowing time for your mortgage to finalize.

At this time, you should have already provided the supporting paperwork to your mortgage broker. This is the time when the broker must sell the lender on your application. The lender will take the time to review all supporting documents and verbally verify employment information.

Provided the broker has done their homework, this stage of the game should be fairly seamless.

However, it is reasonable to allow at least five business days for the financing condition, perhaps a bit longer if an appraisal is required on the subject property. (Your mortgage broker could request an appraisal up front.)

It will not likely take the full five days, as the early prep work has been done, but it is easier to ask for a little more time up front to arrange financing then it is to request an extension later.

Keep in mind that lenders are very busy and just like most businesses in Alberta the turn around times are directly affected by work load and potential employee shortages. A few extra days will be appreciated by everyone, including yourself.

Once the mortgage has been finalized by the mortgage broker, the buyer can remove the financing condition.

When all of the buyer’s conditions are removed from the offer to purchase the deposit becomes non-refundable and the buyer is now legally obligating to purchase the property.

Now the waiting game of possession takes place. Approximately two weeks before possession day your lawyer will call you in to sign the mortgage documents. If a down payment is being utilized then this will be the time when the money is required.

Additionally, the buyer will need to provide proof to the lawyer that fire insurance is in place for the property, with the mortgage lender listed as the first loss payable in the event of a claim.

Provided there are no hold ups with the lawyer, on possession day, at 12 p.m., the keys to the property will be released to you, and the house is finally yours.

All of the pre-planning and gathering up front has paved the way for a successful mortgage approval, and most importantly the purchasing of the perfect home.

Now that the buying process is clearer to you, get started today by calling a mortgage expert who can ensure as few bumps along the way as possible. The other alternative is just too stressful.

—Sharon Essington is a Mortgage Consultant with Canada Mortgage Direct. Sharon specializes in providing a creative approach to mortgage financing for individuals looking to improve their lives through real estate. To request a copy of your FREE report “Buy Sooner With No Money Down”, or for more information on this topic, call 403.239.8250.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Canada Revenue Agency alerts Canadians

2008-01-25T09:48:00.000-07:00

By Esmail Bharwani

In my previous week’s article I discussed Canada Revenue Agency’s (CRA) tax alert on misleading donation tax schemes. I provided an overview of three such programs. I also mentioned CRA’s caution to be extremely careful in dealing with promoters of such schemes.

The CRA is informing taxpayers that there are an increasing number of questionable Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) tax-free withdrawal schemes. Participating in such schemes could result in losing an entire retirement savings to unscrupulous promoters and in a reassessment of your tax returns.

The CRA reassessed over 3,100 taxpayers who participated in the RRSP and RRIF schemes resulting in additional taxable income of approximately $144 million. Audits of another 1,800 taxpayers with $84 million in RRSP and RRIF investments are currently underway.

The CRA recommends that the taxpayers should avoid schemes that promise the following:

• Withdrawal of funds from an RRSP or RRIF without paying tax;

• Promoters often promise to return part of the taxpayer's investment by offshore debit or credit cards, offshore bank accounts, or loan-back arrangements;

• Immediate access to assets in “locked-in” RRSPs or RRIFs;

• Income tax deductions of three or more times the amount invested in an RRSP; and

• Unrealistic returns on investments.

Typically, promoters of these questionable schemes direct the owner of a self-directed RRSP or RRIF to purchase a particular investment through a specific trustee. The particular investment could be shares in a company, units of participation in a co-operative, a mortgage, or other type of investment.

The CRA cautions that the full amount of any withdrawal or ineligible investment is included in the taxpayer's income in the year the investment was made or the withdrawal occurred. This means taxes are assessed on these amounts, as well as any applicable interest. Penalties may also be levied for amounts not reported.

These arrangements can put retirement savings at risk. In some cases, the promoter walks away with all the funds and cannot be found. Many Canadians have lost their entire retirement savings to unscrupulous promoters by participating in such arrangements.

The CRA warns taxpayers to use caution before taking part in any scheme that promises a tax-free withdrawal of RRSP funds.

In 2001, the CRA reassessed a taxpayer who had used such a scheme. Pursuant to the Income Tax Act, the Agency added the total value of the RRSP funds that were withdrawn through the scheme to the taxpayer's income. The taxpayer disagreed with the re-assessment and filed an appeal with the Tax Court of Canada.

In its decision, the court stated: "The business with which the appellant dealt was nothing more than an organization set up by unscrupulous individuals in order to cheat those least able to detect the swindle...individuals who had invested energy and resources in the creation of various corporate entities in such a way as to convince any non-believer or skeptic of the legality of the transactions."

The court also went on to say, "although the appellant is sympathetic and although she may possibly have been the innocent victim of an actual professional swindle, the appeal must be dismissed because the assessment is correct.”

These RRSP schemes are very carefully planned and promoted to give the appearance of legitimacy. As a result, taxpayers should be reminded of the importance of exercising due diligence to protect themselves against schemes that will have a negative effect on their financial or tax situation, states the CRA.

For an RRSP trust that holds non-qualified investments, the annuitant is required to include the fair market value of the investment in income for the year of acquisition, according to subsection 146(10) of the Income Tax Act. In cases where the annuitant has not been assessed under subsection 146(10), the trust is required to pay a 1% tax per month on the fair market value of the investment, as outlined in subsection 207.1(1).

In cases where the trust does not have marketable assets to pay this tax, the trustee can be held personally liable for the tax, as indicated in subsection 207.2(2).

On April 20, 2006, the Supreme Court of Canada announced that it would not hear the taxpayers' appeals of the decisions of the Federal Court of Appeal (FCA) in the cases of Frank Klotz and Quinn, Tolley and Nash. These decisions involved buy-low, donate-high art flipping arrangements in which the taxpayers purchased artworks and donated them to charities. The charities issued donation receipts for three or four times the donors' costs, so the tax refunds exceeded the costs to the donors. The FCA held that the value of the donations was limited to the amount of cash that the taxpayers paid for the artworks.

Despite these favourable court decisions for the CRA, and despite proposed amendments to the Income Tax Act announced by the Department of Finance on December 5, 2003, some donation arrangements continue to be promoted.

The CRA claims it previously reminded taxpayers that the proposed amendments are applicable to years after 2003. They limit donations made under tax shelters and other arrangements to a maximum of the donor's out-of-pocket costs.

The CRA continually audits many gifting arrangements and has completed a number of such audits. For donations made prior to 2002, the CRA has reassessed about 6,700 taxpayers, disallowing about $490 million in donations. For the 2002 tax year, a further 5,700 taxpayers, with donations of $360 million, have just been audited and reassessments were issued in all arrangements. For the 2003 tax year, about 1,800 taxpayers have been audited to date with some $66 million in donations disallowed. Generally, the CRA reduces the amount of the gift to no more than the cash paid by the taxpayer, and in many cases it is reduced to less than that. In some cases it is reduced to nil, when the donation is not a true gift.

The fact that investors in some of these tax shelter gifting arrangements have not been reassessed should not be interpreted as the CRA's acceptance of the arrangement. The CRA generally has three years from the date of assessment to reassess taxpayers and these audits can take over a year to complete.

—The author assumes no responsibility whatsoever for any information given above because the purpose of this column is not intended to provide professional advice including, without limitations, investment, financial, legal, accounting or tax advice. For specific advice to your situation please consult your professional advisor specializing in the area of your needs. Esmail Bharwani, MBA, MSc. (Entrepreneurial Studies), FCCA, FCGA, is a Barrister & Solicitor and associate with the firm of Miller Thomson LLP. He can be reached at 298-2418 or 288-3234, or e-mail ebharwani@millerthomson.ca. Esmail’s column appears weekly in the Calgary Real Estate News.

©Copyright 2000-2008, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Frequent problems found in the home

2007-11-28T08:01:00.000-07:00

by Paul Tobolski

As a professional home inspector for over 13 years, I have inspected many different types and styles of homes. I have inspected homes where I felt it would not be prudent to purchase the property due to the amount of deficiencies uncovered in the process. It is the number of deficient items, which when totally reviewed should dissuade any purchaser from investing in the property.
As a result of the overheated Calgary market many people are opting NOT to have a home inspection carried out at the time of the final offer. Home inspectors are now reverting to carry out inspections for the buyer once the new buyer has taken possession of their new home. By carrying out a post possession inspection, the new owner can plan for a maintenance schedule and budget for replacement of items requiring immediate attention.

Nothing really lasts forever in construction. I carried out an inspection on a home built in 1960.The home had a 46-year-old furnace, which was still in use during the inspection. I did a CO test on the warm air supply and detected a minor level of Carbon Monoxide. I would normally consider a furnace reaching its maximum useful age being at a maximum of 25 years. Because of the location I could not check the front compartment because the front of the furnace was not accessible due to wall construction and the location of the hot water tank. The home had original hardwood flooring which was badly cracked due to having an inoperative humidifier. The hot water tank in this same home was an amazing 25 years old. Most hot water tanks in Calgary have a life span of approximately 10-12 years. Just imagine how much money could have been saved if a mid-efficiency furnace had been installed. As a consequence, it is important to keep your home in a top level of maintenance.

In fact the Canadian Assocation of Home and Property Inspectors (CAHPI) recently completed a survey of the 10 most frequently found problems in homes our members inspected.

1 Improper Surface Grading and Drainage.

Homes that have soil sloping towards the foundation wall, down spouts directing water to the foundation wall, and other surface drainage problems were high on the respondents surveyed. (35.8%). *

2. Improper Electrical Wiring.

The survey showed that this was the second most problematic area discovered during the inspection process. Such things as insufficient electrical plugs, no ground fault circuit interrupters, electrical panels which only had 60 amp service or were completely full, and electrical work carried out by unqualified electricians.

3. Roof Damage.

Members of CAHPI felt that this was the third most frequent problem found during the inspection process. (8.5%) Such items as leaky roofs caused by worn out or damaged shingles, lack of proper flashings, and other poor maintenance problems were among the common complaints. *

4. Heating Systems.

Problems in this category include older forced air furnaces; malfunctioning operator controls, cracked heat exchangers, leaky and poorly maintained humidifiers, poor venting situations, and in some cases blocked chimneys.

5. Poor Overall Maintenance.

Concerns listed here were cracked and pealing paint surfaces, crumbling masonry, makeshift wiring or plumbing, and broken fixtures or appliances. Most home inspectors advise their clients that it is not unusual to consider 1% to 3% of the home’s worth should be dedicated to future maintenance by the homebuyer.

6. Structurally-related Problems.

Damage to such structural components as foundation walls, floor joists, rafters, and window and door headers may be a result of problems in previous categories.

7. Plumbing.

Plumbing defects rank high among the house problems encountered. These include the existence of old or incompatible piping materials, faulty fixtures and waste lines, dripping taps and leaking toilets. *

8. Exteriors.

Flaws in a home’s exterior including windows, doors and wall surfaces cause water and air penetration due to inadequate caulking and/or weather stripping. *

9. Poor Ventilation.

Many homeowners have “over-sealed” their homes resulting in excessive interior moisture. This can cause rotting and mould problems and premature failure of both structural and non-structural elements.

10. Miscellaneous.

These were mainly cosmetic items and not listed individually in the survey.

*At least four of the ten problems identified above are related to the damaging effects of water. Keeping water out of your home is the homeowner’s most important and challenging objective.

-The opinions and ideas expressed are solely those of the author, and not necessarily those of the Calgary Real Estate News. Paul Tobolski RHI, DIPL. A.A. & T. (Architectural Technology) is the owner of Ability Home Inspections and can be reached at 519-6038 or 286-HOME(4663). Paul has 40 years experience in the areas of design, construction, maintenance and inspection of homes. He has been a member of CAHPI (Ab.) since 1993 and is the past president of CAHPI (Ab.).

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Soaring loonie hits business hard

2007-11-28T07:59:00.000-07:00

Todd Hirsch, Senior Economist, ATB Financial

A lot of Canadians are gearing up for some high-powered cross-border shopping this Christmas season. With the Canadian dollar soaring to record highs, and plenty of disposable income in wallets, those United States shopping trips and online purchases will be hard to resist.

That's all fine for the consumer. But how are the loonie's lofty heights affecting the local business community?

Some of the impact will be obvious. For companies exporting to the U.S., the sky-high loonie is clearly a painful blow. Back in 2002, an item sold to an American buyer for, say, $100 US would have put $160 Cdn in the company's pocket. Today, that same product yields only 92 cents Cdn. -- a drop of over 40%.

It's not just exporters who are affected, either. Almost any retailer in the country will be under pressure this season -- pressure both to cut prices to match those in the U.S., as well as pressure to keep shoppers in Canada, period. Even if prices were the same in both countries, the massive U.S. market simply offers greater selection of everything. It's a matter of scale.

A retailer may offer four styles of trendy, $400 True Religion jeans (don't know what those are? Ask any teen). But in super-sized America, giant retailers can offer 28 different styles. Size selection is greater, and they're cheaper to boot. It's hard not to love that. High-end Canadian retailers of big-ticket items such as autos, jewelry, designer clothes, and major electronics are facing the most serious battles.

Prada and Lexus lovers can afford these cross border shopping trips, but the "Blue Light Special" bargain hunters and coupon-clippers likely can't.

Even the food and restaurant industry can look forward to tighter times as a result of the dollar. It's true that most Canadians are not likely to fly to America for dinner and drinks on a Tuesday night. But if that Canadian has just returned from a weekend shopping trip--particularly if that trip involved a new Gucci bag or Armani suit--the remaining discretionary budget for things like eating out will likely be pared back.

Aside from exporters, high-end retailers and the leisure sector, other businesses will be affected too, some of them, thankfully, in a positive way.

Food retailers can expect prices to fall for fresh fruits and vegetables, most of which are imported from the U.S. in the winter months. If they are not U.S.-grown but imported from elsewhere--for example, Mexico or Chile--they are still likely to be priced in U.S. dollars or distributed through U.S. wholesalers.

Prices for these goods should be coming down, which could help boost the profits for food retailers. However, competitive pressures between the grocery giants could result in those savings being passed on to consumers through lower prices, rather than higher profits.

Imported machinery and equipment from the U.S. will also fall in price. This could be a great time for companies which have been holding off on major equipment purchases to do just that. Newer, more modern technology will boost productivity and save money, both of which will help pad the bottom line.

Corporate balance sheets may be affected, too. Larger companies--many of which are neither big exporters nor importers--could still be hit by currency fluctuations, depending on their mix of financial assets. Most sophisticated companies have some type of hedging program designed specifically to protect their balance sheet against currency fluctuations.

For example, a portion of their assets may be held in U.S. dollars. This was a common (and smart) strategy prior to 2002 when the sickly loonie was sinking.

By holding U.S. dollar denominated assets, the company was "hedged" or protected: depreciating Canadian dollar assets were offset by appreciating U.S.dollar assets. The same thing is happening now in reverse. Sinking U.S. dollar assets are offset by appreciating Canadian-dollar assets. Overall, if the hedging program is managed well, it should be a wash. But for those firms too highly exposed to U.S. dollar assets, some retrenchment may have to take place.

The high value of the Canadian dollar is causing delight for Canadian shoppers and snowbirds. But almost every business in Canada will be affected in some way. How long it will last, and how high the loonie has yet to soar, is anybody's guess. But given the volatility of world currency markets and sagging confidence in the U.S. dollar, there could still be more pain--and gain--in the months ahead.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

What is a water furnace?

2007-11-27T09:13:00.000-07:00

by George Dalgleish

Q: What is a water furnace and how does it work?

A: A water furnace is a mechanical device that transfers geothermal heat from the ground in your backyard to heat your home in the winter and transfers heat out of your home to cool it in the summer. This machine uses the heat pump principal to transfer heat. It doesn’t generate heat; it extracts it from one source and transports it to where you want it. The earth has the ability to store heat, which it does very efficiently.

The temperature of the earth in Canada is between 35 to 50 degrees F. A geothermal heat pump will transfer heat from a lower temperature location and then transfer it to a higher temperature location.

If you find this hard to comprehend, take your refrigerator as an example. Using special machinery, heat is removed from the freezer part of your fridge through a cycle of evaporation, compression, condensation and expansion. Even the freezer compartment is very cold; the energy extracted from the freezer turns up as heat in the coils on the back of the refrigerator. The refrigerator moves heat from inside the fridge to a warmer area outside the fridge.

A central air conditioner does the same thing. On a hot day, it moves heat from inside your home to the outside and expels it into air that may be 20 degrees F. or more, warmer than the air in the home.

The water furnace takes heat from the ground under you backyard and transfers it into your home.

There are two ways that heat is transferred into the home. One is to drill vertical holes in the ground and insert a closed-loop pipe system that is connected to the water furnace at both ends. There are usually a number of holes with loops of pipe in them. The holes will vary from 50-feet to 150-feet deep.
A solution of water and antifreeze is pumped down the loops. During this process heat is extracted from the ground. Also, trenches can be dug and the pipes installed in the trenches.

The liquid, after making its journey from the furnace through the pipes in the ground, may arrive back at the furnace with temperatures close to the ground temperature.

The cycle starts as cold liquid refrigerant passes through a heat exchanger known as the evaporator. There the refrigerant absorbs heat from the low temperature liquid through the looped pipes.

The refrigerant evaporates into a gas as heat is absorbed. The gaseous refrigerant then passes through a compressor where the refrigerant is pressurized, raising its temperatures to over 180 degrees F.

The hot gas then circulates through a refrigerant-to-air heat exchanger where heat is removed and pumped into the home at about 100 degrees F. When it loses its heat, the refrigerant changes back to a liquid.

The process starts over again as the liquid in the closed loops start their journey back into the ground. Since the water furnace transfers heat, it can be done very economically. That means, if your only source of energy is electricity, a geothermal heat pump can save you money.

Check with your local heating Contractors and dealers in your area for information and cost of this type of heating system, the energy efficiency and the economic value as well as being a good system for the environment.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Keeping your financial life simple and sweet is easy

2007-11-27T09:09:00.000-07:00

by David Lush

In the rush of everyday life, it is often the details that get missed. But the success of your financial life depends on getting the details right. To help you stay on track in a busy world, here are 10 ways--plus one--to keep your financial life simple and sweet:

1. Set a budget and stick to it. Take a critical look at your income and expenses and establish a realistic monthly budget that includes an amount for savings.

2. Get debt under control and keep it there. Develop good spending habits and use debt wisely. Pay off credit cards and other high-cost, non-tax deductible debt first.

3. Maximize your Registered Retirement Savings Plan (RRSP) contributions. Take full advantage of this tax-deferred savings builder by starting early and making maximum contributions.

4. Develop an education savings plan for your children. Use the tax-deferred compound growth available under a Registered Education Savings Plan (RESP) to offset the rapidly rising cost of a post-secondary education.

5. Be a prudent money manager. Carefully consider where each dollar is going. Set enough aside on a regular basis to achieve your goals with a Pre-Authorized Contribution (PAC) program that automatically invests a specified amount in securities held in your RRSP or non-registered portfolio.

6. Check and revise your insurance coverage to match your changing needs. As your life evolves (career, marriage, family) your need for income protection and estate planning changes.

7. Make tax-efficient investment decisions. Dividends and capital gains are taxed more favourably than interest. Therefore, it’s usually a tax-wise decision to hold investments that earn interest inside your tax-deferred RRSP and those that earn dividends and capital gains outside your RRSP.

8. Establish an asset allocation plan that complements your financial planning needs. Your investment portfolio should include assets from the three asset categories: cash, fixed income investments and equities. Peaks in one category tend to cancel out valleys in another and the overall result should be steadier long-term growth.

9. Consolidate and simplify. If you have a bewildering array of investments, simplify your portfolio so it’s more easily managed and restructure it periodically to align it with your evolving personal goals

10. Minimize your taxes. Take advantage of all of the tax deductions and tax credits available to you. Examples are moving expenses, child-care expenses, tuition fees, medical expenses, charitable donations, and safety deposit box charges.

11. Develop a financial plan and stick to it. A professional advisor can help you ‘simplify’ the financial steps required to realize your life goals

—For more information on this topic or on any other investment or financial matters contact David Lush, CFP of Investors Group at 256-5890. This column, written and published by Investors Group Financial Services Inc. (in Quebec — a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Insurance products and services are distributed by I.G. Insurance Services Inc. (in Quebec — a Financial Services Firm). Insurance licence sponsored by The Great-West Life Assurance Company outside of Quebec.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Highest October on record for MLS home sales

2007-11-27T09:07:00.000-07:00

by Canadian Real Estate Association

Multiple Listing Service (MLS) resale housing activity in Canada's major markets had their strongest showing in October compared to any other year on record and are on track for a new annual record, according to statistics released by The Canadian Real Estate Association (CREA).

Seasonally adjusted national MLS sales activity rebounded to 28,966 units in October 2007, up 1.3% from levels recorded in September. The rebound follows three consecutive monthly declines since sales peaked in June, and reflects a rise in activity in Toronto, Edmonton, Hamilton-Burlington, Victoria, Montreal, Quebec City and Winnipeg. Higher activity in these markets more than offset sales declines in Calgary, Vancouver, Saskatoon and Sudbury.

Actual (unadjusted) MLS sales activity was up 7.6% in October compared to the same month last year. Transactions posted year-over-year gains in every month except September this year, putting activity on track for a new annual record. MLS home sales activity for the year-to-date in October totaled 319,411 units, an increase of 8.6% compared to levels for the first 10 months last year.

Year-to-date transactions continue running ahead of year-ago levels in nearly all major markets.

Seasonally adjusted new MLS residential listings edged down 0.2% month-over-month in October 2007 to 49,497 units.

This is the fifth highest monthly level on record. New listings receded from their peak in Calgary, and eased to their fourth highest level in Edmonton. The decline in new listings in these markets more than offset a rise in new listings in Toronto and Montreal.

“The trend in new listings shows there is no panic selling in Canada's housing market,” said CREA President Ann Bosley. “It is important Canadians understand the differences between the Canadian and U.S. housing markets, and their local REALTOR® can provide that information.”

CREA's MLS revised market forecast for 2008 indicates a gradual slowdown in the re-sale housing market nationally, but MLS sales volume will remain at near record levels. “The MLS residential average price is forecast to set new records in all provinces next year, but those increases will become smaller as the resale housing market becomes more balanced in 2008,” Bosley added.

The monthly rise in sales activity in October 2007 caused the resale housing market to tighten a little compared to the previous month.

Winnipeg, Regina and Hamilton-Burlington were the tightest of Canada's major markets in October, while Edmonton, Calgary and Windsor were the most balanced.

The major market MLS residential average price rose 10.6% year-over-year to $333,544 in October--the sixth consecutive month that the increase exceeded 10%. The average price reached the highest level on record in Regina, Saskatoon, Toronto and Montreal.

“More than half of major markets posted a monthly increase in activity,” said CREA Chief Economist Gregory Klump. “By the end of next month, MLS sales activity is likely to exceed the annual sales last year.”

“Negotiations still favor the seller in nearly all major markets,” said Klump. “This suggests resale housing demand remains on a strong footing, and that price increases will continue to exceed overall consumer price inflation.”

-The Canadian Real Estate Association (CREA) is one of Canada's largest single-industry trade associations, representing more than 85,000 REALTORS® working through 99 real estate Boards, 10 provincial Associations and one territorial Association. CREA's primary mission is to represent members at the federal level, and to defend the public's right to own and enjoy property. This report is published by the Communications Department of The Canadian Real Estate Association (CREA). Further information can be found at www.crea.ca.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Why is fair market value important for income tax purposes?

2007-11-27T09:05:00.000-07:00

by Esmail Bharwani

Various provisions of the Income Tax Act deal with the concept of fair market value. I have been asked a question: Why is it so important to ensure that transactions between people who do not deal at arms length be at the correct fair market value?
What does fair market value mean? I would simply put it in this way: Fair market value means the price a willing buyer is prepared to pay without any influence or bias to a seller who is willing to accept the proposed purchase price without any compulsion and having considered all other offers received in the open market for the product or service.

Canada Revenue Agency (CRA) is concerned that where a taxpayer acquires anything from a person with whom he does not deal at arms length at an amount in excess of the fair market value, what that person has in effect done is inflate the cost of the property in a non arms length transaction. In such circumstances, paragraph 69(1) (a) would deem the person to have acquired it at fair market value. As a result, the vendor or transferor of the property would be required to include the actual proceeds received in computing his/her income.

On the other hand, where anything is disposed of by a taxpayer to a person with whom he does not deal at arms length for no proceeds or for proceeds less than its fair market value, they have in effect attempted to artificially prevent from reporting actual price and thus reported reduced amounts of proceeds in computing income. Paragraph 69(1) (b) deems the taxpayer to have received proceeds equal to its fair market value.

The term transfer may include any transfer either by way of sale of by gift inter vivos, or it may also include a transfer to a trust which arises through bequest or inheritance on the death of a person.

The above point is well explained in the Interpretation Bulletin IT-406R2 issued by CRA. The discussion focuses on CRAs application of the law with regards to under and over pricing of properties when disposed of.

Take an example, let us assume you are the seller and you have a rental property that you beneficially own. Its market value is $100,000. You are selling this property to your sibling, who is a non arms length party to you. A non-arms length party is one who is related to you and can be influenced in accommodating price fixing for the purposes of the sale or transfer in question. Although the market price is $100,000, you choose to sell for $80,000. Your buyer pays you $80,000. What you have done is passed on your $20,000 to the buyer without any payment for it. You have also avoided having to pay the tax on that $20,000 of gain or created loss which you may choose to utilize against your other gains.

If CRA applied section 69 to your situation, they would deem your selling price to be $100,000, thereby increasing your gain by $20,000 or reduce your loss by that amount, as may be applicable. Your (sellers) return is reassessed and taxes are levied with interest. You might say if the seller is going to pay the tax on $100,000 then the buyer should get a corresponding adjustment to their purchase price, or to be precise adjusted cost base. Well think of it why the purchaser should get stepped-up cost base when they have not paid for it. In this case, therefore, there will be no adjustment to the adjusted cost base of the buyer. The buyers adjusted cost base will remain at $80,000.

Now see what happens to the buyer upon subsequent sale. The buyer sells the property for, say $150,000. The buyers adjusted cost base has been determined at $80,000, which is the amount they paid on purchase of it. The gain therefore would be $70,000, which includes the $20,000 on which the previous seller has already paid taxes.

Is there a double tax or duplication of tax? Yes, indeed. The tax on $20,000 is paid twice. Why? The answer is this particular provision is designed to punish those who manipulate deals. This provision has caught many unaware and unprepared taxpayers.

The problem is complicated because by the time the seller is audited it could be anywhere from two to three years down the road by which time the seller has already placed their funds in other investments, or have consumed the capital for personal pleasure purposes. When time comes to pay the taxes the seller has no money.

There is a solution to this problem, which some may find cumbersome and not acceptable. CRA in its IT-406R2, paragraph 5 states, ...where it can be shown that the transfer occurred at an amount other than the fair market value by reason of an honest error and not by deliberate attempt to evade or avoid tax, the Department may permit the adjustment in the amount of the proceeds of disposition or purchase price to reflect the amounts deemed by paragraph 69(1) (a) or 69(1) (b) to have been paid or received. The onus will be on either or both taxpayers, as the case may be, to substantiate a claim that the incorrect valuation was caused by an honest error.

Consider including a price adjustment clause which complies with the requirements set forth by CRA in their Interpretation Bulletin IT-169. It states, If the parties have agreed that, if the Departments value is different from theirs, they will use the Departments value in their transaction, that is their choice and the Department will recognize the agreement in computing the income of all parties, provided that all of the following conditions are met:

(a) The agreement reflects a bona fide intention of the parties to transfer the property at fair market value and arrives at that value for the purposes of the agreement by a fair and reasonable method.

(b) Each of the parties to the agreement notifies the Department by a letter attached to his return for the year in which the property was transferred

(i) that he is prepared to have the price in the agreement reviewed by the Department pursuant to the price adjustment clause

(ii) that he will take the necessary steps to settle any resulting excess or shortfall in the price, and

(iii) that a copy of the agreement will be filed with the Department if and when demanded

(c) The excess or shortfall in price is actually refunded or paid, or a legal liability therefore is adjusted.

This discussion will be continued in future columns.

The author assumes no responsibility whatsoever for any information given above because the purpose of this column is not intended to provide professional advice including, without limitations, investment, financial, legal, accounting or tax advice. For specific advice to your own situation please always consult your professional advisor specializing in the area of your needs. Esmail Bharwani, B.Admin., FCCA, FCGA, MBA, MSc. (Entrepreneurial Studies), LLB is a student-at-law with the firm of Fraser Milner Casgrain LLP. He can be reached at 268-7118 or 288-3234, or by e-mail at esmail.bharwani@fmc-law.com. His Web site address www.ucalgary.ca/~ebharwan. Esmails column appears weekly in the Calgary Real Estate News.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Paying tax on lottery winnings, personal injury damages and punitive damages

2007-11-27T09:03:00.000-07:00

by Esmail Bharwani

In recent months I have received a number of questions from the readers of my column. I will attempt to clarify specific issues raised by some of them.
The first question that I was asked was whether the winnings from lotteries are taxable, especially the big wins from Lotto 6/49. To respond to this question, I made a reference to a recently published book by Carswell, entitled Principles of Canadian Income Tax Law (5th Edition) written by Professor Emeritus Peter W. Hogg of Osgoode Hall Law School, Joanne MaGee, Associate Professor of Atkins Faculty of Liberal and Professional Studies and Jinyan Li, Associate Professor of Osgood Hall Law School. According to these authors, windfalls such as a lottery prize or a valuable find remain untaxed in our tax system. In the United States windfall gains are taxable under Section 61(a) of the Internal Revenue Code. They are not as such taxable in Canada; however, gambling winnings are taxable as income from a business if gambling activities were organized and carried out systematically.

In the past, attempts have been made and recommendation has been given to the government to include windfalls as taxable because it does increase taxable capacity no different than dollars received in other ways. This was Carter Commissions view, and in fact, it was recommended that they be included in income. However this was not accepted by the House of Commons Standing Committee on Finance.

The second question came from someone who was recently awarded damages for personal injury and she asked whether the compensation she received was taxable. Again referring to the book I mentioned earlier, the authors state that damages for personal injuries are not taxable for income tax purposes because they are not from a productive source. In a case called Schwartz, Justice Mahoney stated in the case of a personal injury victim, the source of the right to damages is a persons right not to be injured by the tort of another. That is not a source of income within the contemplation of paragraph 3 (a) of the Income Tax Act (R. Schartz [1994] 2 C.T.C. 99, 94 D.T.C. 6249 Fed. C.A.), Para 17. The authors state that although the Federal Court of Appeal decision was reversed by the Supreme Court of Canada, this statement was not over ruled. To be clearer about the issue, the personal injuries include both physical injuries (loss of limb) and non-physical injuries (loss of dignity or reputation as a result of the libel or defamation).

The authors state that the damages for personal injuries or death generally include amounts paid on account of compensation of pain and suffering, the loss of amenities of life, the loss of learning capacity, the shortened expectation of life, the loss of financial support because of the death of the supporting individual, reimbursement of out-of-pocket expenses (such as medical and hospital expenses), or compensation for accrued or future loss of earnings (IT Bulletin 365 R2).

But do not get confused between damages for personal injury and punitive damages. The authors define punitive damages as an amount a person will receive from a person who caused the harm as punishment for outrageous conduct. In the case called Bellingham the authors state that the additional interest awarded to the taxpayer under the Expropriation Act was considered by the court to be a punitive damage award.

As a matter of public policy, under the Expropriation Act the expropriating authorities are obligated to pay a penal sum in circumstance where the authoritys behaviour falls below a prescribed standard. Because punitive damages are intended to punish the wrong doer and not to compensate the victim, the victim would be considered as an incidental beneficiary. The authors state that although the punitive award may actually put the victim in a better economic position than before the harm was experienced, it is not considered to be income from a source under Section 3.

Such an award according to the authors was analogized with a gift in Bellingham at least from the perspective of the recipient.

I have seen more questions from business owners. They ask questions about the type of expenses a person can deduct from his or her business income. It is difficult to answer this question without greater understanding of the taxpayers situation, however, there are principles that, if used to analyse the case, would make it easier to determine whether an expense or outlay may be deductible for tax purposes.

The authors of the book suggest using following points as general guidelines to assess if the deductibility is even within the realm of the business being considered and whether the expense is deductible according to accounting principles and practices such as the generally accepted accounting principles:

1. Whether the expense is normally incurred by another taxpayer carrying on similar business. If it is then maybe there is an increased likelihood that the expense is a business expense.

2. Whether a particular expense would have been incurred if the taxpayer were not engaged in the pursuit of business or property income or whether in absence of the business activity, the need to incur an expense (such as food, clothing, and shelter) would still be there.

3. Whether the taxpayer could have avoided the expense without affecting the gross income.

4. Whether the expense is an expense of the trader or of the trade. If the expense was an incident of the trade part of the business operation itself, it is an income earning expense.

5. Whether the particular expense was incurred in order to approach the income producing circle such as clothing, childcare, housekeeping, or commuting) or incurred within the circle itself. Only the latter would be deductible as income earning expenses, referred to Justice Iacobucci of the Supreme Court of Canada. He did not consider this test as a helpful analytical tool in the Symes case, but said that it may be of assistance in understanding generally accepted business expenses.

The author assumes no responsibility whatsoever for any information given above because the purpose of this column is not intended to provide professional advice including, without limitations, investment, financial, legal, accounting or tax advice. For specific advice to your situation please consult your professional advisor specializing in the area of your needs. Esmail Bharwani, MBA, MSc. (Entrepreneurial Studies), FCCA, FCGA, is a Barrister & Solicitor and associate with the firm of Miller Thomson LLP. He can be reached at 298-2418 or 288-3234, or e-mail ebharwani@millerthomson.ca. Esmails column appears weekly in the Calgary Real Estate News.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Getting the lowest interest rate is simple

2007-11-21T08:22:00.000-07:00

by Sherry Jenkins

When prospective homeowners head out looking for a mortgage for their new home, there is often one burning question in their mind: “What is the lowest interest rate I can get?”

Although endless marketing campaigns will try to convince borrowers the interest rate is the only factor worth considering, the truth is it is more important to determine which mortgage product is available to you, based on your unique financial situation, and then consider the interest rate which corresponds with that mortgage. As consumers we have all had the experience of believing something will be one way only to have it change as we wade in a little deeper.

Considering only the interest rate when looking for a mortgage has a strong likelihood of turning into a similar experience, primarily because there are so many factors that contribute to the interest rate an applicant is eligible for. It is impossible to know the lowest rate available to borrowers without gathering additional information. Lenders have specific guidelines and programs in which borrowers must qualify for, each with its own pricing. The three major components lenders will use to determine if an applicant is their ideal borrower are the individual’s income situation, credit history and the type of down payment, if one is available.

First off, when lenders are evaluating the applicant’s income, they will look for information such as whether the applicant is employed or self-employed. If they are employed, are they permanent with guaranteed income or is there some other type of payment arrangement? If the applicant is self-employed the lender will want to know for how long in an attempt to determine stability in the applicant’s income. Additionally, many self-employed individuals choose to incorporate and pay themselves a marginal wage, to minimize taxes. While this can be a great tax strategy it complicates proving personal income and could potentially limit the lenders who will finance the mortgage.

Secondly, lenders will evaluate the applicant’s credit history. The payment history, length of account history, credit limit and current balances will all be considered. If the applicant only has a $500 limit credit card for the past six months is not likely to convince a lender a $300,000 mortgage is the next logical step. Alternatively if the borrower has larger credit limits which are utilized entirely then this will not demonstrate a strong applicant to the lender either. All personal debt the borrower currently has will be factored into the ability to repay the mortgage and may affect qualification or determine which lender will consider the mortgage request.

Finally, the applicant’s down payment is another major consideration lenders take into account. Specifically lenders will look at how much down payment can be contributed? What is the source of the down payment? For some programs gifted down payment is acceptable, while others will require the down payment be from the borrowers own resources. More confusing yet is that some lenders will consider the gifted down payment the borrowers own resources, while others will not, it all depends on the lenders internal policies.

Another alternative to contributing a down payment is to consider a 100% financed mortgage, which of course comes with its own set of qualifications which vary from lender to lender.

With all of these criteria and more an experienced mortgage broker will be able to determine the best mortgage product available to an applicant. As a consumer, be wary of anyone who quotes interest rates without knowing your full situation. What value is it to know the lowest interest rate of a lender you may not even qualify for?

All mortgage brokers have access to the same rates and products in our marketplace, the playing field is level in that regard. A mortgage broker’s true ability to differentiate themselves is demonstrated through product knowledge, persistence and the level of service they provide, not interest rates.

Do yourself a favour and look for a mortgage broker who will get the facts upfront, this will avoid future disappointments as you progress through the home buying process.

—Sharon Essington is a Mortgage Consultant with Canada Mortgage Direct. Sharon specializes in providing a creative approach to mortgage financing for individuals looking to improve their lives through real estate. To request a copy of your FREE report “Buy Sooner With No Money Down”, or for more information on this topic, call 403.239.8250

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Insulation and ventilation key to a healthy attic

2007-11-21T08:19:00.000-07:00

With the onset of cold weather, it is important to have appropriate levels of insulation and attic ventilation.
by Paul Tobolski

When I graduated from the Northern Alberta Institute of Technology four decades ago, the standards for insulation called for walls to be insulated to a level of R-7. At that time, walls were insulated to an R-12 level.

Only a few years earlier wall and ceilings even had a lesser level requirement.

These levels are considered inappropriate to the standards used today, as ideally our walls should have an insulating package of R-28 in walls and R-40 in the ceiling spaces.

I have been an active home inspector for nearly 15 years and in that time I have inspected many homes built during different decades where insulation levels were less than required by today’s standards.

In fact, some of the older homes I have seen have very limited levels of insulation in the attic space.

In very rare cases I have also inspected a few homes that did not have any insulation in the attic.

This could be due to not having easy access to the cold attic space, or it may have been due to the extreme difficulty of placing insulation in the attic.

Generally, the insulation is installed in the attic space through the attic hatch or just prior to completing the plywood roof sheeting and the installation of the shingles.

The purpose of the space above ceiling is where a thermal break should be installed between the cold outside exterior air and warm air of the inside of your home.

This attic space also requires proper ventilation to allow for the removal of moisture laden air to escape to the exterior by either natural physics, allowing warm air to rise and exit through roof ventilators, or by mechanical means by a wind turbine or a motorized ventilator.

Generally, venting is accomplished by having ventilation in the eaves with continuous vented aluminum soffit or by having adequate vent holes in the plywood or wood soffit and in some cases venting may be through the gable ends. Standard venting requires a level of 1:300.

In other words, if you have an attic of 300 square metres you require one full metre of venting. More would be even better. Never block any of the vents entering into the attic.

All homes should have easy access to the attic through an attic hatch.

Ideally, your attic hatch should have been weather stripped and held tightly in place by using two hooks and eyes.

Over the years different materials have been used for insulation.

Homes built in the late 1940s to the early 1950s used a product commonly known as zonolite or vermiculite.

Over the past few years this product has been banned because vermiculite may be a product that contains asbestos.

Only laboratory testing can ascertain if the zonolite contains asbestos.

Never disturb or move any of the zonolite in the attic.

You must take the utmost precautions when dealing with this material and for additional information, go to the web and see the information the Canada Mortgage and Housing Corporation has to say concerning this product.

In the late 1950s and onward, wood shavings were the common material used to insulate the attic space.

Normally, three to four inches (75 to 100 mm) was the standard level used.

At best this would provide a value of approximately R-12.

From the mid ‘70s and onward cellulose fibre (finally chopped up news print with a fire retardant added) has been used.

Also fiberglass loose fill or fiberglass batts became more popular and the insulation requirement rose to R-20.

Today the minimum standard of insulation is for approximately ten inches (250 mm) to equal R-32.

Ideally I recommend at least 12 inches of insulation being the minimum standard of R-40.

Newer products such as white non-allergenic blown in products and newer types of foam that does not contain UFFI (Urea Formaldehyde Foam) have started to show up in construction.

Canada Mortgage and Housing Corporation and Natural Resources Canada consider that adding appropriate insulation in your attic can save as much as 30% of your annual heating bill.

-Paul Tobolski has written for the Calgary Real Estate News for over four years. To review over 100 articles, find the Calgary Real Estate News web page and look for a link to articles, then search authors to find the articles archived. Paul is the owner of Ability Home Inspections and may be reached at 519-6038 or at home at 286-4663

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Handling indoor humidity when the weather changes

2007-11-21T08:15:00.000-07:00

by George Dalgleish

Although we are enjoying a beautiful fall season, winter is just around the corner. Soon many homeowners will be experiencing condensation on their windows or even on some of their walls if they are poorly insulated.

During the cold Canadian winter months, indoor humidity has to be controlled. Too little humidity is not healthy, causing dry nose and throat and other related health problems.

Humidity is added to the air in the home during cooking, using the kettle, showering and bathing, and doing the laundry.

Humidity can be generated by adding a humidifier to an existing forced air furnace or by purchasing a portable humidifier.

However, getting rid of too much humidity is a bit more of a problem. Although you can turn off the humidifier, you can’t stop cooking or bathing.

Before you decide how much humidity you should add or get rid of you need to understand the basic relative humidity principal.

The amount of moisture in the air is relative to its temperature. The colder the air, the less humidity it can hold.

Conversely, the warmer the air, the more humidity the air can hold.

For example, lets say the air outside is —35ºordm;C and the relative humidity is 100%. Let’s assume that a cubic foot of air at —35ºordm;C can only hold two grains of moisture. Thus the relative humidity is 100%. But when the same cubic foot of air is warmed to +21ºordm;C, it has the ability to contain eight grains of moisture so now the same cubic foot of air’s relative humidity is 25%.

That explains why condensation starts to form on the bottom edge of windows when the cold weather arrives.

Air in contact with a cold window pane starts to give up its heat as the glass absorbs the heat.

Since cold air is heavier than warm air it tends to fall down the pane and as it does, it gives up even more heat. As the air gives up its heat, its ability to hold moisture is lessened and more moisture is deposited onto the pane. The relative humidity is reduced.

To prevent or lessen the amount of water that collects on a window pane depends on the thermal efficiency of the window as well as the amount of humidity in the air inside the house.

Even very good windows will gather condensation if the humidity in the home is too high when compared to the temperature outside.

You may have to adjust the humidity level in your home a number of times before the proper level is attained, providing maximum comfort yet not forming condensation on the glass.

The best way to control the amount of humidity in the home is to install a heat recovery ventilation system.

This machine removes moisture laden stale air from the home and brings in fresh air of equal volume and at the same time the warm air going out heats the fresh cold air coming in. Thus, very little heat is lost.

The ventilation machine is controlled by a humidistat.

You simply set the humidity to the proper level and the unit will exhaust moist air at any time that the humidity level goes below the set limit. When first installed it may take a few days or a week or so to get the humidity levels down to where you want them as residual moisture is removed from the house. Also, if you hear that the outside temperature will be dropping ten or more degrees in a day or so, you should lower the humidistat to give the machine a head start.

Most good, up-to-date knowledgeable home building contractors know the value of heat recovery ventilation to the homeowner. They can also be installed in existing homes. A good unit built for the Canadian climate, properly installed will virtually eliminate window condensation problems and at the same time provide good healthy fresh air.

—George Dalgleish has been writing the Home Handyman for the Calgary Real Estate News for many years.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited. www.mcmurraysbesthomes.com

Stabilizing your finances after a divorce

2007-11-20T08:53:00.000-07:00

by Sharon Essington

While there are many couples getting married each year, the sad reality is that many other relationships are ending in divorce.

From a financial standpoint, divorce is a huge undertaking and the truth is that how the financials are handled in this situation will determine if the divorce is something that could limit your options for many years to come.

When a home is involved in the separation, both parties will need to decide if the property will be sold or if one individual would like to remain in the home and buy the other party out.

In most cases each individual would be entitled to half the equity in the home, which is generally a substantial amount, especially with the property value increases Calgary has witnessed over the past few years.

To make arrangements for this large amount of money, it is common for the individual staying in the home to borrow against the property to arrange for enough funds to reimburse their partner, which is known as a refinance mortgage.

Depending on the individual’s income amount, employment type and credit history, they may be eligible to access as much as 95% of the value of the home.

Self-employed individuals can now refinance as much as 90% of the property value even if they have hard-to-prove income.

Generally speaking, if the applicant qualifies for either of these two programs, they should receive very competitive interest rates and extended amortizations, which will assist in keeping the new mortgage payment low.

Past credit issues do not automatically disqualify the applicant from applying for a refinanced mortgage.

There are many lenders who will still consider the application and in some situations might even allow for a higher mortgage amount, even as much as 100% of the value of the home. While this could come with a higher interest rate attached to it as a temporary solution, it is not a bad option to consider, especially if the reason for staying in the home is to try and stabilize the situation for any children involved. A couple of years down the road the applicant will likely qualify for a mortgage with better terms.

While dissolving the ownership of the property is often the primary focus, it is important not to overlook the fact that all joint credit accounts will need to be resolved as well.

In fact, the method in which these accounts are handled could determine whether or not the individual wanting to stay in the home can qualify for a new mortgage or not, which directly affects the other party who, in turn, is looking to be paid out their equity share.

All joint credit accounts will report payment history to both of the individuals’ credit bureaus.

The ideal resolution in most situations is to close all mutual credit accounts or have the other party removed as soon as the separation begins.

Often, miscommunication will result in payments being late or missed entirely because one party believed the other was taking care of it, which will only lead to more frustration along the way.

In some instances it will be in the best interest of one party to pay off the mutual debt themselves and then look for reimbursement in the divorce settlement. It is advisable to always discuss such plans with your divorce lawyer before taking action, but in terms of your personal credit history, it takes seven years for past credit issues to come off your personal credit report, which is a long time to have to live with someone else’s payment negligence when you are trying to start a new life.

Talk to an experienced mortgage broker today if you are facing a divorce and not sure of your financing options. The time saved by going to a one-stop shop can be better directed at working through other issues and moving forward with your new life. With the proper advice, you can take the steps to not have this divorce limit your options for a number of years into the future.

—Sharon Essington is a Mortgage Consultant with Canada Mortgage Direct. Sharon specializes in providing a creative approach to mortgage financing for individuals looking to improve their lives through real estate. To request a copy of your FREE report “Buy Sooner With No Money Down”, or for more information on this topic, call 403.239.8250.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited.

Thinking and acting like owners

2007-11-20T08:49:00.000-07:00

Mark Anielski, President and CEO Anielski Management

There were two key messages contained in the recent Alberta Royalty Review Panel's report. The first was that, as Albertans, we should begin to think like owners; the second was that we “do not receive (our) fare share from energy development and (...) have not, in fact, been receiving (our) fare share for quite some time."

I agree.

My own studies, which I began in the early 1990s, of Alberta’s royalty and energy rent regime (defined as a surplus value, i.e. the difference between the price at which a resource can be sold and its respective extraction or production costs, including normal returns), support the Panel’s findings that Albertans receive significantly lower returns on their oil and gas assets than other jurisdictions such as Norway, Alaska and even conservative states such as Texas and Wyoming.
Alberta's "generic" oilsands royalty regime, which charges a mere 1% on net profits (after all capital is expensed), is so generous that it can be compared to allowing a farmer to write off a combine machine or a businessman an entire office building against one year’s revenues!

It isn’t surprising, of course, that the oil industry would complain about any increase in Alberta's oil and gas royalty structure. But it is important to remind the industry that the oil and gas in the ground represents a significant asset for Albertans and all Canadians.

As the owners of the asset, Albertans and Canadians must at least be assured that they are receiving a fair and optimum share of the wealth these resources are generating.

As owners, we expect our government — as asset managers - to fully account for the costs incurred and the benefits accrued from the exploitation of our assets. The government then has the responsibility of ensuring that we receive a fair share of the wealth being generated while ensuring that the industry remains viable.

A full accounting of the energy rents must include transparency in the real costs of extracting the resource. The industry’s obligation to disclose its actual operating and capital costs should be made commensurate with its license to extract the resource.

A full accounting would clear the air and answer industry complaints that the Review Panel's analysis did not account for the real cost conditions it faces. In the absence of a full accounting, the debate is rhetorical, circular and filled with innuendos.

As an Albertan, I would like to propose that my government introduce the following policy recommendation:

That some of the extra $2 billion we should be legitimately collecting as our fair return on our natural capital be used to buy a 5 per cent or greater share in all of the companies that are operating in Alberta's oil patch.

Such an investment only follows the tradition set by many other jurisdictions, such as Norway and recently Newfoundland.

The investment would provide us with a legitimate right to ask for industry production cost information so we would have a basis of assuring that we are in fact collecting a fair share.

Ironically, I'm sure we already have this right to exercise with some of our Heritage Fund invested in petroleum company stocks.

Consider the benefits that Norway now enjoys by investing directly in its North Sea oil reserves; it's Petroleum Fund (now renamed the Government Pension Fund- Global) has grown to US$285 billion, generated a return of 7.9% in 2006 and grew by an astounding $78 billion in a single year from what it collected from its oil and gas royalties!

Norway, with similar oil and gas reserves as Alberta and with a population of 4.5 million people, could earn $22.80 billion US at an 8% return from its in 2007 fund assets.

That would roughly equal 69 percent of the $33.1 billion of the Alberta Government's forecasted expenditures for 2007!

Norway is both thinking, and acting, like an owner of its resources. So should we.
—Mark Anielski is an economist, president of his family-owned corporation Anielski Management Inc. and author of The Economics of Happiness: Building Genuine Wealth.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited.

Transferring a principal residence to a corporation

2007-11-20T08:45:00.000-07:00

Transferring a principal residence to a corporation
by Esmail Bharwani

I have observed a recent trend with some homeowners to transfer their personal residence to their privately-held family corporation. I am told they do this because they believe that their home will remain creditor-proof, that is, immune from third party exposure. This would depend on how the corporation is structured and owned. It will also depend on whether the liability arises in one’s role as a professional where there may not be a limit to a professional’s liability against specific type of professional negligence claims.

I observe that where shareholders have equity in their homes, they transfer their residential property to their corporations in order to draw money out of the corporation. They draw funds from their corporations without paying tax at the employment income rate or dividend rate. They pay tax in the corporation and allow the retained earnings to increase after paying the lower corporate tax rate. This way, they do not draw any salaries or dividends and personally pay no taxes. In the process of securing money from their corporations, they give up any prospect of ever claiming principal residence exemption on capital gains in respect that property.

Others have transferred their principal residence to a formally constituted discretionary family trust. This option has significant advantages, especially for professionals who have considerable exposure to third party claims. I have been involved in a number of these kinds of transactions. Also, beneficiaries continue to enjoy the benefit of principal residence capital gains exemption. This structure also offers the opportunity of designating capital gains to any one or more of the beneficiaries.

I have some difficulty in believing that many individuals undertake a thorough review of various options before making a decision on which alternative to follow. There are very severe tax implications in making a change in the ownership of principal residence.

In some situations it may make more sense to follow the course, however, in other cases it may lead to a negative outcome.

In this and the next article, I will highlight points for your consideration. I do not plan to offer solutions as my answer may be different for each individual situation. After you have read these articles, my suggestion would be that readers review their own situation before moving their home to a corporation. If needed, a proper consultation should be sought and proper direction be obtained from a tax lawyer so there are no regrets later on.

The first thing you want to consider is whether your residence qualifies as a “principal residence” as defined in the Income Tax Act. If it meets the eligibility requirements for a principal residence, you will be eligible to claim the exemption against capital gains on a transfer to a related corporation at market value. On a transfer to a corporation, an owner should maximize their claim for the principal residence capital gains exemption.

On a transfer of a personal residence to the corporation, the transferor is able to claim the deduction against capital gains if the eligibility requirements are met. The corporation, on transfer, becomes the legal and beneficial owner of the personal residence. Any increase in value of the property accrues to the corporation. When a corporation sells the property, any increase in value is taxable to the corporation, hopefully as capital gains, not business income.

On the transfer to the corporation, the corporation becomes indebted to the shareholder for the equity he or she had before the transfer and any loans or mortgages are assumed by the corporation effective the date of transfer. All future payments of mortgage, property tax, insurance and other expenses are paid by the corporation.

In order for the expenses to be deductible the corporation must receive a reasonable rent from the shareholder occupying the premises. What is a reasonable rent is a question that you must resolve very carefully as there is a case law precedent a well as a Canada Revenue Agency policy on this topic. I will discuss next week factors to be considered in determining a reasonable rent.
Another important point to note is that once the property is owned by the corporation, any transfer of ownership from the corporation to the shareholder can only be undertaken at fair market value. Thus, transferring out of the corporation is a taxable event.

More specifically, if you decide to transfer the property back to the individual transferor out of the corporation, the corporation would be deemed to have disposed of the property at fair market value to a related person, and the corporation would be subject to tax on the realized capital gains. The corporation would of course start with a higher cost base which is the amount which the transferor originally reported as his or her proceeds of disposition.

If after the transfer the intention of the shareholder is to continue to occupy the house as his or her personal residence, the individual living in the house can no longer be eligible for any additional amount of principal residence capital gain exemption as the beneficial ownership has been passed to the corporation.

In a rising real estate market, it may not be a good idea to implement such a plan unless there are other compelling reasons to undertake such a transfer.

—The author assumes no responsibility whatsoever for any information given above because the purpose of this column is not intended to provide professional advice including, without limitations, investment, financial, legal, accounting or tax advice. For specific advice to your situation please consult your professional advisor specializing in the area of your needs. Esmail Bharwani, MBA, MSc. (Entrepreneurial Studies), FCCA, FCGA, is a Barrister & Solicitor and associate with the firm of Miller Thomson LLP. He can be reached at 298-2418 or 288-3234, or e-mail ebharwani@millerthomson.ca. Esmail’s column appears weekly in the Calgary Real Estate News.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited.

Implications of transferring a principal residence

2007-11-20T08:41:00.000-07:00

Implications of transferring a principal residence
by Esmail Bharwani

When an individual transfers a residence to a corporation, he or she must be aware of the likelihood that Canada Revenue Agency (CRA) may closely scrutinize the transaction to assess a shareholder or an employee for what the Income Tax Act refers to as a “benefit”.
It is always a question of fact as to whether the corporation has conferred a benefit on a shareholder or an employee.

In the precedent-setting case of Youngman vs. Canada at the Federal Court of Appeal, 1990, Justice Pratte (concurred by Justice Heald and Justice Stone) stated, “It is now well settled that paragraph 15(1)(c) [of the Act] applies only when a shareholder has received, qua shareholder, a benefit or advantage from a corporation.”

Under paragraph 15(1) of the Act, the amount or value of a benefit conferred on a shareholder by a corporation in a taxation year is included in the shareholder’s income for the year with certain exceptions. This provision may also apply to a person who at the time the benefit was conferred was not a shareholder, if it was contemplated that the person would become a shareholder.

Many would ask of their advisor, “When does a shareholder receive a benefit, how is it measured and is it taxable?” The court held that “In valuing a benefit allegedly received by a shareholder, it is therefore necessary to find what the shareholder would have had to pay for the same benefit in the same circumstances if he had not been a shareholder of the company.”
The court goes on to say that a shareholder receives no benefit for the purposes of paragraph 15(1)(c) if, in the same circumstances, he would have received the same benefit from a company of which he is not a shareholder.

According to the court, an example is if a company builds an expensive house with the intention of selling it at a profit and later, after realizing that it cannot be sold for more than half its cost, sells it at that low price to one of its shareholders, that shareholder in all likelihood would get a benefit out of that transaction but paragraph 15(1)(c) does not apply to it. In other words, there is no benefit.

The court then clarifies the process of establishing a benefit.

The court said, “In order to assess the value of a benefit, for the purposes of paragraph 15(1)(c), it is first necessary to determine what the benefit is or, in other words, what the company did for its shareholder; second, it is necessary to find what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder.“

Justice Pratte then provided the court’s analyses of the Youngman case by stating “In the present case, the benefit or advantage conferred on the appellant was not merely the right to use or occupy a house for as long as he wished; it was the right to use or occupy for as long as he wishes a house that the company, at his request, had built specially for him in accordance with his specifications.”

“How much would the appellant have had to pay for the same advantage if he had not been a shareholder of the company?”, the court asks.

The court then provided its own view.

“Certainly more than what the two experts referred to as the free market rental value since, in my view, the company would have then charged a rent sufficient to produce a decent return on its investment.” The court had difficulty with in coming up with that figure and in Justice Pratte’s words, “It is impossible to determine with accuracy the amount of that rent. However, subject to one important reservation, I cannot say that it would have been less than what the minister assumed it to be.”

The minister estimated that the value of that benefit for the year was $37,251.

The minister had acknowledged that the appellant had, during the year, paid $12,100 for rent and expenses. The appellant and his spouse were in aggregate assessed the difference between the value of benefit of $37,251 less reimbursement of $12,100.

The minister computed the amount of benefit by aggregating the return on investment--using 9% yield on investment of $316,135.79, the cost of building the house--plus the property taxes and insurance paid by the corporation, less the amount of rent paid by the shareholder to the corporation.

The Federal Court of Appeal allowed an offsetting adjustment for the interest-free loan the shareholder had given to the corporation. The court held “As long as that loan remained outstanding, the rent otherwise payable would, in my view have been reduced by an amount equal to the interest that should normally have been paid on the balance of the loan.”

The court based its decision on the principle that if “he was not a shareholder, consideration would certainly have been given.”

CRA makes taxpayers aware of the policy it follows, which emanated from Youngman.
CRA states that “If the fair market rent is not an appropriate measure, or if it does not exist or cannot be determined, the amount of value of the benefit would then usually be determined by multiplying a normal rate of return times the greater of the cost or market value of the property and adding the operating costs related to the property.

The total of these two amounts is often referred to as the “imputed rent”.

In terms of the offsetting deduction for the interest-free shareholder’s loan given by the shareholder to the corporation, the CRA restricts its policy by saying the imputed rent may be reduced by any outstanding interest-free loans or advances to the corporation made by the shareholder to enable the corporation to acquire the property. In other words not all shareholder’s loans may qualify.

It must also be noted that if an amount is included in the income of a shareholder under subsection 15(1), such amount is not allowed to the corporation as a deduction. This provision has a severe effect on the overall tax costs.

If you are in a situation where you are acquiring or transferring personal-use property in a corporation or otherwise using any of the corporation’s property (such as residence, yacht or for that matter any other capital asset), you are best advised to consult a tax lawyer or accountant such that you may plan properly in light of the Youngmen case and CRA’s policies.

-The author assumes no responsibility whatsoever for any information given above because the purpose of this column is not intended to provide professional advice including, without limitations, investment, financial, legal, accounting or tax advice. For specific advice to your situation please consult your professional advisor specializing in the area of your needs. Esmail Bharwani, MBA, MSc. (Entrepreneurial Studies), FCCA, FCGA, is a Barrister & Solicitor and associate with the firm of Miller Thomson LLP. He can be reached at 298-2418 or 288-3234, or e-mail ebharwani@millerthomson.ca. Esmail’s column appears weekly in the Calgary Real Estate News.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited.

Using the right tools of the trade

2007-11-19T10:21:00.000-07:00

Using the right tools of the trade
by George Dalgleish

If you like to make repairs around the house or you are contemplating a major plumbing project, acquiring the right tools is very important.

The following is a list of relatively inexpensive tools to use for your plumbing project.

• Crescent wrenches. A six-inch crescent wrench and a 12-inch crescent wrench are used to remove spindles from faucets and nuts on basins and drains.

• Socket wrenches. Special “deep” sockets are used for removing nuts from fittings just inside the wall. These tools resemble spark plug wrenches.

• Vice grips. A combination plier and wrench that is adjustable and is used to hold objects together while a join is being made since they can be locked into a closed position. Vice grips can be used in removing or replacing odd-sized nuts or removing a nut that has been damaged and defies removal by a conventional crescent wrench.

• Seat wrench. This tool is used to remove the seats from a faucet. It is hexagon shaped on one end and has a square shape on the opposite end. The ends also have various sizes which increase the diameter of the wrench.

• Basin wrench. This tool has a long handle and an adjustable grip to clasp nuts on the bottom of faucets behind the basin and other nuts.

• Spud wrench. This is an adjustable wrench used on large nuts found on the bottom of sinks and basins which hold drains in place.

• Seat reamer. This tool is used to ream out a valve seat that has become pitted and thus allows the faucet to drip. One type of seat reamer has cutting teeth on its end that smoothes the seat. Other types are small grinding tools that attach to an electric drill.

• Penetrating oil. This oil is used when removing stubborn valve seats or nuts. The oil works its way into the threads through capillary action and loosens the seal or nut. Apply the oil and let it stand for a period of time.

• Toilet auger. This tool is used to clean out plugged toilets and is essentially a handle attached to a rod with a flexible coiled spring attached to the end of the rod. The flexible coiled spring allows you to reach around the bend of a plugged toilet.

• Plunger. A plumber’s plunger is used to unclog drains. It consists of a rubber suction cup on the end of a handle. It can also be used to unclog toilets.

• Tube cutter. This tool cuts the solid water supply pipe neatly and square.

• Mechanical fingers. If you are an amateur plumber, this device may be helpful. It is used to retrieve objects dropped down plumbing drains or other hard-to-reach places. It has four retractable fingers on the end of a flexible shaft. The shaft is worked into the area where the object is to be retrieved, then the user presses the plunger and the four fingers clasp the object.

• Hacksaw. A hacksaw is handy for cutting any type of pipe, including PVC or other non-metallic pipes. There are different varieties of blades, so make sure you purchase the right blade for your particular project.

• Propane torch. A propane torch is necessary if you are repairing or installing copper water supply pipes and are using sweat joint solder connections. The torch usually consists of a burner and valve assembly and a nozzle attached to a pressurized bottle of propane. It may also have a torch lighter consisting of a flint attached to the end of the handle that rubs on a surface to create a spark to light the torch. As a caution, only well-trained and qualified professionals should use this tool.

• Tape measure and screwdrivers. These are common household items. A standard slot screwdriver and a Phillip’s screwdriver are usually all that are required for a basic plumbing project, however, you should have a variety of different lengths.

• A quality tape measure with metric and imperial rulings is essential. And, it should have a movable end to allow measurements inside and outside a specific area.

Always buy quality tools. They may cost more, but they are longer lasting and result in a more accurate job. And, store you tools in a secure place to keep them out of children’s reach.

—George Dalgleish has been writing the Home Handyman for the Calgary Real Estate News for many years.

©Copyright 2000-2006, All Rights Reserved. All articles, text and photographic material presented here is copyright. Unauthorized copying or re-distribution is strictly prohibited.

Thirteen financial frights to scare you all year round

2007-11-19T10:07:00.000-07:00

Thirteen financial frights to scare you all year round
by David Lush

It’s the scariest time of the year when wee goblins and ghosties haunt the streets in search of sweet treats. In the spirit of this scary season, here are 13 financial frights that can really get your knees knocking at any time of the year.

1. Chatting with guests at your retirement party and realizing you have no idea if your retirement pension is going to cover all those things you want to do.

2. In your hospital bed getting the good news that you will only be off work for six months and realizing that you have no disability insurance and no emergency funds.

3. Realizing that your mother, who needs to move into a long-term care facility, cannot afford the cost of the facility she has chosen.

4. Opening your credit card statement and realizing your interest charges are higher than the current month’s charges for purchases.

5. Celebrating the move of your youngest child from home to an apartment and getting a phone call from your eldest, who is unemployed and wants to move back home.

6. Basking in the glow of your daughter’s high school graduation ceremony and realizing that it’s too late to set up a Registered Education Savings Plan and get Canada Education Savings Grants, provided by Human Resources and Social Development Canada, to help finance her university education.

7. Realizing when you file your tax return that you cannot offset the income earned on the fixed income investments, which you bought with the proceeds of your stock portfolio, against the capital loss you realized when you sold your stock portfolio.

8. Realizing that stock market indices are up anywhere from 10% to 30% compared to when you sold your equity investments at a capital loss to buy fixed income investments.

9. Getting a call from Canada Revenue Agency telling you that they are going to deny the deduction on that tax shelter scheme you bought.

10. Finding out your furnace needs replacement just after you depleted your bank account for your mid life crisis sports car.

11. Getting your notice of assessment and finding that you have unused Registered Retirement Savings Plan contribution room of $60,000 and no extra funds.

12. Realizing that your children, who you added as joint owners to your mutual fund accounts, are not going to consent to a withdrawal from the accounts to finance your European holiday with your new sweet young love interest.

13. Opening your credit card statement in January.

You need not fear these 13 financial frights--or many others that can set your teeth chattering--when you put in place a comprehensive financial plan that fits your life.

Don’t trick yourself, be sure you and your family get all the treats they deserve by talking to a professional planner today.

—For more information on this topic or on any other investment or financial matters contact David Lush, CFP of Investors Group at (403) 256-5890. This column, written and published by Investors Group Financial Services Inc. (in Quebec — a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Insurance products and services are distributed by I.G. Insurance Services Inc. (in Quebec — a Financial Services Firm). Insurance licence sponsored by The Great-West Life Assurance Company outside of Quebec.

Cost allowance and its many intricacies

2007-11-19T10:02:00.000-07:00

Cost allowance and its many intricacies
by Esmail Bharwani

The Income Tax Act (Act) provides for the deduction of capital cost allowance.
Capital cost allowance is a system of amortization which allows the business owner or the property owner to deduct, at the prescribed rate, the wear and tear of a depreciable capital asset of a business by way of a deduction from income.

In the field of accounting, it is referred to as the depreciation. The accounting principles or acceptable standards may differ from the prescribed rates used for capital cost allowance purposes.

In other words, when you purchase a capital asset for use in earning business or property income, the Act allows a proportionate deduction based on the useful life of the asset. The actual useful life of an asset can differ from person to person. The Act assumes a certain length of time a given asset is likely to produce income.

Subsection 13 (21) of the Act provides that the capital cost system is essentially the grouping of depreciable property into prescribed classes which are established by regulations.

If you purchase assets which have the same classification, the Act requires they be treated as one unit for the purposes of capital cost allowance.

Therefore, the taxpayer needs to put all of the assets of the same class in one grouping.
Some of the familiar classes are the following:

• Class 1 includes most buildings or structures acquired after 1987, including component parts such as electrical wiring and fixtures, plumbing, heating and central air conditioning;

• Class 3 includes buildings or other structures, including component parts acquired before 1988 and limited costs of an addition or alteration made after 1988;

• Class 8 includes miscellaneous tangible capital property such as furniture, fixtures and outdoor advertising signs bought after 1987, and machinery or equipment such as photocopiers, refrigeration equipment, telephones, and tools costing $200 ($500 proposed by the May 2,
2006 federal budget for tools acquired on or after that date) or more, not included in another class; and

• Class 10 includes automotive equipment, such as automobiles (except taxes and those used in a daily rental business), vans, trucks, tractors, wagons and trailers, and general purpose electronic data processing equipment with its systems software acquired before March 23, 2004.
There is quite a variety of items that fall into one class and must be grouped in that class as a whole before computing any deduction for the capital cost allowance each and every taxation year.

The method of computing can also vary. Some groups use declining balance and others a straight line method, such as the classes which include leasehold interest, patents, franchises, concessions or licences for a limited period.

A question often asked is whether or not one should claim capital cost allowance on an annual basis. You have a choice either to claim capital cost allowance or not, but it should be a planning consideration.

Whatever capital cost allowance is claimed, it must be reported back as income in the future if the asset is sold for more than the tax cost (the depreciated cost or amortized cost).
In other words, claim the capital cost allowance now and report it back later when you sell the asset. This is referred to as recaptured capital cost allowance.

Before making a claim for the capital cost allowance, consider the following:

• Size of the investment in capital cost of the assets;

• The maximum available amount of the capital cost allowance claim;

• The likelihood that the asset will be sold soon or the business in which the assets are being used will be sold in its entirety;

• If there is a likelihood of business selling in the future as a whole, what is the likelihood the shareholders would be able to sell the shares of the company? If shareholders are able to sell shares of a corporation, the burden of paying taxes shifts to the buyer of the corporation.
Many claim capital cost allowance even when the amount of the allowance is small and the consequent tax benefit insignificant.

If it is not going to make a material difference in the ultimate tax liability, I question whether it is a sound practice to continue claiming capital cost allowance.

It is so important to make small amounts of capital cost allowance claims because the time value of money is so important to the taxpayer that he or she needs to make a claim each and every year.

Don’t make the mistake of claiming capital cost allowance on your residence when you rent a portion of the house to a temporary tenant or a boarder. You should not even consider claiming capital cost allowance when your principal residence is rented out to a tenant after you have temporarily moved out of the house while your election under subsection 45(2) is in effect.The subsection 45(2) election allows you to continue treating your former principal residence as a continuing residence.

You should also avoid claiming capital cost allowance on a rental property which you may be considering occupying as your residence in the future. If you make a claim, you may forfeit the ability to designate the years the capital cost allowance was claimed as eligible years for the principal residence exemption.

One other rule that you need to be aware of is what is known as the One Half Year Rule.
All additions to capital cost assets are subject to the One Half Year Rule in the year of addition. That means you are not allowed to make a full deduction of the capital cost allowance in the year the asset is acquired.

However, Class 12 is not affected by the One Half Year Rule. So if you purchase a book that is part of a lending library, chinaware, cutlery or other tableware, a kitchen utensil costing less than $200, a medical or dental instrument costing less than $200, linen, a tool costing less than $200 ($500 proposed by the May 2, 2006 Federal Budget), a uniform, rental apparel or costume, including accessories and a patent, franchise, concession or license for a limited period covered by Class 12 and Class 14 of the schedule II, you may make a full claim in the year of addition.

You must also remain aware that if the taxation year is shorter than 12 months, the capital cost allowance will be prorated based on the number of days the property has become available for use.

Be aware the One Half Rule applies in the year the asset is acquired or brought into use. If you do not make a claim for capital cost allowance and you later realize that you should have claimed it after the assessment has been issued, CRA may not allow you to re-open your assessment just for the purpose of making a claim for capital cost allowance. Therefore the decision to claim or not to claim must be made after a careful consideration.

Employees who use their automobiles to earn employment income are entitled to claim capital cost allowance on automobiles.

Section 8 (1) (j) of the Act provides for deduction of capital cost allowances. People who are involved in sales and negotiation may claim under section 8 (1) (f) and people who are allowed to claim travel expenses other than motor vehicle expenses may be able to claim.

If you are buying expensive automobiles, you need to be aware that there is a restricting provision for capital cost allowance claim under Class 10.1, which applies to expensive cars.
Some miss out on electing to place one or more specified properties that would ordinarily be classified in Class 8 or Class 10 in a separate class for each asset.

For example, electronic equipment, data processing equipment and system software which are normally included in Class 10 may be put into a separate class.

Another example is computer software, presumably system software for electronic process control or monitor equipment and electronic communications control equipment, normally classified in Class 8 may be placed into a separate class of its own.

A further example would be a photocopier or electronic communications equipment, such as facsimile transmission device or telephone equipment, normally included in Class 8, may be put into a separate class as long as each of these assets has a capital cost of at least $1,000.
The advantage of placing these assets into a separate class would be that you may be able to claim terminal loss much earlier than having them mixed up with the other assets in the big class of assets such as Class 8 or Class 10 because the class needs to be completely empty before a terminal loss can be claimed.

By having a separate class your class becomes empty when the one particular asset is disposed of.

CRA has useful guides on their website on rental properties, capital gains and principal residence.

-The author assumes no responsibility whatsoever for any information given above because the purpose of this column is not intended to provide professional advice including, without limitations, investment, financial, legal, accounting or tax advice. For specific advice to your situation please consult your professional advisor specializing in the area of your needs. Esmail Bharwani, MBA, MSc. (Entrepreneurial Studies), FCCA, FCGA, is a Barrister & Solicitor and associate with the firm of Miller Thomson LLP. He can be reached at 298-2418 or 288-3234, or e-mail ebharwani@millerthomson.ca. Esmail’s column appears weekly in the Calgary Real Estate News.

Pension income splitting is new and could save you money

2007-11-19T09:55:00.000-07:00

Pension income splitting is new and could save you money
by David Lush

The 2007 federal budget included a few new tax provisions, and one of these, pension income-splitting, can provide certain tax-savings opportunities to seniors. Here’s how pension income-splitting works:

• If you receive income eligible for the existing pension income tax credit you can allocate up to half of that income to your spouse or common-law partner for taxation purposes, provided each member of the couple resides in Canada.

• According to the Canada Revenue Agency (CRA), eligible pension income is generally considered to be periodic payments from a superannuation or pension plan. Registered Income Fund payments, including Life Income Fund payments and Registered Retirement Savings Plan annuity payments are also considered eligible pension income if the pensioner is age 65 or older at the end of the tax year.

• Old Age Security, Canada or Quebec Pension Plan payments and Guaranteed Income Security payments do not qualify.

• Because pension-income splitting decreases the net income of the ‘transferor’ spouse and increases the net income of the ‘transferee’ spouse, both must agree to the allocation. To do this, the couple must complete a new form, Joint Election to Split Pension Income (CRA Form T1032). Your 2007 income tax return will contain a new line for the pension recipient to deduct the amount of the pension to be allocated to the spouse/common-law partner and a new line for the spouse/common-law partner to report the allocated pension on their tax return.

• The allocations can be changed each tax year.

• There can be no adjustment to income tax that is withheld at the source from eligible pension income.

Pension income-splitting can be an effective tax-saving strategy for you when:

• There is a considerable difference in net income between spouses because some of the income from the higher-earning spouse will now be taxed at the lower tax rates applicable to the lower-income spouse.

• It helps bring the income of a higher-earning spouse below the OAS claw back threshold ($63,511 in 2007).

• It allows both spouses to take advantage of the pension income credit.

• It increases the potential for spouses to take advantage of the age credit and the medical credit, both of which are income-tested.

• It results in a reduction in health premiums for families in Ontario and Quebec.

Be sure to take full advantage of pension income-splitting and all other tax-reduction strategies — talk to your professional advisor today.
—For more information on this topic or on any other investment or financial matters contact

David Lush, CFP of Investors Group at 256-5890. This column, written and published by Investors Group Financial Services Inc. (in Quebec — a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Insurance products and services are distributed by I.G. Insurance Services Inc. (in Quebec — a Financial Services Firm). Insurance licence sponsored by The Great-West Life Assurance Company outside of Quebec.

Be sure you burn the proper wood in your fireplace

2007-11-18T08:42:00.000-07:00

Be sure you burn the proper wood in your fireplace
by George Dalgleish

Many problems associated with burning wood in a fireplace, wood stove or wood furnace is caused by burning green, wet wood. Installing a wood furnace or stove that is too big for the area you are heating can cause problems.

Green wood is wood that has not been properly seasoned. Wood that has dried over the summer usually would be properly seasoned if it was split and stored in an open area where the wind could get at it.

If wood is stored against a building, particularly on the north side or under large trees, it may not dry properly in one summer.

Large sticks of poplar, ash or oak should be split, however, smaller sticks under four inches in diameter will usually dry when stored properly.

Even the small pieces of Birch have to be split in order to dry properly. It can be very difficult to split a small stick of birch, so it is possible to by using an axe on a 45-degree angle and cutting the bark two or three times. If birch is not split, it simply sours, and will rot as the birch bark is waterproof and acts as a vapour barrier. Canoes were made out of birch for that very reason. If it has not been split, it’s advisable not to buy birch wood for wood burning in your home, even if it is two years old.

Burning green wood will cause creosote to form in the chimney. When creosote builds up a lot, it could run down the chimney and may leak out at an elbow or where the chimney is attached to the stove. A large wood-burning furnace can produce a couple of gallons of creosote per day.
Another problem associated with wood burning in stoves or furnaces is the fact that many homeowners buy too big a stove and have to damper the unit down as the room becomes too hot.

When a stove or furnace is dampered down too much the flue gasses cool off before they exit the top of the chimney and deposit creosote in chimney.

Even properly seasoned wood can produce creosote if the fire does not burn hot enough. It is important to let the fire burn hot enough even if a window has to be opened, which seems contradictive.

It is better to buy a smaller stove and burn it hotter than to buy one that is too big.

If you now have a stove or furnace and you have had problems that resemble those described in this article, make sure you clean the chimney properly before burning the unit hotter.

Wood that is wet from rain or snow usually does not present many problems as the moisture is usually on the surface and it evaporates quickly when added to the fire.

Dry pieces of construction scraps and garbage wood you may have around the home should not be used as the sole source of fuel for your wood burning unit or fireplace.

This type of material should be used to start a fire only, as even when dampered down, it still burns quick and hot. This is especially true in a factory built fireplace.

Wood that is stored outside may contain a few insects or their eggs that were meant to hatch next spring. They may decide to hatch after the wood has been brought into the warmth of the house. That is why it’s best to leave the wood outside and bring in a little at a time. If you experience problems with bugs or flies from wood stored inside, spray with an insecticide that is approved for indoor use or environmentally friendly, always following the instructions provided.
A fireplace burning on a cold winter night can add a cozy glow to any home. Burning wood in a stove or furnace may help reduce your energy costs.

When burning wood, burn the proper wood and burn it properly if you are to avoid problems, and by all means, burn it safely.

--George Dalgleish has been writing the Home Handyman for the Calgary Real Estate News for many years.

What to do if your purchasing agreement is ignored

2007-11-18T07:44:00.000-07:00

What to do if your purchasing agreement is ignored
by Michael Dunkley

Purchasers and vendors usually enter into agreements for the purchase and sale of homes several months prior to the closing date.

In the majority of cases, all goes well, and the transaction closes as scheduled without difficulty.
Occasionally, however, an unscrupulous vendor may receive a second higher or more favorable offer in the interim period between acceptance of the first offer and the closing date.

Despite the fact that the first agreement constitutes a valid and binding contract, the vendor may simply attempt to ignore the first contract and attempt to proceed with a sale to the second purchaser on the basis of the second offer.

While there are remedies available in these circumstances to the initial purchaser, often the costs of enforcing the agreement are prohibitive, and the initial purchaser is in reality left with no other option but to continue the search for another home.

One inexpensive way in which a purchaser can significantly protect his interest in the lands to be purchased pending actual closing is by registration of a purchaser's lien against the title thereto.
Assuming that the purchase agreement has been properly completed, an interest in the lands in favour of the purchaser arises at that time, which can be protected by registration of a caveat against the title. Once the caveat has been registered, the purchaser's "security" is significantly increased, as it will be extremely difficult for a vendor to proceed with a sale to a subsequent purchaser in the face of the registered caveat.

In one case in which I was involved, after accepting my client's offer, the vendor purported to accept a second significantly higher offer received later that same day.

The vendor advised my client that he did not intend to proceed with the sale to my client, despite the contractual obligation to do so, and that he would be proceeding on the basis of the second offer.

Rather than giving up, however, my client filed a caveat against title, claiming a purchaser's lien thereagainst as a result of the interest he had obtained in the lands through his purchase agreement.

As the purchase agreement was valid and binding, the vendor was left with no choice but to complete the sale to my client in accordance with the terms of the initial agreement.

In any situation where closing date is delayed, or where a purchaser of property simply wishes additional assurance that the purchase will be completed in accordance with the contract, the purchaser should discuss the possibility of a purchaser's lien caveat with his lawyer.

—Michael C. Dunkley is a Calgary lawyer who has practiced exensively in the area of Real Estate Law for more than 23 years, and may be reached at 291-0006.

Housing starts drop in October across Canada

2007-11-18T07:42:00.000-07:00

Housing starts drop in October across Canada
by CMHC News

The seasonally adjusted annual rate of housing starts was 219,500 units in October, down 22% from 281,300 units in September, according to Canada Mortgage and Housing Corporation (CMHC).

“The decline in housing starts in October reflects the exceptional strength in new construction in September rather than weakness in October,” said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre. “Much of the decline in October can be attributed to the fall in multiple starts. We continue to expect that residential construction activity will remain strong throughout next year, with the trend decreasing gradually between now and the end of 2008.”

The seasonally adjusted annual rate of urban starts decreased 24.9% to 183,600 in October, compared to September. Urban singles were down 6.0% to 84,900 units in October, while multiple starts decreased 36% to 98,700 units.

In October, the seasonally adjusted annual rate of urban starts decreased in all five regions. Urban starts registered a decrease of 14.7% in the Atlantic region, 36% in Quebec, 30.6% in Ontario, 20% in the Prairies, and 5.6% in British Columbia. Urban single starts were down in all regions except British Columbia, where they were unchanged. All regions saw declines in urban multiple starts. The largest decrease was in Ontario where urban multiple starts dropped by 50.1%.

Rural starts were estimated at a seasonally adjusted annual rate of 35,900 units in October.
Actual starts, in rural and urban areas combined, were up an estimated 1.5% in the first 10 months of 2007 compared to the same period in 2006. In urban areas, actual total starts grew by an estimated 0.1% year-to-date. Actual urban single starts from January to October 2007 were down 5.3% compared to the same period in 2006, while multiple starts grew by approximately 5.4% over the same period.

All starts figures in this release, other than actual starts, are seasonally adjusted annual rates (SAAR)-- that is, monthly figures adjusted to remove normal seasonal variation and multiplied by 12 to reflect annual levels.

As Canada’s national housing agency, Canada Mortgage and Housing Corporation (CMHC) draws on over 60 years of experience to help Canadians access a variety of quality, environmentally sustainable, and affordable homes-- homes that will continue to create vibrant and healthy communities and cities across the country.

The changing face of assumed mortgages

2007-11-18T07:40:00.000-07:00

The changing face of assumed mortgages
by Sharon Essington

Nowadays, many people are realizing that real estate is a fantastic investment, and for those who already knew it, that point has certainly been proven beyond a shadow of a doubt.

According to the Calgary Real Estate Board, single family homes in Calgary have increased by an average of $168,048 in the past 24 months, and recent market conditions are putting the control back into the hands of the buyers who are looking to expand their portfolios.

The Canadian Mortgage and Housing Corporation (CMHC) has recently announced that they will now insure investment mortgages for up to 100% of the property value if the applicant can prove on paper they have enough income to support the mortgage.

But what if the applicant is unable to do so? What other options might be available?
Alberta has always been the promised land of assumable mortgages, however today that is not as cut and dry as it once was. More and more lenders are now including what is known as a “due on sale clause” into the mortgage documents, meaning that the mortgage must be paid out if ownership changes hands.

Other lenders are allowing “assumption upon qualification,” meaning the new buyer must prove that he or she can qualify for the mortgage, which brings up the obvious question of why they wouldn’t have just qualified on their own initially, if that was possible.
Unfortunately, sellers do not often clearly understand or even read the details of their mortgage documents prior to listing their home as an assumable sale, which can lead to a frustrating experience for the prospective buyer.

A prudent buyer could ask to review the seller’s mortgage documents to clarify any specifics around assuming that particular mortgage, or perhaps have their lawyer review the documents instead.

So if not all mortgages are assumable in Alberta anymore, what are some other ways to purchase rental properties if you don’t qualify?

If you are self-employed then you are able to take advantage of tax deductions which employees could only dream about, however, the downside is that on paper, your provable income is usually very low.

Lenders are acknowledging that more and more self-employed borrowers are facing the challenge of qualifying for a mortgage, so as a result many lenders now offer “stated income” programs for small business owners and the self-employed.

What this essentially means is that on the application, an income is presented which is deemed as reasonable for the industry, and also allows the would-be borrower to qualify for the purchase.

Some lenders will base this kind of approval on the applicant’s credit history and length of time in business, while other lenders will allow only one day in business, assuming the applicant was previously in a similar industry.

Interest rates will vary among lenders who use this program, but generally speaking, the less information the lender asks for, the higher the interest rate will creep. Lenders refer to this as risk-based pricing.

Additionally, a larger down payment could be required when qualifying under stated income guidelines. The great news here is that many lenders will allow a second mortgage to be used to help borrowers minimize the out of pocket funds required.Second mortgage lenders base their decisions heavily on the subject property’s overall condition, resale value and marketability. An appraisal will always be required and pricing will likely not be provided or decided upon until the lender has had an opportunity to review all of the information.The interest rates tend to be higher on second mortgages because they are usually funded by private investors. However, all interest paid on funds borrowed to purchase investments, such as mortgages, is eligible as an income tax write-off, which is good news to many Canadians.

It is also common practice for prospective buyers to bring on a second applicant, or joint venture partner, to help qualify. This could assist with the down payment to provide a stronger credit history or perhaps to prove income.

There are so many different financing options available for those looking to get into the investment game, or become bigger players. Take the time to find a mortgage broker who is knowledgeable and savvy in this area and you will be amazed at the speed in which your investment portfolio will grow to new heights.

--Sharon Essington is a Mortgage Consultant with Canada Mortgage Direct. Sharon specializes in providing a creative approach to mortgage financing for individuals looking to improve their lives through real estate. To request a copy of your FREE report “Buy Sooner With No Money Down”, or for more information on this topic, call 403.239.8250.

Four simple rules for tax-wise investing

2007-11-18T07:36:00.000-07:00

Four simple rules for tax-wise investing
by David Lush

A solid return on your investments is always a good thing. Paying excessive tax on those returns definitely isn’t.

You can’t totally avoid paying tax but you can reduce those taxes by making tax-wise investment decisions. Here are four simple tips:

1. Know how you are taxed. The amount of tax you pay on your investment income depends on your marginal tax rate—#8212;that’s the rate of tax you pay when you earn an additional dollar of taxable income—#8212;and the type of investment income you receive.
Your investment dollars are taxed in three different ways:

• Fully taxable: That includes interest income from such fixed-income investments as bonds, Guaranteed Investment Certificates (GICs) and term deposits.

• More favourably taxed: That includes most of the dividends you receive from Canadian corporations, which qualify for a Dividend Tax Credit.

• Nice tax break: That’s on capital gains, especially if you’re in a higher tax bracket. Only 50% of a capital gain is included in income for tax purposes.

2. Defer taxes. A Registered Retirement Savings Plan (RRSP) is the best tax-deferred savings plan for most Canadians. Your contributions (which are subject to annual limits) are fully deductible from income and all earnings in the plan accumulate on a tax-deferred basis until you withdraw them.

3. Design a tax-wise non-registered portfolio. The government puts limits on your RRSP contributions, so you may need non-registered investments to augment your savings. These will be taxed at a rate that depends on the source of the income. But even here, you can benefit from tax deferrals by:

• Buying and holding investments. taxes on capital gains are not usually paid until the gains are realized, so you can defer or even reduce taxes by choosing to sell these investments when your marginal rate is lower.

• Investing in tax-advantaged mutual funds. This type of structure allows you to accumulate and move assets freely among the share classes of these types of mutual funds while deferring capital gains.

4. Split income to avoid taxes. Strategies that allow you to split income by having money earned by a family member in a higher tax bracket taxed in the hands of a lower-earning family member include: contributing to a spousal RRSP; making a loan to a lower-earning spouse for investment purposes; transferring assets or money to a child; or establishing a Registered Education Savings Plan (RESP) for each child. In addition, eligible pension income can now be split between spouses for taxation purposes.

Tax-wise investing should be an important part of your overall financial plan and investment program. A professional advisor can help you develop the right tax-reduction strategy for your personal situation.

—For more information on this topic or on any other investment or financial matters contact David Lush, CFP of Investors Group at 256-5890. This column, written and published by Investors Group Financial Services Inc. (in Quebec — a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Insurance products and services are distributed by I.G. Insurance Services Inc. (in Quebec — a Financial Services Firm). Insurance licence sponsored by The Great-West Life Assurance Company outside of Quebec.