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Comments, Questions

Q: What are the major highlights regarding the changes to the capital gain exemption on personal residence? You also hinted at other changes, what are they?

A: In an excellent ‘tax blog” Law Firm Thorsteinssons points out that the “CRA advises that it has doubled its level of effort focused on the BC real estate sector, hired 70 new auditors and that it has also started a review of 500 high dollar value real estate transactions in British Columbia.”

The five areas of “compliance risk” that have been identified by CRA are:

  1. Questionable sources of funds. As stated in the report, “[t]he acquisitions of expensive assets, such as a high-end home, without an obvious income source, can be an indicator of potential unreported income earned from legal or illegal sources of income.”
  2. Property flipping.
  3. Unreported goods and services tax/harmonized sales tax on the sale of a new or substantially-renovated property/ GST/HST new housing rebate.
  4. Unreported capital gains.
  5. Unreported worldwide income.

THORNSTEINSSONS: We expect to see more, and more aggressive real estate audits being conducted by CRA for both income tax and GST and auditors will likely examine issues such as:

  1. Whether the disposed property qualifies for the principal residence exemption. If the CRA is not satisfied that the property has met all the requirements of the exemption, part or all of the exemption will be denied.
  2. Whether the gain realized on the disposition of real property is a capital gain (50% taxable) or business income (100% taxable). The distinction of capital gain from business income is often not straightforward and prone to challenge.
  3. Whether income has been reported in respect of an assignment of contract for the purchase of real property. If income has been reported, there may be a further issue of whether the gain from the assignment of contract is capital gain (50% taxable) or business income (100% taxable).
  4. Whether the buyer has complied with the withholding requirements in respect of an acquisition of real property from a non-resident. If no clearance certificate has been obtained pursuant to section 116 of the Income Tax Act, the buyer may be liable for 25% of the purchase price that should have been withheld and remitted to the CRA.
  5. Whether GST has been collected and remitted on the sale of new or substantially renovated housing. If a builder has leased or moved into to a new or substantially renovated home, the builder may be liable to pay GST on the fair market value of the home, including the land value.
  6. In addition to tax issues that directly apply to real property transactions, the focus of an audit might also turn to a taxpayer’s worldwide income. In those cases, the CRA might look into whether the taxpayer’s lifestyle is being funded by unreported income from a foreign source.

Where a taxpayer has knowingly or under circumstances amounting to gross negligence made a false statement or omission in reporting of tax, the penalty will generally be 50% of the underreported amount of income tax and 25% of the underreported amount of GST.

Please read the blogs in their totality … It is important! Blogs from Thorsteinssons:



Q: Condo rentals. I read some conflicting reports on whether rents are likely higher or lower, which is it?

A: It depends. Overall the expectation of inward migration – interprovincial and foreign – is expected to continue, but we are also building A LOT OF NEW CONDOS! In the area where your rental competes with new building launches, rental values will be depressed for a while. One 6 (individual) unit condo owner in the downtown and West End area says he had to reduce his rents from $2,600 to $2,100 and another from $2,400 to $1,900 to get a (quality) tenant.

Q: You said the new mortgage rules would benefit the banks more? How?

A: The new higher rate for the new borrower’s test is intended to create a buffer if rates rise. But that rate is set by the big banks! The six largest banks set their own rates, but if – for instance – only two banks changed their posted rate, the borrower could qualify easier (or harder), but it’s in the hand of the banks! Talk about the fox guarding the hen house! Technically, if the banks want to slow down their lending for their own reasons, all they have to do is raise the posted rate (right now at 4.64%). Remember, not only low down payment buyers are affected! Every buyer, even with more than 20 per cent down, must also meet the new standard of qualifying based on the posted rate if their loans are securitized in a program that is backed by the federal government. Result: Still hard to say, but suffice to say … the banks make the call. Since they have a strong self-interest their call will be made not to benefit the buyers – you and me. Outcome could well be a further backing off by the buyer and the downturn in the economy as a result.


Spotlight: New Westminster – More Condos Built In New West Than In Vancouver

We recommended New Westminster in 2014 and 2015. Now, something is stirring in New Westminster as the Royal City creates a critical mass that makes it a potentially strong market for condo investing. With three stations on the expanding SkyTrain network, a revitalized waterfront, the only historic and true downtown of any Metro suburb and condo prices less than half that of Vancouver, it may be a sleeper market for investors.

After $100 million spent upgrading the old city in the past decade, New West has an urban public waterfront and market Quay and an impressive Front St. park. It also has Douglas College and other public-sector employment with a major office for TransLink, and growing medical community

An indication of New Westminster’s potential is that more multi-family homes, mostly condos, have been started in the city, 553, so far this year than in all of Vancouver and second only to Burnaby.

New Westminster has a small footprint at a mere 15 square kilometres and a population of around 72,000. But it is attracting a number of millennials for its cool factor, lower cost condos and large number of older and low-rent apartment buildings.

As of September, the typical price for a condo apartment in Sapperton, close to a SkyTrain station and Royal Columbia Hospital, was $256,500 and condos in Uptown New West were selling for a median of $336,400. A quick search this week found several New West condos for under $275,000, including the Uptown and Quay areas, with no rental restrictions:

Examples; R2115511 renovated 1-bdrm, wood frame older unit for $199,000. R2116401, 2-bedroom concrete close to Douglas College for $229,000.

Major Point: Changes to mortgage financing that came in this month means that both investors and those needing mortgage insurance for condos may have to lower their price expectations in Metro Vancouver. New Westminster fits the bill with low prices, strong rentals and quick transit access.


CMHC Red Warning Could Lead To Lower Rates

Further to our announcement last week, here is the convoluted reasoning, which makes about as much sense the Red Warning that Canada Mortgage and Housing Corp. will slap on the national housing market this week: the warning could lead to lower mortgage rates.

CMHC intends to issue the highest level of warning in its Housing Market Assessment, due on October 26. It’s the first time such a grade has been given to Canada’s entire market, and indicates “unaffordable home prices are spreading from the hottest cities to other, smaller markets.”

Calgary, Saskatoon, Regina, Vancouver, and Toronto have already been pegged as troubled, even though house sales and prices in three of these markets have been falling for months!!!

On Oct 17, all mortgage borrowers paying less than 20% down have to pass a mortgage stress test, qualifying at a rate of 4.64%, which is nearly double than today’s lowest mortgage rates. It will also be tougher for lenders to obtain mortgage insurance for these higher-risk borrowers.

As fewer new mortgages will now qualify for mortgage insurance, these lenders, who often rely on selling pooled insured mortgages as investments for funding, will have less cash flow. As a result, they won’t be able to fund as many mortgages, and will hike their fixed mortgage rates.

However, these changes are giving the Bank of Canada bit more breathing room. The central bank has been keeping its rate at a record low 0.5% in efforts to boost the economy – but it has been hesitant to lower its rate further as doing so would fuel risky borrowing. Now, it’s expected the new rules will offset a spike in borrowing caused by a rate cut. While the Bank opted to keep its rate at 0.5% in last week announcement, this could mean it may be in a place to lower it again in the future – and slightly lower rates for variable mortgage borrowers.

BMO Financial Group chief economist Douglas Porter said the BOC could cut rates because of its grim economic outlook. “The Bank has cut its GDP forecast heavily, slashed its core inflation outlook, sounds much more concerned about the medium-term prospects for exports, frets about domestic competitiveness, looks for a 0.3% slice in GDP from the housing measures and doesn’t see the output gap closing for almost two years,” Porter said in a note to investors. “This is a Bank that has precisely zero appetite for rate hikes, and seems to be keeping a flame alive for the possibility of rate cuts should the need arise.”

Major Point: Frozen in its ability to raise interest rates – which would lead to an immediate cooling of the housing market – Ottawa is trying to do something else to slow housing sales and prices. If the BOC lowers the lending rate, it will simply prove a boon for those investors who don’t need mortgage insurance. We expect the new mortgage rules and the constant barrage of “government actions” to have a very negative impact on buyer psychology! Buyers are becoming spooked. This new warning from CMHC will make them back off even more. Early numbers how a sharp – very sharp – decline in sales right across the board. Read the item in “Questions”.


The Other Oceanfront And High Immigration Market

You can buy a waterfront house on Prince Edward Island for $200,000 or less and inland houses for less than $80,000.  And it may be a good idea.

Canada’s smallest province is attracting an average of 1,560 international immigrants, highest in years, which has driven the 2016 MLS sales to record highs, up 20% from 2015, according to the Canadian Real Estate Association. Most of the foreign buyers are Americans and Europeans.

Here is an example of how low the prices are:

MLS R2115511: $119,900 for 67 acres with 800 ft. of oceanfront and a 4-bedroom home located less than a half hour drive to Summerside, PEI.

Major Point: Big mosquitos notwithstanding … it’s worth a look. No tax, foreigner’s money and cheap! But buy only the best: large acreages, waterfront, cashflow apartment buildings!


Cap Rates Fatter For Alberta Rentals

When Boardwalk REIT, one of Western Canada’s biggest residential landlords, bought a 238-suite Calgary apartment building this year, it paid $51.7 million and provided a capitalization rate of 5.4%.

Higher cap rates are another reason multi-family investors from B.C may want to look closer at Alberta this year and next.

The annual Canadian cap rate report from Colliers International shows the cap rates for multi-family low-rise wood frame rental apartments in

  • Calgary range from 5% to 5.25% and,
  • In Edmonton, from 5.5% to $6.5%
  • In Vancouver, the same buildings throw an average cap rate of 2.75% to 3.5%.
  • In Victoria, the average is 4.25%.

Major Point: Colliers notes that Alberta is to lead the country in GDP growth for the next two years.

TD Bank is among those forecasting Alberta’s GDP at 2% in 2017 and 2018, which would be the highest of all provinces. For us cashflow-seeking smaller buyers, we expect that the overall SF and condo market will take a further downturn in prices. Particularly the new apartment market will see substantial discounts early to mid next year. Time to buy? No yet, but if there is a deal of a lifetime – do it! Calgary will recover!



Look up the MLS deals in this issue (above). Good deals there! The Kimberley duplex from the Michael Campbell show has an offer on it.



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