Owning an income property or two is both a great way to make money and a real financial challenge.

It’s been an excellent source of income for people over the last decade or so, as real estate prices in Canada have soared. But making money from property is a lot of work, an ongoing expense and requires some financial know-how to, in the end, make it make sense.

Landlord Prep for Income Tax Season

Since it costs money to operate a rental property, being a landlord comes with numerous tax deductions, which you can use to offset your rental income.

In general, it’s a good idea to keep all your receipts and use an accountant to help you determine which are legitimate and whether to consider an expense a current expense (like paint or a new door lock) or a capital expense (a new furnace).

When you file your taxes, you have to fill out a special form: a T776 Statement of Real Estate Rentals. As well, if you are buying a new house or condo in order to rent it out, you might be eligible for an HST or PST rebate. In short, the tax side of being a landlord is complex. While you can find some information from Revenue Canada here you truly do need a tax professional helping you to make sure you fill things out property and get all the refunds and deductions possible.

Landlords Need to Know the Law

Every province has an act that governs relations between tenants and landlords — get to know the rules where you live to avoid conflict and, in extreme cases, court. These laws spell out the limits on how much rent you can charge, how much notice you have to give before raising rent, rules about security deposits and eviction rules and limitations. Here’s a quick list of the different provincial rules from the Canadian Mortgage and Housing Corporation.

As well, have a look at the Canadian Human Rights Code. This says a landlord cannot discriminate against a potential tenant based on race, sexual orientation and even being on social assistance. This means you must be cautious during the interview process and not ask personal questions about religion, plans to have more children and the like.

Going against these rules can land you in court or, at the very least, disrupt your relationship with your tenants.

Screen Tenants Carefully

The risk in becoming a landlord is losing money because of unpaid rent. It happens. But it happens less often to landlords who carefully screen potential tenants.

It begins with an interview process with some careful questions: how long the tenant expects to stay, how long they stayed at their last place. Just as important, a smart landlord noticing everything in an interview: how the person is dressed, the kind of car they drive, the kind of small comments they make about the place and money. Anything that raises a red flag about a person’s commitment to the rental, their reliability or their past should go into the decision to move ahead with the contract.

Before you sign on with any new tenant, it’s crucial to do a proper credit check.

And once you’ve found a reliable person, be sure they sign a lease. Standard lease agreements are readily available, including this version for Ontario.

Becoming a landlord is not unlike launching a small business. And like running a business, renting out property can lead to great profits, but there’s also a risk for losses if you’re not careful. Taking it seriously, knowing the risks and getting help when you need it will increase your chances of having a positive landlord experience.

It’s been a year now since the Harmonized Sales Tax (HST) came into effect in Ontario and British Columbia. (The combine federal and provincial sales tax was first introduced in the Maritime provinces in 1997.) So how have residents in two of the country’s most populous provinces fared by dishing out extra tax dollars on most of the products and services they pay for?

Consumer goods
The overall intent was to shift the tax burden from businesses, where the tax was buried in the sticker price, to consumers, where it became a very overt consumption tax (i.e. the more you spend – consume – the more tax you pay). A pre-implementation report by TD Bank estimated that consumers “could witness a 0.8-0.9% drop in the pre-tax ticket prices on the purchase of goods and services.” Yet a report by the University of Calgary, commissioned by the Ontario government, found that prices in fact initially went up by the very same 0.9 percent. Asked on the eve of the HST’s anniversary about the taxes’ supposed savings, Ontario Finance Minister Dwight Duncan claimed it is “a bit early” for consumers to expect to see prices to drop.

Real Estate and Home Renovations
Having gutted and remodeled our home last year, I know from first-hand experience that the combined tax added a big bite to renovation bills. The tax not only adds an additional 5 percent to the cost of materials, it also added 13 percent (12 percent in B.C.) to the labour bill that was previously tax-exempt.

The real estate market also saw a surge of sales as buyers tried to close deals before the sales tax rate jumped on new homes, and higher taxes on agent commissions, lawyers fees, home inspections, and other related services kicked in on resale properties. (Though, contrary to what was expected, the market hasn’t tapered off – or crashed – as some predicted it would post-implementation.)
And, as the managing editor of a trade magazine for contractors and custom homebuilders, Renovation Contractor, one thing I constantly hear from readers in Ontario and B.C. is that the tax is costing legitimate tradespeople work and driving it into the hands of guys willing to work for cash. As one contractor recently told me, “HST and the underground economy have been killing us this year.”

Small business and the self-employed
The federal government requires all small businesses to have a GST/HST number if their gross billing exceeds $30,000 a year. That whirring sound – accompanied by the smell of slowly burning paper – you may have detected earlier this spring emanated from accountants’ calculators as they worked in overdrive trying to decipher which invoices and expenses fell under the pre-July 2010 GST-only column, and which were HST-applicable. On the upside, small businesses and low-income earners were eligible for a variety of rebates, including a “transition” payment to help them adapt to the new system.

Political protest
The loudest uproar against the tax was out west, where the B.C. Premier who introduced the tax, Glen Campbell, was forced to resign four months after it came into effect. Back in June, the province started sending out ballots for a binding referendum on whether to keep or kill the tax. The mail-in initiative ends on August 5th, at which point the ballots will be tallied. Even if voters elect to keep the tax in place, it will be lowered to 11 percent in 2012, and 10 percent in 2014.

With Ontario’s provincial election still a few months away (on October 6, 2011), it remains to be seen how much a role the topic of HST will play in the campaign, but it’s safe to say it’ll be a topic voters will want to hear decisive views on. Already, both the Conservatives and NDP have vowed to remove the tax from home energy bills.

Coming soon to a cash register near you
If you happen to live in one of the four provinces (or three territories) that currently don’t have HST, don’t be so smug: The federal government recently set aside $2.2 billion to help grease the wheels of implementation in Quebec. If it passes there, you can almost be certain to see it eventually rolled out nationwide.

Allan
Writer for RateSupermarket.ca

Our estimates include average household costs that many home owners and condo owners incur. Our calculations found that home owners should expect expenses to increase by approximately $580 per year because of HST, while condo owners will likely see a rise of $504 per year. Although condo fees aren’t directly affected by HST, condo corporations costs are going to increase because of HST and they won’t be able to claim them back. As a result, many condo corporations will be passing on the HST they will have to pay on after July 1st, 2010 to condo owners in the form of increased fees.

Other condo corporations are being more creative. We spoke to one resident of a downtown Toronto condo, who said that his building is installing smart meters into all units in order to try and save energy costs. Hopefully, these energy savings would offset the higher HST costs, and condo fees would not need to be increased.

Here are our calculations:

Increased costs due to HST on condo owners:

Note:

Increased costs due to HST on home owners:

Notes:

There is alot of confusing information out there and it’s not surprising that 80% of respondents to our survey said they knew little or nothing about HST and how it will impact them. Some industry experts are confused themselves. A case in point is that during our research we found an article outlining how moving costs are not going to be HST eligible in Ontario. After phoning 3 Ontario moving companies and the Ontario Ministry of Revenue, we were told that moving costs in Ontario will be eligible for HST.

With any new tax there will always be some grey areas that need to be ironed out and it looks like the HST will be no exception. I think the main point is that if you’re unsure of what is included, please consult a tax specialist to make sure.

Kelvin

Following our HST study last week on the additional cost HST will add for Canadian home buyers and home owners once it’s introduced on July 1st, we were featured last night on CTV’s evening news Consumer Alerts segment with Pat Foran.

Here is a link to the home and condo owner costs that are referenced in the segment.

TORONTO, June 17, 2010 … RateSupermarket.ca, Canadian consumers’ one-stop-site to quickly and easily compare over 500 mortgage rates from the country’s top providers, has embarked on an educational campaign to expose additional fees that homebuyers will experience when the HST comes into effect July first.

“We were surprised to see that of 383 respondents to our online poll, 56% said that they had no knowledge of how the HST will affect home owners, 24% said they had a little knowledge and only 20% said that they had knowledge of the HST,” said Kelvin Mangaroo, Founder, RateSupermarket.ca. “Clearly Canadians need to know the additional fees and taxes that they will be levied after July first because there is no doubt that the overall cost of home ownership will increase.”

RateSupermarket.ca has posted articles about the HST on their website info centre and created the following ‘hit list’ to highlight additional HST levies:

Breakdown of Costs with HST:

[1] Based on a 5 per cent fee – all real estate agent fees are negotiable

[2] Ontario land transfer tax

About RateSupermarket.ca (www.ratesupermarket.ca)

RateSupermarket.ca is an independent, impartial resource that is not affiliated with any mortgage lender or broker. It is the only resource in Canada that allows visitors to compare the whole mortgage market in the country. RateSupermarket.ca also compares insurance products, credit cards and GIC rates.

To help us make sense of these changes we asked Frank Bilotta, Associate Partner and Tax Specialist at SBLR Chartered Accountants, to answer our questions.
(Frank operates in Ontario, so answers are specific to Ontario law)

What exactly will change on July 1, 2010?

Frank: On July 1st the 13% Harmonized Sales Tax (HST) will come into full effect in Ontario. The HST is a combination of the 5% federal Goods and Services Tax (GST) and the 8% Ontario Retail Sales Tax (RST or PST). There will no longer be a separate Ontario retail sales tax. (The new Harmonized Sales Tax in BC will be applied at a rate of 12%.)

The biggest change is to services that were not subject to the Ontario PST, but will now be subject to an additional 8% in taxes under HST.

What type of services are we talking about?

Frank: Well, actually, quite a few common services will be affected. Consumers are most likely to notice an increase in the price of gasoline and heating fuels. Electricity will no longer be exempt from provincial sales tax, nor will tobacco. Personal services like haircuts, membership fees for clubs and gyms, magazines, and taxi fares will all be affected.

With regard to services associated with buying a home or home ownership items such as renovation services, legal fees, real estate agent commissions, landscaping, land survey reports, home inspections and cleaning – will all be subject to the new HST.

Will anything remain exempt?

Frank: Not a lot. Children’s clothing and footwear, children’s car seats, newspapers, books, diapers, feminine hygiene products and meals under $4.00, will remain exempt from the provincial portion of the single sales tax.

Basic groceries, rent, condo fees, prescription drugs, and medical devices which are currently exempt from both PST and GST, will remain exempt from HST.

What about home sales?

Frank: Only newly constructed or substantially renovated homes will be subject to HST. For purchases of new homes that straddle the implementation date of July 1, 2010, the provincial portion of the HST will apply depending on when the written agreements of purchase and sale were entered into and when ownership or possession are transferred.

For contracts signed before June 18, 2009, HST will NOT apply. For contracts signed on or after June 28, 2009, where both ownership and possession are transferred after June 30, 2010, HST will apply. For all contracts signed on or after July 1, 2010, HST will apply.

So resale homes will not be subject to the HST?

Frank: No, although real estate transaction fees will be taxed along with legal fees, as I mentioned earlier.

It sounds like home ownership is going to get a lot more expensive after July 1st. What’s the up side to all of this?

Frank: HST will result in the removal of the hidden PST which is buried in the price of the final goods and services. This should result in lower costs incurred by businesses and potentially allows savings to be passed onto consumers. The new tax will also make things easier for businesses currently charging both GST and PST; one sales tax is all they need to worry about now.

For consumers, the Ontario government has allowed for certain point of sale rebates and transition credits to offset the additional cost of the HST.

Tell me more about the housing rebates that will be offered.

Frank: Under the new HST rules, individuals will be eligible for the Ontario new housing rebate which is 6% of the value of the house, up to a maximum of $24,000.

This rebate is in addition to the existing GST New Housing Rebate, which remains at 5% and is phased out for house values greater than $350,000.

What if the value of the house exceeds $400,000?

Frank: Unfortunately, the rebate is capped at $24,000, but there is no reduction of the rebate if the value of the house exceeds $400,000. Unlike the rebate for the GST portion which is clawed back.

The chart below might help to explain this.

When will rebates be paid out?

Frank: The Ontario rebate will be administered by the Canada Revenue Agency along with the GST rebate.

What if a homeowner is in the process of renovating their kitchen? Will they be charged HST even though the work started before July 1, 2010?

Frank: HST will apply on the portion of the progress payments on contracts to construct, renovate, alter or repair real property (this excludes newly constructed or substantially renovated housing) relating to work completed from July 1, 2010 onward. For example, if 60% of the work related to a progress payment is completed before July 1, 2010 and 40% is completed after July 1st, HST will apply to the 40% portion.

Who determines what percentage of the work is complete?

Frank: With July 1st fast approaching, the rules for HST have not been finalized into law and we have not been given any guidance as to whether there is going to be a specific rule to determine this. What is most likely to happen is that the facts of each specific situation will determine the work completed before and after July 1st. The supplier of the services, who will be responsible for charging and collecting the HST, will have to ensure they have the necessary documentation/proof available to substantiate their determination under a CRA review of their GST/HST account.

What should potential home buyers and existing home owners do to prepare for the price increases caused by the new HST?

Frank: If you’re worried about the price increases, I suggest you speak with an accounting professional to see how these changes will affect your own personal situation. The most important thing is to be aware of the changes that are coming so you can adjust your spending plans and budget accordingly.

Where can consumers find more information about the new HST?

Frank: There are a lot of information sources out there. The Canada Revenue Agency website is likely to have the most accurate and up-to-date content. But if you can’t find what you’re looking for online, speak to your accountant.

HST chargeable common items

Here’s a list of common products and services that were subject to 5% GST before July 1, 2010, but will be charged 13% HST in Ontario after July 1st:

• Dry cleaning
• Electricity and heating
• Internet access services
• Home service calls (i.e. electrician, plumber, carpenter)
• Landscaping, lawn care and private snow removal
• Hotel rooms
• Taxis
• Camping sites
• Domestic air rail and bus travel originating in Ontario
• Magazine subscriptions
• Home renovations (i.e. installation for a new kitchen, or painting services)
• Gasoline/Diesel
• Real estate commissions
• Massage therapy
• Vitamins
• Green fees for golf
• Gym membership fees
• Sport/leisure lessons/classes (i.e. dance, karate, hockey, soccer, sewing, etc) (some exemptions apply)
• Hall rental fees
• Fitness trainer
• Hair stylist
• Esthetician services
• Funeral fees
• Legal fees
• Cigarettes and other tobacco purchases
• Nicotine replacement products

To learn more about the new tax changes go to www.ontario.ca/taxchange in Ontario and www.gov.bc.ca in British Columbia.

Frank Bilotta, CGA, Associate Partner
SBLR LLP Chartered Accountants
416-488-2345 x 269
fbilotta@sblr.ca
www.sblr.ca

Frank is a Tax Specialist with SBLR, a full-service accounting and business advisory firm located in mid-Toronto. With 9 partners and over 40 team members, including a full-time senior tax department, SBLR specializes in providing creative income tax solutions and high-impact growth and exit strategies for profitable, privately-held companies.

SBLR and RateSupermarket.ca do not accept any responsibility for the contents of this article or for the use thereof. Furthermore, SBLR and RateSupermarket.ca do not accept any contractual, tortuous or other form of liability for the contents or for any consequences arising from its use.

So potentially higher interest rates and additional taxes are on the horizon – sounds like a double whammy right? You see, the additional tax is going to affect everything we currently don’t pay PST on: groceries, haircuts, clothes, etc. This also includes most of the home purchasing closing costs such as lawyer fees, home inspections and real estate commissions. To top it off, the current 5% GST we pay on new homes will now increase by 7 – 8%. Homeownership is going to get a little more expensive come July 2010.

So what exactly is the HST and how will it affect the provinces of Ontario and BC?

The HST is a sales tax that combines both the PST with the GST. In Ontario, this tax will be 8% PST + 5% GST equalling a new 13% HST. In BC, this will mean adding up the existing 7% PST + 5% GST resulting in 12% HST. When the new tax becomes effective, GST/PST will be completely eliminated and everything will instead require HST, minus certain exempt items that can be found on the Revenue Canada website.

While the HST will take effect in BC and Ontario on the same day, key differences exist between how the tax was introduced and the rebates each province will receive.

In Ontario, Dalton McGuinty introduced the HST in January 2009. Despite negative reactions, it was announced in March 2009 that the HST would take effect in July 2010. When this tax was introduced, the public was also promised a family rebate to “offset” some of the tax burden. Rebates introduced to counter balance the effect of the sales tax totals $1,000 for families with an income below $160,000 and $30 for singles with an income below $80,000.

While Ontario has been preparing for the July 2010 transition to HST since March, BC didn’t make this announcement until this past July. The announcement came as a complete shock to businesses and residents. There was no warning or consultation and no family or individual rebate offered.

How will the HST affect real estate

Regardless of when it was announced, both provinces will face increased taxes. Resale homes will be exempt but new home sales will be affected. However, in both cases, the services required to run a home and sell a home such as utilities, real estate commissions, home inspections and legal fees will increase by 8% or 7% (depending on the province you live in).

For new home sales, according to the Ontario Real Estate Association, the HST will add $1,747 to $2,297 to a home costing less than $400,000. Here is a breakdown of the typical increases we’ll see in both Ontario and BC:

To help ease the burden, both the Ontario and the BC governments have promised rebates for all home buyers purchasing new homes regardless of the price of the house (resale homes don’t qualify).

Rebates up to $24,000 are promised on the first $400,000 of the purchase price. This rebate is also extended to new residential rental properties.

Yes, all new homes, regardless of their price, are going to be seeing a maximum rebate of $24,000. However, the price for a new home will increase by 8% in Ontario and 7% in BC. Meaning, a $400,000 house will still increase by approximately $8,000 after the rebate, plus you’ll have to pay the additional taxes on top of the closing costs.

Other areas being affected by HST

Residential landlords will see an increase in the costs to house tenants. Items required to operate a building such as maintenance, electricity, plumbing, etc., will now be subject to the additional tax. Landlords may be forced to increase rent as a result.

The home construction industry is also expected to suffer. All new homes are subject to the combined tax and builders are worried this will cause the market to collapse when it was just getting back up to speed, even with the promised rebate. The past few months have been seeing extremely high rates of housing starts, rising to the highest levels in March. Starts were up to 55,700 in October (up 14.8% from September) in BC and up 13% in Toronto reaching 34,200 in October.

While builders have seen a promising recovery in their industry over the past few months, they’re now worried consumers will once again crawl back into hiding after July. Therefore, many are working overtime to get projects done before the deadline.

The HST is arriving at a time when we’ll still be recovering from the hard-hit recession. Yes consumer confidence in the real estate market has increased but this has been a result of lower prices and record-low interest rates. Now with the new tax coming at a time when interest rates are predicted to go up, new home sales and starts may once again stagnate.

The real estate market experienced a depressing winter last year, with real estate agents and lawyers losing out on a lot of money. While this winter looks more promising, lawyers, agents and builders will have to work to maintain consumer confidence into the summer; whether this is through discounts, packaged deals or attractive home prices. If you’re thinking about purchasing a new home, you may want to look into it now so you’re not caught in the potential crossfire between hiked interest rates and added tax.

Caroline
PR@RateSupermarket.ca