Real Estate, LSIFs & TFSAs (Ruby May 18, 2015) Flashcards
Investing in real estate - income tax implication
Interest expense can be deducted on borrowed funds used to acquire an income producing property. However, the interest expense incurred to carry raw land must be capitalized (ie: added to the cost of the property).
Also, any rental losses incurred or interest expense claimed on borrowed funds is added to the taxpayer’s cumulative net investment loss. If, at some point, the taxpayer wants to make use of a capital gains exemption on qualified small business shares of qualified farm property, the amount his his allowable deduction will be reduced by his CNIL balance.
Net Present Value (NPV)
Minimum Acceptable Return (MAR)
Internal Rate of Return (IRR)
The NPV of an investment measures the present value of cash inflows and outflows, generated by that investment.
The MAR is the minimum annual return that allows the investor to achieve her desired investment objectives.
The IRR is the discount rate at which the NPV is zero.
An investor would calculate the NPV and the IRR and compare them to the MAR. Investments with an NPV or zero or greater would be acceptable, as would those with an IRR greater than the investor’s MAR.
Limited Partnership for real estate
A limited partnership is the ideal investment vehicle for real estate tax shelters. A real estate limited partnership can flow through any losses to the investor, and he can then deduct them from his other sources of income, lowering his current tax bill. However, the ITA limits the cumulative losses that he can claim to the amount of the capital that is deemed to be at risk. This is referred to as the at-risk rule. The investor in a limited partnership can only claim a loss up to the amount of the capital deemed to be at risk.
Investors in real estate limited partnership have limited liability for the actions of the partnership, so long as the investor does not involve himself in the management of the partnership. Not all investors can afford the costs of an entire property. The amount of the contribution in a limited partnership unit can be comparatively small relative to the cost of the property. This allows investors with limited funds to participate in real estate investments even if they do not have enough money to purchase the real estate directly.
Real Estate Investment Trusts (REITS)
Real estate mutual funds typically invest in commercial properties that generate rental income, such as shopping malls, office buildings, or industrial space. These funds provide the investor with rental income, and may also distribute capital gains if they dispose of an appreciated capital property. The mutual fund deducts the capital cos allowance (CCA), but the fund makes cash distributions to the investor that is equal to her share of the net income plus the CCA that was claimed by the fund. The income and deductions retain their character as they flow to the investor, so capital gains are only taxed at 50% and the investor can also deduct the CCA. When the investor deducts the CCA, it reduces the ACB of her shares.
Tax advantaged investments
Is an investment that has one or more of the following three types of tax advantages: tax deferral, tax avoidance, tax conversion
Distributions and income from REITs, how it affects the ACB.
Taxable income that a Canadian REIT allocates to it unit holders is added to the ACB of the unites, while cash distributions from the REIT are deducted from the unit’s ACB.
Labour Sponsored Venture Capital Corporation (LSVCC) also known as Labour Sponsored Investment Funds (LSIFs)
A type of mutual fund corporation, sponsored by a labour union or other labour organization, that makes venture capital investments in small and medium sized businesses. LSVCCs may be referred to by other names under provincial legislation.
A federal tax credit is provided to individuals for the acquisition of shares of LSVCCs of up to $5000/year, providing Federal tax relief. Select provinces provide a similar tax credit. An individual who acquires shares of an LSVCC in the first 60 days of a taxation year may claim the tax credit for the year of the acquisition or prior year.
Bill C-4, a second act to implement certain provisions of the Budget tabled in Parliament on March 21, 2013, and other measures was given Royal Assent and passed nto law on December 12, 2013. This legislation phased out the Federal LSVCC tax credit that was 15% when claimed for a taxation year that ended before 2015 and is reduced to 10% for the 2015 taxation year, and 5% for the 2016 taxation year. The federal LSVCC tax credit will be eliminated for the 2017 and subsequent taxation years. This legislation also ended new Federal LSVCC registrations.
Venture capital is money that is invested in high risk companies, typically those that are in their start up or expansion phases. The companies tend to be too risky for bank financing, or too small for stock market listings.
LSIFs were created because the government wants to stimulate new business. Some provinces also provide tax credits for LSIF investments. However, the invest must hold his shares in the LSIF for a minimum of 8 years, or he or she will incur a penalty equal to the tax credits received.
Can you deduct admin fees or counselling fees in respect to a TFSA?
Can you deduct interest on money borrowed to invest in TFSA?
No!!
What happens when a spouse is not named beneficiary or successor holder on a TFSA?
If, on death of a TFSA holder, a survivor of the holder does not become the successor holder, the arrangement ceased to be a TFSA. However, if payments are made from the arrangement to a survivor of the holder within the two year period following the holder’s death, the survivor may contribute up to an equivalent amount to his or her own TFSA, within that same period, without affecting the survivor’s TFSA contribution room.
