This is a question we are frequently asked by our clients, and it is a complicated one to answer as there are a multitude of variables which contribute to the entire process. The short answer is, as you might expect: it depends.

For many years, it was standard practice to begin collecting your Canadian Pension Plan (CPP) at age 65, with the option of deferring. Now, you can start collecting CPP as early as age 60, or defer collection until as late as age 70.

Early CPP collection

The drawback to collecting CPP early is that the amount you receive will be reduced by 7.2% for each year before the age of 65. This can add up to 36% reduction if you choose to begin collecting at age 60.

This is a hefty amount to lose, especially given this is money that has been deducted from your hard-earned income throughout your life.

Deferred CPP collection

On the flip side, if you defer your withdrawals past the age of 65 then your payments will increase by 8.4% for each year thereafter. This can reach up to a maximum of a 42% increase if you choose to defer all the way until the age of 70.

Looking at an example helps to give a bit more context:

CPP example breakdown

Let’s say you are all set to receive $700/month as a CPP benefit if you begin collecting at age 65, which gives you $8,400/year (this is a pretty standard CPP benefit amount).

If you begin collecting at age 60, you will receive $5,376/year (64%), but if you begin collecting at 70 you could receive $11,928/year (142%). This is why it is especially important to properly plan the timing of your CPP withdrawals!

So, when should you start collecting CPP?

The answer to this question can be very different depending on your personal situation. But to help make it easier, there are a few important factors to consider.

Financial situation

The main factor is of course your financial situation. If your financial situation is forecast to be fairly comfortable between the ages of 60-70 regardless of whether you begin receiving the CPP benefit or not, then it makes more sense to defer the benefit to receive the larger amount.

Alternatively, if you require the CPP benefit in order to be financially comfortable from age 60-65 then it might be best to collect early.

Tax implications

It is important to be mindful that your CPP benefit is taxable income, and therefore your tax situation will have a large impact on the amount you receive as well. Looking at your marginal tax rate (the amount you will be taxed on the next dollar you earn) between age 60-65 and 65-70 can help determine if it is sensible to begin collecting early or late.

Reusing our example of a CPP benefit of $8,400/year, if you wanted to begin collecting at 60 but you are in a high tax bracket from 60-65 and your marginal tax rate is 40% then you would lose 40% of your CPP benefit for each year (plus an additional 36% for collecting early, leaving you with $2,016/year).

As you can see, it would make very little sense to begin collecting until you are in a lower tax bracket.

Similar logic can be applied to those in a high tax bracket from age 65-70. These are the situations where it is usually most advantageous to defer collecting until the age of 70 to avoid losing the majority of your CPP benefit to tax while you are still earning a high income.

Your health

Another important factor to consider is your health, but of course this is much more difficult to accurately predict. Many people would think it foolish to wait all the way until 70 to begin receiving this benefit, but as life expectancies continue to increase in Canada and more people begin to outlive their retirement savings, this option becomes more and more sensible.

Of course, we can only offer so much advice on this topic, but we remind our clients to consider their own personal health when making this decision.

In short, if someone is in poorer health they may see benefit from collecting CPP at 60, whereas someone in better health could see the most ideal situation from collecting at 70. Again it depends on the situation, but those who start collecting at 65 versus 60 will usually begin to see overall benefit (greater total CPP received) from this deferral around the age of 72-73. Those who defer from age 70 versus 65 can begin to see this benefit around age 82.

For taxpayers who pass away before receiving all of their CPP benefits, there are a few different types of survivor benefits available which can allow their spouse or children to continue receiving a portion of their benefits.

The right choice depends on your situation

The decision of when to begin collecting CPP can play an important role in making your retirement years as enjoyable as possible, and there are many factors to consider. Seeking advice from professional financial advisors is always a good idea.

Need help with planning your CPP strategy?

Our free Financial Planning Program is a great tool to help you crunch all of the numbers for income/expenses throughout your retirement, and assist with CPP and other important decisions. Get in touch with us today to receive your free Financial Planning Program.

Get in touch

If you would like further advice on when the ideal time is for your specific situation, visit our website to book a free consultation today. We are always happy to share our expertise on this topic.

I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.

Until the next time,

Gerry J. Hogenhout, CPA, CGA, CFP, AMP

Founding Principle, Canadian Investment Services

Personal Real Estate Corporations (PREC): a new and exciting opportunity for realtors

Bill 145, Trust in Real Estate Services Act, 2020 received royal assent on March 4, 2020, meaning that real estate agents in Ontario will be allowed to create their own Personal Real Estate Corporations (PREC). The time has finally come for real estate agents to enjoy the numerous benefits of a regulated industry, including reduced income tax and improved professional standards.

This is a tremendous victory for realtors as Bill 145 poses a very exciting opportunity to save on tax expenses. Here’s how:

Bill 145 breakdown

The main difference between earning income through a corporation versus a business is that you and your corporation are considered separate tax entities (compared to your previous filings where you and your unincorporated real estate business were only considered one taxable entity).

With a corporation, you need to file both a personal and corporate tax return, and income earned through your corporation will be taxed differently than income earned through your previous unincorporated business (which would just be reported on your personal tax return and taxed based on your “marginal personal tax bracket”).

In a corporation, the first $500k of income earned is taxed at the small business tax rate of only 12.5%, so this is obviously one of the main advantages now available to real estate agents.

How does it work for you?

Let’s compare this with personal tax rates: 20% on income up to $50k, 30% up to $100k, 40% up to $150k, and further increased to 50% on income over $150k. You can clearly see the potential for reducing the amount of tax owing by using a corporation to filter your income through. Plus, certain expenses such as meals, rent, auto expenses, etc. can possibly be considered corporate expenses and used as deductions within the corporation to reduce net income.

Paying yourself a salary from your corporation can be done through a variety of different ways, but we usually use “employment income” on a T4, or as a “dividend” on a T5 as a method to extract money from a corporation (FYI, you can pay yourself $45,000 as a dividend without paying any personal taxes!). Once this money is issued to the taxpayer, it is then taxed based on their personal tax rate.

PREC considerations

Under the new legislature, real estate agents are the only candidates able to set up professional corporations. The main limitations with a professional corporation are that all income earned by the corporation must be earned through that particular profession, and that all members of the corporation must work in that profession. The other limitation is that there is no liability protection, which is normally an advantage of non-professional incorporations.

There are other factors to consider when making the decision of whether or not to incorporate. One example is the ability to sell part of or all of your corporation via shares and being able to shelter the money you receive as a capital gain. Another factor is that a corporation requires more time consuming and costly maintenance when compared with an unincorporated business.

Is PREC for you?

Incorporating makes the most sense for real estate agents who are subject to higher personal tax rates and who do not need most of their money for personal use. Overall, the decision is very dependent on your personal situation. Here is a quick summary of the major benefits for incorporating real estate earnings:

Reduction of overall taxes payable
The ability to defer taxes
Funding non-deductible expenses
Access to the lifetime capital gains exemption

Another significant benefit is to use your corporation as a funding vehicle for your retirement. A corporation is a much better way to save for your future than a traditional RRSP. In fact, a traditional RRSP may very well be the worst method of saving for your future.

As mentioned, the decision to incorporate or not depends on a number of factors, one being your personal “marginal personal tax bracket” which is the tax you would pay on the next dollar of income.

See for yourself

As an exercise of interest, go to your 2019 personal tax return and divide your Total Taxes Payable (line 43500) by your Total Taxable Income (line 26000). Although this is not your “marginal personal tax bracket” this is your “combined tax payable rate”. If that number is greater than 12.5%, you will definitely save money by incorporating your real estate earnings. The bigger the gap between your “combined tax payable rate” and 12.5%, the more taxes you will save.

I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.

Until the next time,

Gerry J. Hogenhout, CPA, CGA, CFP, AMP

Founding Principle, Canadian Investment Services

Get in touch

For further advice on whether incorporation could be advantageous for you, please visit our website www.canadianinvestmentservice.com and book a free consultation today.

Gerry talks REITS and digs into all you need to know

For the next installment of our Financial Vlog series, our Founding Principle Gerry J. Hogenhout CPA, CGA, CFP, AMP talks about the various benefits and considerations of Real Estate Income Trusts (REITs).

Smarter Mutual Funds Investment with Canadian Investment Services

At Canadian Investment Services, it’s no secret that we prefer to lean towards real estate and other non-traditional investment options to empower our clients with broad access to financial growth opportunities.

We primarily tap into the ‘private assets’ investment marketplace, which includes Real Estate Income Trusts (REIT), real estate fix & flips, and private mortgage lending, to name a few. You can find out more about the numerous lucrative factors for this alternative investment approach on our website.

Having said this, we do recognize that some people like the potential upside of investing in ‘public assets’ which involve mutual funds and stocks. If you are one of these investors, then this article is directed at you.

Take our advice, it’s free

It is important to be aware that mutual fund investing is a very self-serving industry, and many financial advisors are only motivated to sell you on the product offered by their company, rather than focusing on what may be best for your personal situation.

At CIS, we want to set our clients up with the investments they actually want to be invested in, and for that reason we have established a few strategies that allow our clients to stay invested in mutual funds while mitigating the negative aspects of this type of investing.

Mutual fund investment considerations

In our opinion, there are two main issues regarding investing in mutual funds: market volatility and high management fees.

Market volatility

There are inevitable fluctuations in the market and no level of experience or expertise will allow anyone to accurately predict and take advantage of them - despite what some financial advisors might tell you.

Extremely high management fees

Often, these management fees are not well communicated to investors by banks and investment companies and can be as high as 2.5% - 3% regardless of whether the investor is actually experiencing any return from their investment in the mutual fund.

When most investors are presented with these facts, they inevitably begin the process of searching for new investment opportunities that do not have these issues. But before you do, consider the CIS difference, as follows:

The CIS difference

At CIS, we use two separate strategies to individually combat each of these issues:

Dollar-Cost Averaging

Dollar-Cost Averaging is a strategy in which an investor places a fixed dollar amount into a given investment on a regular basis (usually common stock or mutual funds). The investment generally takes place each and every month regardless of what is occurring in the financial markets. Making these predetermined monthly investments allows the investor to take advantage of inevitable market fluctuations in value, and be much less susceptible to losing money as a result of these fluctuations.

The graph below shows the beauty of Dollar-Cost Averaging, as even during the most turbulent and unpredictable economic times (such as the 2008 market crash), your investments will continue to grow.

The benefit of Dollar Cost Averaging is that if and when the market goes down, you are actually bringing more “units” or “shares” with your monthly investment. So, when the investments eventually go back up you have more “units” or “shares” that go up accordingly.

Robo Advisors

For clients who like the idea of being invested in mutual funds, we will often suggest they switch their investments to be managed by a robo advisor - a digital entity that provides financial advice based on mathematical rules or algorithms.

Robo advisors allow our investors to keep their money in similar mutual funds, but with a significant reduction in management fees. Traditional management fees with banks or other investment companies usually cost up to 3%.

But when investing with CIS through our roboadvisor network, our investors enjoy a management fee of only 0.5%. Therefore, if you were investing $100k, the difference in management fees could be saving you $2,500 a year.

The robo advisor mimics moves made by other investment portfolio managers, so our investors normally experience similar growth to what they might see with their previous investment company (but since the management fee is much lower they actually experience a much higher growth).

Trust the investment specialists

Overall, using one or both of these strategies can be a great way to improve the returns and stability of your current mutual fund investment. It has allowed many of our clients to continue with the simplicity and convenience of investing in mutual funds, while at the same time combating the negative aspects by taking advantage of fluctuations and reducing money lost to high management fees.

I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.

Until the next time,

Gerry J. Hogenhout, CPA, CGA, CFP, AMP

Founding Principle, Canadian Investment Services

Get in touch

Are you looking for smarter ways to invest in mutual funds? To find out more, visit our website www.canadianinvestmentservice.com to book a free consultation today.

Real Estate Income Trusts (REITs): the BEST investment option you’ve NEVER heard of

At Canadian Investment Services, we aim to inform and educate our clients about the best and most rewarding investment opportunities available. After all, CIS = EIS, remember? In-keeping with this philosophy, this article is devoted to broadening your access to an amazing investment opportunity that has been kept a well-guarded secret - until now.

Real Estate Income Trusts (REITs) are incredible investment options that most people have never about before. Why? Because when you strike gold, you tend to keep it to yourself. Not us though, because investment success for you means business success for us.

What are Real Estate Income Trusts (REITs)?

Quite simply, a REIT owns and manages properties. At CIS, we primarilry work with REITs that focus on multi-unit residential properties. These REITs therefore hold a portfolio of rental properties that generate rental income, usually apartment buildings.

How does it work?

Our partner companies, Pulis Investments and Centurion Asset Management Inc., strategically purchase undervalued real estate (apartment and townhome properties) in up-and-coming markets and renovate these properties in order to increase rental income.

Real estate in these markets is one of the safest and most profitable investment options available. I am sure we are all aware of this as we have watched housing prices and rent steadily skyrocket over the last few decades. The revenue from these properties will then be used to purchase additional properties, and the REIT portfolio continues to grow exponentially through this strategy.

REITs allow you to enjoy the stability and growth potential of real estate investing without the headaches that come along with owning rental properties yourself. This, along with many other reasons, are why REITs are a fantastic investment option.

Why it works

In many ways, REITs can provide the ideal balance between investing in public stocks and private real estate, as it is much less risky than stocks but requires much less maintenance and stress than real estate.

As the REITs we work with are limited partnerships, this allows our investors to further lower their risk: with a limited partnership, an investor’s liability is limited only to the amount they have contributed.

Long-term investment

Another important factor to consider when comparing investment options is liquidity. This is one area where real estate can be more limited, and is therefore usually viewed as a longer term investment.

REITs can provide a significant advantage in this regard, as it is much easier for an investor to sell their units and access their money as they need it. With that being said, REITs should still be seen as a longer-term investment. Often, the initial profits from net rental income are reinvested by the REIT in order to complete further renovations and purchase new properties, which leads to greatly increased unit value in the long run. So, for this reason we usually recommend our clients keep their money invested for at least 3-5 years in order to experience the best possible returns.

REITs: a breakdown

Investors/unit holders will receive distributions of a portion of the net rental income generated within the trust, based on the number of units purchased. However, as the value of the properties within the trust increases and the mortgages are paid-down, investors will see the value of their units increase as well.

Therefore, there are 3 potential avenues for generating income/value within REITs:

Net rental income
Increase in property value
Mortgage pay-down

In addition, REITs will also pay out distributions to their investors as a “return of capital”. Now, here’s the great part: return of capital distributions are considered a non-taxable income for the investor.

That’s right, non-taxable.

A prudent investment choice

Overall, REITs are a very prudent and tax efficient investment. During the initial stages of the investment, it is not uncommon for REITs to be experiencing a net loss (total rent - total expenses) as they use the rent money to purchase and renovate additional properties. While this can limit distributions to investors initially, in reality it is greatly increasing the value of each unit the investor owns, and allows them to see much better returns in the long-run.

Think of it like a normal real estate renovation investment: initially you spend money to buy/redo a property, which allows you to sell it for a huge return on your investment in a few years. In addition, investors continue to receive a return of capital each year, so even when the trust is actually experiencing a loss, investors can still enjoy positive cash flow from the distributions they receive. It’s a no-brainer.

CIS and REITs

In truth, REITs are a low risk and low maintenance investment option that many of our clients have had great success with. If the idea of investing in REITs sounds appealing to you, please get in touch with us at Canadian Investment Services. We will be happy to further educate you on the topic.

I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.

Until the next time,

Gerry J. Hogenhout, CPA, CGA, CFP, AMP

Founding Principle, Canadian Investment Services

Get in touch

Are you looking to leverage Real Estate Income Trusts (REITs) as a reliable investment opportunity? To find out more, visit our website www.canadianinvestmentservice.com to book a free consultation today.

Private Mortgage Lending as an Investment Opportunity

Private mortgage lending is a very popular way for people with money (lenders) to generate a solid return on their funds, and for people in need of money (borrowers) to acquire funds they are otherwise unable to receive from a financial institution.

At Canadian Investment Services, we often use this strategy with clients who are in search of capital in order to make additional real estate purchases, which usually allows the lender to secure their loan against a real estate asset.

In this article, I will provide an overview of the Private Mortgage Lending process from both the borrower and lender perspective to give you insight into how we use this strategy as an investment opportunity for our clients.

Let's start by looking at the different borrowing options available. There are 3 main mortgage lending categories to consider when aiming to secure a mortgage:

Banks

Banks can provide a very low interest rate, and for this reason securing a mortgage with a bank is normally the best choice if you are looking for a mortgage to purchase your principal residence. However, banks have strict requirements which can make it very difficult to qualify for these enticing mortgage rates. Also, they will often only provide these rates for your principal residence, so those purchasing additional real estate usually have to look elsewhere.

Alternative lenders

Alternative lenders are essentially any mortgage provider that is not a bank, such as Freedom Capital Inc. These institutions provide a middle ground between banks and private lenders. The interest rates they offer are usually higher than those provided by a bank, but lower than those normally seen in the private lending space. It is easier to qualify with an alternative lender than with a traditional bank, however it is more difficult than if you were simply borrowing from a private lender.

Private lenders

Private lending usually involves borrowing money from an individual who is not associated with a bank or a mortgage provider. This option can provide you with a higher interest rate and the requirements to qualify are far less strict and easily accessible. For this reason, private lending is a very appealing option for people who do not qualify for a mortgage from traditional lenders (be it due to owning multiple properties or a variety of other factors).

From the lender’s perspective, this can be a very beneficial investment opportunity for those looking for the best way to generate a reliable return on a large sum of money. It is also beneficial for those with money tied up in their RRSPs/pension account. This is a well kept secret by the financial industry, but you can actually hold a mortgage in your RRSPs/pension account.

There is also the enticing option of borrowing money from yourself if you have money tied up in your RRSPs/pension account, or even in your corporation. I won’t dive too deep into this option here as I will devote an entire article to it soon.

Private Mortgage Lending with CIS

At CIS, we facilitate private mortgages between our clients in need of money and our clients in need of a solid investment option. Most of the time, our clients who borrow money through a private mortgage do so in order to purchase real estate. In many cases, these real estate properties are purchased for the purpose of renovation and resale.

In these situations, it can be very difficult to get approved for a mortgage from a traditional lender. Therefore, we help facilitate short-term (usually one year), and interest-only private mortgages for these clients.

How it works

Commonly, the lender will register a mortgage against a property which guarantees the repayment of the loan upon the sale of the property. Borrowers will receive a mortgage from a traditional lender (i.e. a bank) which sometimes accumulates to less than the required amount, so they still require additional funds which they access through a private mortgage.

We use the loan-to-value ratio on the property to help our lenders find a level of risk that they are comfortable with for these private mortgages. The higher the loan-to-value ratio, the more risk for the lender. Usually, a loan-to-value ratio of 80% or lower is very safe (loaning up to $450k for a $550k house, for example).

While registering private mortgages against a property provides additional security, it also involves substantial lawyer fees and a lot of paperwork. An alternative option that we have found success with is creating a promissory note from the borrower to the lender, which cuts out the lawyers and reduces your costs. This option provides more risk for the lender, so it is only feasible if there is a high level of trust between all parties involved.

Why choose CIS

At CIS, we pride ourselves on helping our clients by pairing investors looking to lend money with a trustworthy party ready to borrow the money at an agreeable interest rate.

We usually facilitate private mortgages with a one year term, and it can therefore be looked at as a fantastic one year investment option. Indeed, it is very difficult to find other one year investment options with this kind of guaranteed rate of return.

Of course, we will adjust the terms of any of these agreements in order to find an option that best suits both parties. These mortgages can include an option for renegotiation after the one year period, or the option to pay out the remainder of the mortgage before that date.

As mentioned above, these will usually be interest-only mortgages, so borrowers will only be required to pay interest throughout the term of the mortgage, and pay the principal in a lump sum at the conclusion of the term.

This arrangement works perfectly for clients who are borrowing the money for real estate investment/renovation purposes: it allows them to maintain lower expenses through the process of the renovation, and gives them the opportunity to pay back the principal upon the resale of their renovation property - an option that they would certainly not have access to through any traditional mortgage process.

Of course, the key to successful private mortgage lending is finding the right match between someone looking to lend money and a suitable applicant looking to borrow. Finding this ideal match is one of our specialties at CIS, and can result in great benefits for both parties. It has allowed our clients interested in real estate investing to secure a mortgage on additional properties they would not otherwise get approved for, and it allows lenders to see a generous and stable rate of return for a large sum investment.

I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.

Until the next time,

Gerry J. Hogenhout, CPA, CGA, CFP, AMP