Money Matters

What is Your Intention In Buying Property?

In Tax Court of Canada, a recent appeal sided with the person making the appeal and against CRA.

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Background: In short, Steven B. owned a townhouse in Ontario since 1998. At the time of purchase, his brother, Patrick, contributed to the downpayment, moved in and shared expenses. In and around 2006 the brothers discussed going their separate ways because of brother Patrick’s changing circumstances. So Steven wanted to sell the townhouse and move to a smaller home that was closer to his work.

The New Condo Purchase: In 2006 Steven purchased a preconstruction condo which was scheduled to close on April 27, 2008; yet the occupancy date was postponed by the builder to October 28, 2009.

Changing Circumstances: In 2008 Brother Patrick married, had a child and all lived in the townhouse. Also in 2008, their father passed away and in 2009 their mother moved in with her two sons. Steven soon refinanced the home and paid his brother for his interest in the property. Brother Patrick used the funds to buy a home for him and his family.

New Plan to Sell the New Condo Purchase: Steven had every intention to sell the townhouse but plans changed when his mother moved in. He now felt the condo he purchased was too small for them and by 2009 his plan changed to selling the new condo instead of the townhouse. Steven became the registered owner of the new condo on August 10, 2010. He now arranged to list the property for sale and the sale closed on November 2010.

Sale Results in a Questioned Gain by CRA: His gain on the sale was $13,412 and was reported as a capital gain. He appealed the Minister of National Revenue’s reassessment that this gain was unreported business income from an adventure or concern in the nature of trade, as opposed to a capital gain, so gross negligence penalties were levied against him. Tax on a capital gain is based on one half of the net gain. Tax on business income is on the entire gain after expenses.

The Court’s Decision: The tax court judge based her decision on the following four factors which are a good takeaway.

  • Intention: Steven’s intention was to sell his current property and move into the new condo. This plan was thwarted by the death of his father and his obligation to look after his mother. According to the Judge, “Therefore, this factor favors a finding on account of capital” as opposed to income.

  • Nature of business of trade of the taxpayer: Steven and brother were both transit operators. Prior jobs had no connection to real estate transactions and the townhouse was the first and only property he had ever owned until buying the new condo. Again this evidence favored capital.

  • The nature of the property: As a new condo which sold quickly after closing, “this factor favors a finding on account of income.

  • Extent and Use of Borrowed Money and length of time the real estate was held: The agreement to buy was September 2006, yet the closing took place in August 2010. Steven only borrowed money to refinance the existing townhouse to pay off his brother. There was no financing on the new condo and he could not afford to own both homes. The sale took place quickly but time between agreement to buy and closing was long: about 4 years. This factor was found to be neutral.

Decision: The sale of the new condo was determined to be a capital gain and properly reported. The appeal prevailed and CRA’s penalties were dismissed.

It's Important to Know Today's Mortgage Rules

Confused About Getting a Mortgage Today?

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You’re not alone. Recently reports state that a majority of people (some 57%) are befuddled about qualifying for a mortgage. It has further been reported that the stress test causes some 47% of people additional confusion.

Mortgage Pre-Qualification Is More Important Than Ever

Why? Aside from the stress test, qualifying for a mortgage has become quite complicated. The website for Canada Mortgage and Housing (CMHC) includes an article called: How key inputs calculate a borrower’s debt service ratios. This can help to clarify some of the essential steps lenders have to look to today to qualify you or a mortgage. Here are the highlights of these key inputs.

What is GDS?

GDS or Gross Debt Service represents 32% of your gross income. So if you have a combined gross income of $100,000. Your GDS works out to $2,667 per month. This amount must cover the mortgage Principal and Interest, property Taxes and Heat. The acronym PITH is commonly used.

What is TDS and How Can It Reduce GDS?

TDS or Total Debt Service represents 40% of your gross income. At a gross income of $100,000 your TDS works out to $3,333 for all debts, or $667 more for Other Debt Obligations. Should other debt obligations be greater, they will reduce your GDS. So if your other debts are $1,133, this will reduce your GDS to $2,200 for mortgage, taxes and heat.

Condo Fees

If applicable, 50% of condo fees must be included in the calculation.

What’s Included in Other Debt Obligations

These include credit cards, lines of credit, car and personal loans. For this type of debt, the lender must calculate and factor a monthly payment of 3% of the outstanding balance. A balance of $15,000 works out to $450 per month.

What’s Different About a Secured Line of Credit?

For a line of credit that is secured on your property the formula differs. Here the lender takes the outstanding balance and calculates a monthly payment based on a mortgage amortized over 25 years at the benchmark rate if the contract rate is unknown. The benchmark rate, currently at 5.34% represents a cross-section of posted bank rates and is set by the Bank of Canada.

For example, a $20,000 secured line of credit based on the above would have a monthly payment of $120.22 to factor into the qualifying mix.

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Finally the Stress Test

For an insured mortgage, typically one with less than 20% down, the borrower must qualify at the benchmark rate of 5.34%, though the contract rate might be in the area of 3% for a five-year term mortgage.

For an uninsured mortgage, typically a mortgage with 20% or more down, the borrower must qualify for the greater of the benchmark qualifying rate or the contract rate plus 2 points.

What’s More,CMHC requires a recommended minimum credit score of 680. With all of these rules, knowing how much mortgage you qualify for requires the help of an expert before you decide to shop for a home.

5 Things to Avoid When Applying for a Mortgage

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Whether you are purchasing your first home or refinancing your mortgage, there are harmful things you can do to jeopardize your own approval. Here is our list of what to avoid and why:

Don’t change your job

Depending on how long you have to purchase or refinance, you could wait this one out, but typically mortgage providers are required to see you have stable employment. When you move between jobs, the mortgage provider will then need to wait until you are out of your probationary period. With probation often lasting about 3 months, this can hurt your purchase or refinance application in this window. Occasionally, if you have been in the same industry, the employer may waive the probationary period, but I wouldn’t count on it!

Don’t buy a car

This is a big mistake for many borrowers. When being qualified, mortgage brokers take all your debt, loans, and car payments into the calculations for your mortgage approval. Car payments themselves can range from $200/month to $800/month. With that in mind, these payments reduce your monthly cash flow, and in turn reduce the amount you can be eligible for in your mortgage. The best bet is to wait until after your mortgage funds to buy a car.

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Don’t extend credit balances further than when you were approved

With your mortgage approval, we are required to use a 3% payment on most of your debts (unless there are set payments such as car loans, or other set obligation loans).

Don’t miss any payments

When you are approved for a mortgage, the mortgage provider takes into account your income situation, your credit worthiness, and overall property to approve your mortgage. With that in mind, you do not want your credit situation to change – this means keeping all payments up to date and ensuring none slip to past due. Mortgage providers will usually do a final credit check right before funding to ensure everything is still in order. You do not want your mortgage approval getting cancelled last minute!

Don’t make unusual or large deposits between accounts

When you are approved for a mortgage, the bank requires 3 months of statements showing the accumulation of your down payment. When there are large deposits (typically over $3,000) which are not payroll deposits, these deposits must also come with 3 months of statements from the transfer account. That means if you are moving a lot of money around, this could be a headache to gather the appropriate statements!

Despite these things to avoid, the home buying process shouldn’t be challenging or alarming. Once your mortgage provider supplies you with your mortgage funds, you will be able to go buy that car you want, change your job, or extend credit card balances. But don’t neglect to make your mortgage payment!

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Sherri Vigna - Mortgage Agent

CENTUM Omni Mortgage Corp.

282 Geneva Street, St. Catharines, ON

T: (289) 337-1304

Should You Sell First or Buy First?

Whether to sell or to buy first depends on market conditions, affordability, and your tolerance for risk.

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In a balanced or buyer’s market, offers conditional on the sale of the buyer’s home are fairly common. Today in Niagara, we are again starting to see conditional sale contracts.

In a seller’s market, sellers favor purchase contracts free of a condition to sell the buyers property. Sellers often have the choice of accepting an offer with the fewest conditions possible. This is especially true if the home’s list price is based on a valuation that reflects market pricing.

Regardless of Market Conditions...

The most desirable homes tend to be positioned in seller’s market territory. These are homes that are competitively priced, appeal to and are affordable to the highest concentration of buyers. Also, the supply and demand of homes varies within different price ranges. For high-end homes the market can shift to a buyer’s market as seen below. Market conditions can be measured by the months of inventory, also known as the absorption rate.

Months of Inventory Analysis For Homes Listed for Sale

Under 5 Months Supply = a Seller's Market

5 to 6 months supply = a Balanced Market

7 to 9 months supply = a Buyer’s Market

Over 9 months supple = an Extreme Buyer’s Market

As an example, in a recent St. Catharines study of MLS listings and sales over three months, the following clearly makes the point: .5 months of inventory at $250,000 or less; 8 months at $250-$350K; 2.3 months at $351-$450K; 4.5 months at $451-$650K; 9 months at $651K +.

Anything under $650 indicates a seller’s market in varying degrees while anything above $650,000 points to a buyer’s market.

So How Does this Relate to Whether to Buy or Sell First?

  • There are buyers who have to know where they’re going before they can sell and those who have to sell before they’re ready to buy.

  • Not everyone can afford to buy a house before they sell theirs as you might have to qualify for two mortgages. Can you afford to hold two properties if your current home sits on the market and does not sell for a few months? If so, consider an open mortgage that can be paid off at any time. Once your home sells, lock into a fixed mortgage.

  • Have a detailed conversation with a mortgage broker and your REALTOR®. Strive to understand your options and costs.

  • Be ready to put your home on the market. Repairs take time, as does staging and listing a home for sale. Time is precious when you’ve got a pending closing date quickly coming up.

  • Ideally, you should be ready to list within 48 hours of signing paperwork to buy. You should also have had the property evaluated by your sales representative.

  • Selling first might mean temporary accommodation but eliminates the risk and cost of owning two homes. It can also give you a strong negotiating position.

  • Bridge financing can only be obtained when you have a firm and binding sale on your home.

Rooting Out Fraud & Tax Avoidance

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13% of Canadians Would Lie Applying for a Mortgage

A survey by Equifax Canada, a leading consumer credit company, indicated the following regarding mortgage fraud:

  • 13% of Canadians felt when applying for a mortgage, a white lie to get the house they want is okay.

  • 16% believe “mortgage fraud is a victimless crime.”

  • 8% “admitted to misrepresenting the facts on credit or loan application.”

Equifax further noted that since 2013 there has been a 52% increases in “suspected fraudulent mortgage applications.

What is Mortgage Fraud?

CMH defines mortgage fraud as deliberately misrepresenting in order to obtain a mortgage. It cites the following 8 deceptive acts::

  1. “Misstating your work position, your income or the length of time you’ve held your job

  2. “Stating you’re a full-time salaried employee if you are not

  3. “Misrepresenting the amount or source of your down payment

  4. “Claiming a rented property is owner-occupied

  5. “Not disclosing other mortgages or debts

  6. "Omitting information to inflate the value of the property

  7. “Adding purchasers’ names on the mortgage application who do not intend to take responsibility for the mortgage

  8. “Acting as or using a “straw buyer” – a person whose good credit is used to get a mortgage for someone else”

Fraud May Create Liability and Criminality

Such acts, CMHC warns, make the borrower liable for financial shortfalls should default occur, and they can be held criminally responsible. Aside from some borrowers inflating their income, CMHC believes that notices of assessment from Canada Revenue Agency can be printed and easily falsified.

CMHC Asks CRA to Verify Incomes

CMHC recently asked CRA to take a more active role in verifying income borrowers are claiming on mortgage applications. CMHC sees this association as necessary due to sophisticated increases in fraudulent threats. So CRA is looking into secure ways to share information with financial institutions conditional on client consent. Such direct access by lenders should speed up income accuracy and verification, speeding up the approval process.

Budget: CRA to Crack Down on Tax Avoidance

To address tax non-compliance in real estate, the Feds are giving CRA $50,000,000 to create audit teams to ensure the following:

  1. Taxpayers report the sale of their principal residence,

  2. Any capital gain from a property sale is identified & taxed,

  3. Ensure money on real estate flipping is reported as income,

  4. Commissions earned are reported as taxable income,

  5. Builders of new residential properties remit the appropriate amount of tax GST/HST to the CRA.

To Deter Financial Crime in Real Estate, including mortgage fraud and money laundering, the Budget is strengthening enforcement by expanding its “outreach and examinations in the real estate sector.”

Share Equity First Time Buyer Incentive

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To Help First Time Buyers: the Liberal Government Budget included a First Time Home Buyer Shared Equity Incentive, and an increase in the RRSP Home Buyer Plan.

1. The First Time Home Buyer Shared Equity Incentive: One catch about this new initiative is that details of the plan won’t be out until sometime in September of this year, 6 months down the road. This may actually cause first-time buyers to wait it out until more details become available on how the plan will work.

The basic information: Through Canada Mortgage and Housing, the government will contribute 5% for a resale home and 10% for a newly built home to bring down the mortgage on a shared equity basis. The money is interest free and there is no monthly payment. You can choose to pay it back at any time or when you sell the home down the road.

What still needs to be unraveled is how the money is to be paid back. Will you simply be required to give the money back without interest or will the repayment include an equity share in the home’s value? With the second option, if for any reason the home’s value goes down will CMHC take a proportionate share of the loss?

To qualify the down payment required is 5%, the minimum for an insured mortgage and a household income of $120,000 or less. As well, the mortgage including the equity loan is restricted to 4 times the household income. So at an income of $120,000, the maximum mortgage loan would be limited to $480,000. A household income of say $100,000 would qualify for a mortgage loan of $400,000.

No Stress Test Relief or 30-Yr Mortgage

The hope prior to this announcement was that the government would ease up on the stress test and/or increase the amortization to 30 years from 25 years. Instead the stress test to qualify for a mortgage remains unchanged and the maximum amortization stays at 25 years. Here is a comparison in savings if the government had simply increased the amortization to 30 years vs. the Equity Plan of 5% & 10%:

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A Significant Savings with 30-Yr Plan

The 30-year mortgage gives a savings of $247.85 versus $119.88 and $239.65 per month. The 30 year versus the 5% assistance for resales ($247.85 - $119.88) gives a savings of $127.97 more per month. That would be especially significant for first-time buyers.

2. The RRSP Home Buyer Plan for first time buyers now allows a withdrawal of up to $35,000 per individual to purchase a home. Two first-time buyers in the same household can withdraw up to $70,000 for a downpayment to be repaid over 15 years.

People in marriage or common-law partner breakdowns will also be able to participate in the Home Buyer Plan as of this year.

2019 Federal Budget

The 2019 Federal Budget came out yesterday!

It is always interesting to see the types of changes that the Federal Governments make each year. Attached is a summary of those changes.

Here is a list of the highlights for your reference:

  1. Employee Stock Option changing (taxes)

  2. Home Buyers’ Plan Changes for RRSP limit and Plan Incentive

  3. Canadian Training Credit for working adults 25-65 years old

  4. Canada Student Loans – Lowering Interest Rates

  5. Change in use rules for Multi-Unit Residential Properties

  6. Canada Pension Plan and Guaranteed Income Supplement Changes

  7. Registered Disability Savings Plan updates

  8. Individual Pension Plans

  9. A new ALDA (Advanced Life Deferred Annuity) program

  10. Medical Expense Tax Credit expansion to Cannabis

  11. Zero-Emission Vehicle enhancement of Capital Cost Allowance for those cars

  12. More Support for Canadian Journalism

  13. Enhanced small business deduction for farmers and fishers

  14. Enhancement in the Scientific Research and Development Program

If you have any questions or concerns in regarding the budget changes, please don’t hesitate to e-mail me or call me. If you would like to review your financial plan or if any changes have taken place recently, please let me know and we can have a meeting.

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You Must Report Sale of Your Principal Home

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Important Reminder for Sellers

With tax season upon us, this is an important reminder: if you sold your home in 2018, you must report the sale of your principal residence on your tax return. The following is from an article we published previously.

On October 3rd, 2016 the Government announced a change to the reporting requirements. From the 2016 taxation year and thereafter, when you principal residence, or when you are considered to have sold it, “it must be reported to [Canada Revenue Agency] CRA in order to qualify for the tax exemption.”

Why the Change?

As reported in 2016, the intent of this mandatory reporting, according to Finance Minister Bill Morneau, is to:

  • “Improve tax fairness for Canadian homeowners,”

  • Improve compliance and administration of the tax system, and

  • Close this loophole thus preventing foreign investors from flipping homes and fraudulently taking advantage of the capital gains exemption.

To be clear, reporting the sale of investment property and payment of capital gains tax has always been a requirement. But because some have evaded their tax obligations, Canadian residents are now required to report all sales, including their tax-free principal home.

How and What to Report

On the sale of your principal residence, you will be required to complete Schedule 3 and file it with your income tax and benefit return for the taxation year in which the residence has sold. This form will ask for the year the home was acquired, the proceeds of the sale, and a description of the property. Of course, you must own the home, you and your family must ordinarily inhabit it, and you must designate it as your principal residence if the property was your principal residence for every year that you owned it. Understand that you can have only one principal residence in a particular year.

It is likely that requiring the home’s description helps determine its use as a residence and any portion that may have an investment or commercial application.

For sales in 2017 and later, you also have to “complete page 1 of Form T2091 (or Form T1255) if the property you sold was your principal residence for all the years, or for all but one year, that you owned it.” As well, a late filing might raise a red flag and result in a possible audit.

Penalties for Failing to Report

CRA will only allow the tax exemption if you report the sale and the designation, as your principal residence in your tax return.

So what if you forget to Report the Sale?

If you forget to report the sale, you must amend your return though a penalty may apply comprised of $100 “for each month from the original due date to the date your request was made” or $8,000 whichever is less. So claim your exemption and avoid any penalties or even a possible audit by reporting your sale.

Is Cannabis Still a Stigma When Buying?

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What is a Stigmatized Property?

In real estate a stigmatized property can be one that buyers, even tenants, may reject, prefer to avoid or devaluate for reasons not related to its physical condition. Stigmas can include murder, suicide, any criminal activity and some negative public perception not related to a home’s physical condition.

Despite the legalization of marijuana many sellers and buyers view it as a negative. According to a recent survey:

  • 64% of Sellers felt that smoking marijuana in the home would harm its resale value and 57% believe growing the legal limit of four plants would impact on their home’s value negatively.

  • 52% of Buyers said they would not consider buying a home that grew the legal limit.

So, smoking and/or growing cannabis in a home is viewed as a stigma for a majority of buyer and sellers.

Built-in Protections

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More and more, brokerages include a typical clause in agreements in which sellers represent and warrant that during their ownership, the buildings and structures on the property have not been used for the growth or manufacture of illegal substances. We have amended the clause to include the growth or manufacture of legal substances as a reference to marijuana’s new status and its continued negative perception with both buyers and sellers.

How Does This Warranty Effect Rental Property?

As or April 1st, 2018, landlords must use the new mandatory lease agreement for any tenancy from that date forward. Ontario also gives landlords the option to include as a schedule to the new agreement that can include a clause that prohibits the smoking, vaping or growing of cannabis. This restriction, however, cannot be added to tenancy agreements existing prior to April 1.

The Warranty When Selling Income Property

Recently an offer to purchase was presented on a four-unit apartment that included the clause referenced above about the property not being used for the growth or manufacture of legal or illegal substances. As part of the counter offer, the seller and his lawyer deleted the clause for valid reason. As rental units the seller was unaware of the tenants’ activities regarding cannabis. What’s more, with legalization, tenants with rental agreements prior to April 1 are entitled to grow up to four cannabis plants per household, and the landlord has little recourse if any.

Enforcement of Legal or Illegal Limits

Even if a new mandatory lease were in place that included the cannabis restriction, how could a seller warrant that the tenant did not abuse the agreement? It would be risky to do so as enforcement by the Seller is not easy.

Even enforcement by the landlord of limiting growth to four plants might be difficult in some instances.

Are Niagara Region House Prices Dropping?

It’s a Commonly Asked Question Today

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One of the questions homeowners continue to ask lately is, “Are prices dropping?” A legitimate question when they notice “New Price” and “Reduced” stickers on any number of for sale signs, not to mention homes lingering on the market, unsold compared to last year.

To date the answer is “no,” at least prices, that is to say, have not gone down overall. To the end of September, versus the same time last year, the number of sales is down by about 13% to 15%, yet average and median sale prices indicate positive numbers as follows:

  • The overall average price year-to-date for the Niagara Region is up by about 2.6%, and

  • The median price by and large is up by about 4%.

Of course average and median prices cannot determine how any one home or neighbourhood has performed. They do, however, point toward general market conditions and trends. As well, in certain districts within the region and in high-end properties average and median prices are down somewhat.

What has been going down are list prices

The hot seller’s market of 2017 brought about a sizable increase in sale prices. By the end of December 2017, the overall average sale price for the region was up by about 23.8% and the overall median price by 21.2%. Homeowners still have the benefit of this appreciation.

Yet in many cases, sellers this year have overextended their asking prices, possibly thinking that prices were going to continue to rise to a similar degree as last year. Such a strategy has not served them; hence the noticeable number of price reductions and listings that remain unsold. Market conditions change and experience has shown that there is often a delayed reaction to such shifts on the part of sellers.

Some of the following have contributed to this shift:

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  1. The mortgage stress test introduced in January of 2018 caused some buyers to opt out of the market;

  2. Home price increases contributed to reduced affordability;

  3. The number of out of town buyers coming to the region has dropped as sales of single family homes in and around Toronto have gone down as well as their average prices.

  4. Interest rates continue to inch up shrinking affordability and creating buyer concern.

In spite of this, and to reiterate, prices for the most part have gone up, and properly-priced homes continue to sell. Even during the hot seller market overpriced listing prices did not result in a sale. Today properties have to be priced to attract buyers and their representatives.

Fear Can Drive Many Buying Decisions

In a hot seller’s market buyers fear they might lose out. In a slower market buyers fear they might pay too much. They question whether their home purchase will maintain its value.

5 Steps for Planning An Affordable Christmas

Christmas is fast approaching and for many of us the stress of social and financial commitments detracts from the celebrations and enjoyment of the season.  The better prepared you are, the more likely you are to enjoy the festivities.  Here are five steps that may help you make better decisions around planning your Christmas events.

1. Give based on your actual financial situation, not your wishful financial situation

The fact is, people who overspend on Christmas gifts and parties by putting everything on credit may have a wonderful December, but an incredibly stressful January.  If you aren't able to pay off the entire credit card bill when it comes in after the holidays, then you've spent too much.

Perhaps it is the fear that friends and family will consider us similar to the character Scrooge, from Dicken's A Christmas Carol that cause us to overspend.   The truth the financial burden of spending more than we have creates a far more dire reality than any perception of being "cheap".

In your Christmas planning, you must establish boundaries.

  1. Financial Boundaries (often called making a budget) — How much money do you have to spend on Christmas?

  2. Scheduling boundaries — How many Christmas parties can you logically attend?

  3. Hosting boundaries — How many people can you feasibly host?

As a result, 'no' must become a part of your Christmas vocabulary. For many, Christmas is about a time of over-commitment, so it is essential that we know our limits.


2. Giving a gift doesn't necessarily mean spending money

You can express your love and appreciation for people without spending money.  Marketing over the years has become extremely effective at associating buying expensive gifts as showing how much you love someone.  We need to reset that misconception.

If you are handy or crafty, make a gift.  It could be a scrapbook from a special event, an upcycled piece of furniture or event passing along a cherished family heirloom like grandma's teacup.  It could be as simple as a handwritten Christmas card you've made yourself.


3. Make a list and check it twice, then check it again.

Start your list by writing your total gift budget at the top of the page.  Then start writing down a list of everyone you'd like to give a gift.  Go through your list and allocate portions of your budget to everyone on that list.  This may take several passes to make sure you don't go over your original limit.

Whilst going through your list, who will get a store bought gift?  Who will get a lovely handwritten card from you?  Who will get the gift of your time and energy?  Taking the time now will prevent impulse buying and overspending when you are at the mall.


4. Start saving money as soon as you can

Even though the stores decorate for Christmas earlier and earlier each year, it can be a positive trigger for you.  Start saving as soon as you can so all of the bills don't hit you in December.  Take a look at your total budget and look at how many paycheques you have between now and Christmas.  Plan to put equal portions of each pay aside to match your budget.  If you aren't able to do it, then take another look at your budget - perhaps you'll have to decrease it.


5. Be watching for sales today

Time is always a friend of a savvy shopper.

Stores almost always have sales, but they don't put everything on sale at the same time (typically). This means that if you start watching for sales today, you can snag a pair of running shoes for junior today, and then in a few weeks they might have a video game on sale. Far too many of us wait until the last week and are forced to pay full price for everything. But since you've already got your list, your budget, and you're even setting aside money, you can start taking advantage of sales now.

Net Cost of Owning Versus Renting Your Home

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Mr. Will Dunning, Chief Economist for Mortgage Professionals of Canada, released an insightful report called, Owning Versus Renting a Home in Canada, release September 2018.

Increase in Home Prices vs. Renting:

  • According to the Canadian Real Estate Association, over the last twenty years, home prices in Canada have appreciated by an average of 6.2% per year.

  • According to CMHC, rents over the past twenty years have increased by an average of 2.7% per year.

Given the discrepancy, does home buying still make sense and are young people better off renting?

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Yet Home Ownership is at an All-Time High

Notwithstanding the perceived “deterioration in affordability” due to price increases, “Canadians remain highly interested in becoming homeowners, and they continue to succeed at buying homes.” Mr. Dunning reports that compared to renting, those able to invest in ownership would be better off in the long term as opposed renting. He agrees that upfront monthly costs for renting can be cheaper in most locations. However, the net cost of owning a home compared to the comparable rental cost is less and more cost effective over time. And that’s without considering a home’s appreciation.

The Net Cost of Owning Trumps Renting

Over time the cost of owning or renting will both rise. The net cost of owning, however, takes the following into account. The largest cost of ownership is the mortgage payment which typically becomes a fixed amount over the term of a mortgage contract, as in a five year term. During this period, and with each mortgage payment, a portion of the principal is paid down increasing the owner’s equity in the home. This savings effectively reduces cost resulting in a net cost savings.

Here is the Result On Average

According to Mr. Dunning, the result, based on a Canadian average price of $569,849, 20% down and a 3.25% over 25 years is as follows: On average, the cost of owning exceeds renting a similar home by about $541 per month. Yet once the “the principal repayment is considered, the net cost of owning is $449 less than the cost of renting.” Over 25 years or less, once the mortgage is paid off, he projects the cost of ownership at about $1,549 per month versus $4,655 for renting a corresponding dwellings.What’s more, because the lifetime costs of housing is lower than that of tenants, owners have a greater opportunity to accumulate more savings tend to be better off financially.

How Does This Pan Out in Niagara?

The regional overall average price year-to-date is about $470,000. Based on the same parameters as above, the net cost of owning exceeds the cost of renting by about $640. Minus the principal repayment, the net cost of owning is $380 less in the first month. Over year it’s about $6,400 less.

Other Housing Costs

Average annual increases for housing costs in Canada for the past 5 years: Property taxes 2.8%; Repairs: 1.9%; Home insurance: 5.4%; Utilities: 1.6%; Rents: 2.4%; Utilities: 1.6%; Rents: 2.4%. For full report, do an internet search on “Owning versus Renting in Canada-Mortgage Professionals.”

6 Mortgaging Mistakes to Avoid

Avoiding Mortgaging Mistakes

The Inability to close a purchase for lack of mortgage funds can occur for any number of reasons. some of which are:

  1. Not Acting in Time: The buyer may not have acted within the time frame specified in the offer to arrange a mortgage and, instead of requesting an extension of time, removes the mortgage condition on the assumption that arranging a mortgage is “no problem. Left with a condition-free offer the buyer scrambles to get the mortgage funds and ends up with a high-rate private mortgage with high upfront fees and payout penalties.

  2. a. Seller Won’t Extend: Alternatively, the seller is getting a lot of interest and refuses the buyer’s request to extend the mortgage condition. The buyer takes the risk of removing the condition making the agreement firm and binding. In this scenario, the mortgage company is often awaiting additional paperwork from the buyer before committing, such as: tax assessments or a letter of employment and income verification.

    b. A Conditional Approval: The lender may have given the buyer an approval conditional on the appraisal of the home being purchased and buyer removes condition. The seller who might not allow an appraiser to view the property once the mortgage condition is removed.

  3. Buyer Misunderstand the Process: The buyer may fail to understand that aside from being approved, the lender may want to approve the home by way of an appraisal. The lender will approve a mortgage based on the lesser of the purchase price or the appraised price. The buyer could be caught short of downpayment funds if the valuation cannot justify the price paid.

  4. The buyer makes a cash offer in the hope of negotiating a lower price, all the while knowing that funds need to be borrowed to close the sale. This approach too can be harmful if sufficient funds cannot subsequently be borrowed. The mortgage stress test for conventional mortgaging added to this dilemma when it came into effect.

  5. Credit Purchases Before Closing: Prior to closing the buyer makes substantial credit card purchases--for say furniture and appliances--that negatively affect credit qualification. Then the lender, as a common practice, checks the buyer’s credit one last time before closing and discovers that the credit purchases no longer qualify the buyer for the needed mortgage. Buyers would be wise to avoid this between signing an offer to purchase and closing date.

  6. Incomplete Paperwork: The mortgage agent or representative for the lender did not have all of the proper paperwork in place and the mortgage, conditional on documents to be received, was withdrawn.

Why It Is Better To Buy Now Rather Than Later

Buy Now Or Later

It’s More Important Than Ever:

As you know, the internet can be a great source of information. Some buyers though are too anxious to start looking at homes without confirming what they can afford with a lender. And with today’s mortgage stress test, the need for a buyer to confirm their mortgage affordability is more critical than ever before.

Don’t Assume Affordability:

In one such case, a young couple assumed they could afford their desired price range in spite of the salesperson’s encouragement to obtain a pre-approval. So they viewed some ten homes and signed a purchase agreement conditional on obtaining a mortgage and a home inspection.

Stress Test Failure:

After meeting with their lender they were told they did not qualify for the price of the home they were buying. Though they did qualify based on the current mortgage rate, they failed the stress test. Such an occurrence affects about 18% of prospective buyers today. They would have to reduce their expectations by about $30,000 to buy or increase their downpayment.

Other Possible Measures by the Salesperson:

As well, the salesperson, against his better judgment, was influenced by their confidence, enthusiasm and motivation to buy. He also did not want to lose them as a client. He might have taken one more step though and suggested that, though he cannot pre-approve them, he can certainly run through the same exercise a lender uses to find out what buyers can qualify for based on their income and debts.

Opting to Wait and Improve Downpayment:

The couple was initially upset with the bank but mostly at themselves. They felt the salesperson had done a good job and admitted they should have followed his advice before proceeding. Because of their let down, they decided to put a hold on buying. They did not want to reduce their expectations on the home they wanted. They wanted to save a larger downpayment, about $20,000 more, which they determined would take about two years at a savings of $10,000 per year.

Why it is Better to Buy Now:

Yet buying a lower-priced home today might turn out to be the better strategy, and here’s why: According to the latest statistics, the average house price across Canada has risen by about 6.2% per year for the last 20 years. As an example, barring a downturn and if things remain equal, a $300,000 house today would potentially be worth around $338,000 in two years.

How Equity Can Increase:

If the buyers purchased a home at a lower price today of $270,000 to qualify, after their downpayment of $30,000 they would have a mortgage of $247,440 with CMHC insurance of 3.10% added. Given the 6.2% average annual increase, this home might be worth about $304,500 in two years. That’s a potential gain of $34,500. As well, if they paid down the mortgage by the $10,000 per year they planned to save, their equity would increase again by $32,738.

Their Total Equity:

They would then have the following equity: the original $30,000 down, the capital gain of $34,500, plus an additional $32,738 from reducing the mortgage principal. That’s a total of $97,238 allowing them to buy a better home in two years. It’s worth pursuing.

Canada Revenue Agency (CRA) Cracks Down on Real Estate

Tax Avoidance on Real Estate over $636 Million

To crack down on non-compliance on real estate transactions, the Canada Revenue Agency reviewed 30,000 files over the past 3 years in Ontario and B.C. They found $592.6 million in additional taxes resulting in over $43.7 million in penalties. The CRA news release dated May 17, 2018 also said, “Specifically in 2017-2018, the CRA assessed $102.6 million more in additional taxes than in 2016-2017. Penalties increased by $19.2 million from one year to the next.”

To uncover tax avoidance on real estate deals, CRA collaborates with provinces, territories and municipalities and continues to improve on tools to combat non-compliance.  One legal tool to uncover taxes and GST/HST on assignment sales is their unnamed persons requirement.

So What is the “Unnamed Person Requirement?” 

New homes, rental properties and substantially renovated properties are subject to HST. So Builders and Developers are required to remit the HST on selling, renting a new unit for the first time or on personally moving into one of the properties. Under the “unnamed persons requirement” issued to developers and builders, CRA can obtain the identity of any buyer who is not reporting properly for income tax and HST purposes.

As well, purchasers of new homes can apply for a new home HST rebate provided the home is used for their primary residence. In many cases, as the builder includes the HST in the price of the home and pays it on behalf of the buyer, the builder also applies for the rebate as it is taken off the price to benefit the buyer. If the buyer is not going to use the property as their primary residence, the rebate does not apply and must be paid to the builder on closing. This HST rebate provision can also get abused by some buyers.

Flipping Property

On flipping property, any profit must be reported as business income and not as capital gain. Buyers also cannot avoid compliance by pretending to use the property as their non-taxable primary residence.

CRA is also looking closely at “pre-construction assignment sales” in which a condo or home is sold to another buyer before completion of the home or unit. 

Re-assessments and Gross Negligence  

Failure to properly report can result in re-assessment of taxes owing and arrears interest. For “gross negligence” a penalty of 50% of the tax avoided would be imposed.  A Financial Post article dated May 25-18, by Jamie Golombek, CPA, mentions a case that involved a real estate salesperson and her granddaughter. In 2006, the salesperson purchased Unit 6 and the granddaughter purchases Unit 5. The deals both closed in June 2010 and were resold by the next month. No income relating to the condos was reported with their individual 2010 tax returns. CRA reassessed and established that the buyers failed to report business gain of $103,206 on Unit 6 and $106,025 on Unit 5. They failed to further report their profits and so CRA charged both with gross negligence. 

In court, after hearing arguments, the salesperson grandmother was found guilty of gross negligence. The granddaughter a 21-year old was relieved of gross negligence as she relied on her grandmother and father, both real estate agents, to tell her if reporting her income was necessary.

How Landscaping Increases Property Value

by Josh Fredman

If you want to make an investment that adds value to your home, consider landscaping, which covers practically everything on your property other than the house itself. Landscaping upgrades can involve things like patios and decks, flowerbeds, barbecue pits, watering systems and plants of all sorts. As you enter into a landscaping project, you have plenty of choices about what kinds of upgrades to make.


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It doesn’t take much to understand the economics of increasing property value through landscaping upgrades. A well-placed, properly sized tree, for example, can provide visual enjoyment simply by looking pretty. It can also smell good and sound peaceful in the breeze. It can shield your home from summer heat. It can provide recreation for your kids, or support for a hammock. A good tree provides pleasure and utility, and these things translate to increased property value. The same idea applies to all landscaping: If a given improvement offers something that prospective buyers want, then your property value will rise.  Also, as the tree grows, the value of replacing the tree grows as well.  Thus buyers will value larger and more established  trees and shrubs higher than those newly planted.

Quantifying Value

Though experts agree that landscaping improvements usually raise a property’s value, it can be extremely difficult to predict exactly what kind of gains a specific homeowner will see in her individual circumstances. Thornton Landscape president Rick Doesburg uses 15 percent as a ballpark figure when advising clients, but he stresses that estimates vary by home and notes that the lasting effect of landscaping requires ongoing maintenance. Virginia Tech horticulturist Alex Niemiera arrived at a similar figure -- 12.7 percent -- in his research. In extreme cases, property values can more than double, and they can actually decrease if the landscaping contains undesired features that the local market doesn’t support.


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When considering the property value increase of a landscaping upgrade at your home, you must take into consideration the cost of actually installing the new landscaping, as well as the cost of continually maintaining it. If your primary intent is to increase your home’s value rather than derive added enjoyment from your yard, treat these costs as investments and make them cost-effective. Professional landscapers can discuss the options with you. For example, perennials and bulbs can add color and style to your property all year long. Other cost-effective improvements include aesthetically pleasing architectural improvements, such as stone walkways and terracing that require little or no maintenance.

Other Considerations

Landscaping upgrades have a number of variables that go into the property value equation, some of which you cannot control. For example, according to Mark Henry of Clemson University, the quality of landscaping on your neighbors’ lots also affects your home’s value. Even the general quality of landscaping in your whole neighborhood has an impact. If one of your adjacent neighbors has a particularly bad yard, you might want to talk with him to see if he would be willing to make any improvements.

Another important factor to consider is the contractors who do your landscaping upgrades. Many companies vie for this kind of business, and choosing the right contractor can make a lot of difference. Find a contractor with whom you are comfortable, who is honest and patient, and who can show you a good track record. Lastly, pay attention to the details. Michigan State University horticulturist Bridget Behe notes that a subtle, small change, such as curving the edges of your flowerbeds, by itself can increase your home value by 1 percent.

No Deposit Can Equal No Deal

Three Ways to Submit a Deposit

An agreement of purchase and sale provides for a deposit to be submitted by the buyer. The agreement makes following three options available:

  1. “Herewith” or at the time of presenting the offer;

  2. “Upon acceptance”, defined as 24 hours from acceptance in the preprinted portion of the agreement, and

  3. “As otherwise provided.” This allows the parties to agree to a longer period to deliver the deposit, and can be a better choice for out of town buyers.

It Should be an Amount the Buyer Doesn’t Want to Lose

Regardless of how it’s submitted, a deposit secures the agreement in a number of ways. The buyer has “skin in the game”, money he stands to lose if he doesn’t follow through with his promises under the contract. To that end the deposit should be meaningful. That is, it needs to be an amount that the buyer would not want to lose. It commits the buyer to act in good faith in striving to meet any conditions (such as obtaining mortgage financing, a home inspection for instance) and to complete the purchase.

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What Happens When No Deposit is delivered?

The purchase agreement clearly states that “time is of the essence.” So meeting any obligation under the contract has to be adhered to within the time period stated, including delivery of the deposit. Otherwise the seller can take the view that the offer has been repudiated, hence the buyer is in breach of contract.

So What Can the Seller do?

The seller can choose from two courses of action:

  1. Write a letter to the buyer stating that if the deposit is not received within say twenty-four hours from the date the letter was communicated, the seller will declare the contract terminated.

  2. The seller can also pronounce the offer null and void immediately after the time for receiving the deposit expires.

When There’s More than one Buyer

The issue becomes even more important when other interested buyers are waiting in the wings. As an example, recently a second offer for more money was accepted by the seller as a back-up offer, conditional on the seller being released from the first offer. The first buyer not only failed to deliver their deposit within the twenty-four hours stated, the seller still had not received it by the end of the fourth day. On day five, and due to the breach, the seller declared the first offer null and void.

Releases Not Necessary But a Precaution

The seller’s lawyer agreed with the seller’s decision and felt any challenge by the rejected buyer would be an assured win for the seller. Yet to avoid such a possibility, the lawyer asked for signed releases if possible. The buyer signed releases without a problem and likely to his benefit as well. If he were to legally challenge the seller’s repudiation of the offer, the seller could still be awarded the deposit in spite of the fact that the seller did not receive it or lose any money.    

Downpayment Sources for First Time Buyers

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How can first time buyers afford to buy a home today?

With the recent rise of home prices first-time buyers need more down payment than ever before. They have also had to grapple with:

  • The increased costs of mortgage insurance as provided by CMHC plus other default insurers and

  • he stress test imposed on insured mortgages by the government in fall of 2016.

Findings to Answer the Question

A most convincing answer to the question comes from a recent survey by the Mortgage Professionals of Canada authored by their economist William Dunning.

  • Before 1990 the average downpayment for first time buyers was 21% and 66% had down payments of less than 20%.

  • Between 1990 and 2013, that average down payment hovered between 21% and 22%. The percentage of first time buyers with less than 20% down ranged from 56% to 62%.

  • In the most recent buying cycle, between 2014 through 2017, the average down payment increased to 26%, and the percentage of first time buyers with less than 20% dropped to 42%.

Under the National Housing Act, any purchase with a down payment of less than 20% requires mortgage insurance which varies in cost depending on the percentage down. A down payment of 5% to 10% attracts the highest premium of 4% which is applied to the mortgage. On a $300,000 mortgage $12,000 would be added and the mortgage payment is based on $312,000 total.

The cost of mortgage insurance has increased as follows for 5% to 10% down: until May 31, 2015: 3.15%, as of June 1, 2015: 3.60%, and as of March 17, 2017: 4.00%.

Benefits of Increasing Down Payment

Finding sources to increase down payments can avoid the cost of mortgage insurance. In turn, it decreases the loan amount giving the buyer a better chance of passing the stress test which, as of January 1, 2018, is being applied to most mortgage amounts. Currently it has been reported that some 20% of mortgage applicants are unable to obtain the mortgage applied for due to failing the stress test.

More than One Source for Down Payment

In the latest buying cycle (2014 -2017), most first time buyers used an average of 2.2 sources of funds for their down payment. Only about 47% used one source.

Where Down Payments Came From

The following gives how much of the down payments came from various sources. Though buyers rely on any number of sources, parents have played a greater role in assisting with down payments through loans and gifts.

The most important source continues to be personal savings at 52%. Loans from financial institutions are next highest at 21%; family gifts at 10%; family loans at 5%; and 9% from RRSP/Home Buyers Plans.   

Thanks to William Dunning for this report.

New Rules Affect Mortgage Renewal

Are you one of over 1 million Canadians who will renew your mortgage in 2018? If so, you have reason for concern.

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Few People Are Aware of the Stress Test

As of January 1, 2018 the Stress Test has been introduced and must be implemented for all new mortgage approvals. Interestingly, it’s stunning how many people know little or nothing about the stress test. More often than not, when the phrase “stress test” is mentioned, the reaction is, “what’s that?” As of January 1st, anyone applying for a mortgage would have to undergo the stress test in the following manner.

Example of the Stress Test:

  • You might be looking at a contract interest rate of about 3% today;

  • At 3%, let’s say you will qualify for the mortgage you want.

  • To be approved, however, you must be stress-tested at the current qualifying rate of 5.14% or your contract rate of 3% plus 2% whichever is greater.

  • In this instance you would have to qualify at 5.14%.

  • The stress test might cause you to fail and so your mortgage application would be denied.

Renewals Don’t Have to be Stress-Tested, But...

You do not have to be stress-tested if you are renewing your mortgage with your current lender if that mortgagee is federally regulated by The Office of the Superintendent of Financial Institutions (OSFI).

...Transferring Requires a Stress Test

For a number of reasons, but mostly because of negotiating a better rate, you may want to transfer your mortgage to a different lender and, if that lender is federally regulated, you must undergo the stress test; that is, qualify at the greater of the qualifying rate or the contract rate plus 2% as mentioned. If you were to fail the stress test, you would be forced to stay with your current lender. Will Dunning, Chief Economist for Mortgage Professionals of Canada, says that this could put you “in a disadvantageous situation for negotiating” a new interest rate. Dunning estimates that “as many as 200,000 Canadians who renew mortgages will fail the stress test, and this may limit their ability to negotiate the lowest possible interest rates.”

Lenders Not Required To Stress Test Are Encouraged To Do So

Provincially regulated lenders, such as Credit Unions, are not required to perform stress tests. They are, nevertheless, encouraged to do so.

In a recent application a senior wanted to borrow an additional $25,000 against her home, valued at $300,000, to purchase a new car. This would increase her registered line of credit from $50,000 to $75,000. She has no other debts and an excellent credit rating of 790. On her income, however, she failed the stress applied by her bank. She then went to a Credit Union who also stress-tested her. A debt of $75,000 against a $300,000 home gives her a very low loan-to-value ratio of 25%. Yet the mortgage was denied. There has got to be something wrong with this.  

Renovate or Move?

If you're waffling whether 'tis better to work with what you've got or start fresh somewhere else, Bud Dietricht, IAI, architect's insight can help.

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Do you stay where you are and renovate your existing house or do you move to another, maybe newer, house? How do you make that decision? Some will counsel you to leave that old house and buy something new. Others will tell you to tear it down and build new, while others still will tell you to stay and remodel.

So how do you make that go or no-go decision? What criteria do you use to make a rational decision to stay put and renovate or move on?

Here are some questions to ask yourself. Your answers will certainly help you decide on your next move.


How do you feel about your neighborhood?

Is it a place you enjoy? What about the neighbors? What about amenities? Are you happy your children go to the local schools?

In sum, make sure that the neighborhood is the right fit. Take to heart the old adage that you can always fix a house but you can't fix a neighborhood.


Is there some intangible quality to your house?

While not every house has a significance beyond simply providing shelter, many do. Whether it's age or design or some other quality, a home that has significance shouldn't be subjected to the wrecking ball. Expanding, renovating and adapting these homes are sure ways to keep that significance alive for future generations.


Does renovating make economic sense?

There are a whole host of factors to weigh when it comes to this question. If you're renovating, there's not only the cost of the renovations. There could very well be associated costs, such as temporary living quarters while the house is under construction.

Additional costs are also associated with moving (such as Realtor fees and decorating the new house).

Determining whether to go or stay requires that you identify all of the costs, not just the construction costs, before making a decision.


Does the existing house have good bones?

Not every house is a good candidate for a renovation. While there might be a reason to rebuild an old historic barn that's full of memories, a 20-year-old tract house with a failing foundation or another significant defect might not be a good candidate. So make sure to assess, or have a professional assess, the bones of your house to see just what lies beneath those foundation cracks and less-than-level floors.


How will the latest zoning restrictions affect the project?

If your house is older, it very well could have been built under different, often more lax, zoning restrictions.

While your house may suit you better through the benefits of these laxer restrictions, a new house in its place might not. Evaluate height, distance to property lines, yard dimensions and so on to see if saving the existing structure provides some benefits that would be lost if the house were razed.


Can I be patient and have fun with the project even when it isn't going well?

In any case, building a new custom home or renovating your existing house will require you to make countless decisions. From the macro, like how big and how much, to the micro, like what hardware you want on the kitchen cabinets, you'll spend countless hours on Houzz and elsewhere researching what you like and what's available. If you're new at this, you'll likely want to have a professional help you every step of the way, so you can avoid "We should have done ... " or "Why did we ...?"

Being patient is key. And starting at the right place for you — whether it's where you are or somewhere new — will make the end result truly worth the journey.