Category Personal Finance/ Estate Planning

The Lowdown on Home Appraisals

Buying a home is likely to be the largest single investment you will ever make, and whether it’s your primary residence or a vacation home, you and your mortgage lender, will want to know that the value of the property is in line with the amount you plan to pay.


Preparing for an Appraisal of Your Home

If your house is being appraised, it is helpful to have certain documents available when the appraiser arrives, including:

  • The most recent assessment from your local Municipality Property Assessment Corporation.
  • A plot plan or survey of the house and land if available.
  • The date you purchased the property.
  • A list of personal property that will be part of the sale.
  • Title policy that describes encroachments or easements and any written property agreements, such as a maintenance agreement for a shared driveway.
  • A list of major home improvements and upgrades, when they were done, and how much they cost. Include permits if you have them.
  • A copy of the current listing agreement and broker’s data sheet and purchase agreement if a sale is pending.
  • Information on Homeowners Associations or condominium covenants and fees.
  • A list of proposed improvements if the property is to be appraised “As Complete“.

You don’t need to accompany the appraiser during the inspection, but you should be available to answer questions and point out any improvements.

Make sure all areas of the home are accessible, including the attic and crawl space.

This is where an appraisal comes into play. A real estate appraisal provides an estimate of the fair market value of a property and it can make the difference between getting that mortgage and having the financing fall through.

But there are other reasons you may want to have your home appraised, such as:

  • Lowering your tax burden;
  • Establishing the replacement cost of insurance;
  • Settling an estate or divorce;
  • Satisfying a government agency request, say for tax purposes, or
  • Providing evidence in a lawsuit.

Mortgage lenders require appraisals to ensure that a property is worth the amount they are lending. Then, if a borrower defaults, the lender knows there is adequate collateral to recoup the initial investment.

As the potential buyer, you’ll pay for the appraisal. Costs vary widely, depending on the house, the province, the geographic location and the scope of the report.

Appraisers start by viewing the property inside and out to ensure that it is in a condition that a reasonable buyer would expect. The appraiser looks for any obvious features — or defects — that would affect the value of the house.

Once the site has been inspected, the appraiser employs one of two common methods for evaluating properties that are to be used only as personal residences and not to generate rental income.

Cost Approach

The appraised value is determined by combining the value of the land with the estimated reconstruction cost of the home minus accrued depreciation. This method is most useful for new properties, where the costs to build are known.

The appraiser takes data on local building costs, labor rates and other factors to calculate the cost of building a home similar to the one being sold. The appraisal often sets an upper limit on what price the property could fetch. Such mitigating factors as location and amenities are usually not reflected in the cost approach.

If the appraisal comes in lower than the amount you were planning to finance, the bank isn’t likely to provide the full amount you were hoping for. Depending on your contract with the seller, you may be allowed to back out of the purchase deal or make a lower offer.

You could make a larger down payment in order to secure a mortgage the lender would be willing to extend, but then you risk spending more cash than makes you comfortable. If the appraisal comes in higher than expected, the seller generally does not have the right to raise the asking price.

Sales Comparison Analysis

This method compares the attributes of the home for sale with existing houses in the area that have similar attributes and have recently been sold. No two properties are exactly alike, so the appraiser compares the comparable properties to the home you are interested in, making adjustments to make the comparable homes’ features more in-line with the listed property. The result is a figure that shows what each comparable home would have sold for if it had the same features as the listed property.

Using knowledge of the value of such features as square footage, extra bathrooms, hardwood floors, fireplaces and view lots, the appraiser adjusts the value of the comparable home. For example, if a comparable property has a fireplace and the home you want does not, the appraiser may deduct the value of a fireplace from the price at which the comparable home sold. If the house you are looking at has an extra half-bathroom and the comparable home does not, the appraiser might increase the price of the other property.

This approach is generally considered the most reliable if adequate comparable sales exist.

In most instances when the cost approach is involved, the appraiser actually uses a mix of the cost and sales comparison approaches. For example, while the replacement cost to construct a building can be determined by adding the labor, material, and other costs, land values and depreciation must be derived from an analysis of comparable data.

If you are looking for an appraiser on your own, ask your real estate agent or use the search function on the website of the Canadian National Association of Real Estate Appraisers.

Add an Ingredient to Your Wealth-Planning Mix

Tax Free Savings Accounts (TFSA) can not only help you to save, they can help you minimize your taxes and plan your estate.


Benefits and Drawbacks

In a Nutshell

There are many benefit to owning a Tax-Free Savings account, including:

1. Tax-free compounded growth and withdrawals. Contributions are made with after-tax money.

2. Withdrawals that won’t affect income-tested benefits such as the child tax benefit, GST credit, age credit, or Old Age Security payments or supplements;

3. No upper age or lifetime limit for contributions. If you don’t contribute for 25 years and then receive a $100,000 inheritance, you could conceivably shield that entire amount from taxes.

4. Unused contribution room is carried forward indefinitely and withdrawals can be replaced later without penalty or having to create additional contribution room. Unlike an RRSP, withdrawals will be added back to accrued contribution room.

5. You don’t need earnings to make annual contributions.

The accounts present some drawbacks that should be considered:

1. Interest paid to borrow money to contribute to a TFSA isn’t tax deductible;

2. Over-contributions are subject to a penalty of one per cent a month, the same as RRSPs, and

3. Capital gains (or losses) accrued in a TFSA won’t be available to offset gains/losses outside it.

Contribution limits will be calculated on the annual Notice of Assessment you receive from Canada Revenue Agency (CRA).

Canadians aged 18 and older may invest in a TFSA. The accounts are mirror images of Registered Retirement Savings Plans (RRSPs) — contributions are made with after-tax dollars, rather than pre-tax money, but withdrawals are tax-free.

Withdrawals add contribution room matching the amount taken out. In contrast, when you withdraw money from your RRSP you lose contribution room. In other words, if you withdraw $4,000 from your RRSP, $4,000 of your contribution room is lost forever.

Generally, the same investments eligible for RRSPs are eligible for TFSAs. So you can hold a number of income-earning holdings in the account, including equities, bonds, mutual funds, savings accounts, and term deposits. (See right-hand box for a closer look at the benefits of TFSAs.)

However, the point of the TFSAs is not to replace registered plans. In fact, all things being equal, the two plans are a wash.

There generally would be no advantage to either a TFSA or RRSP, although both can provide a better rate of return compared with unregistered savings. The only difference is that with an RRSP you receive an initial tax deduction, which leaves you with more pre-tax dollars to compound over the years. The after-tax TFSA contributions mean you essentially have less money to grow.

Ideally, you would have both accounts and maximize their uses. Then you would have the flexibility to choose annually whether to pay tax on withdrawals from a registered plan. In some years you may want to keep taxable income low to minimize benefit clawbacks and in other years you may want some taxable income to account for losses.

Here are several ways to use the savings accounts that you should discuss with your accountant:

1. Shelter Investment Income: Generally, TFSAs will work best with fixed income investments. But if you consider yourself a very good trader, you could trade stocks within the TFSA and profits will be tax-free. But CRA does not like active trade in TFSA accounts.  If you are actively trading in your TFSAs account, CRA can assess tax to TFSAs in respect of income earned from carrying on securities trading business inside the TFSA.

But, be wary. Capital gains inside a TFSA are tax-free, so you cannot claim a capital loss to offset other capital gains nor can you carry it forward. So if you own any laggard stocks, they would generally be wasted in a TFSA, while in a conventional investment account you can apply losses against taxable capital gains.

Generally, high-income investors with extensive investments in non-registered plans might want to keep interest-paying investments in a TFSA and stocks outside. If you have small holdings outside a registered plan, you could consolidate into a TFSA. That could save you significant tax liabilities when you withdraw the money.

“In-kind” transfers from taxable plans to TFSAs would trigger capital gains. If such transfers were deemed a sale, you would be liable for capital gains taxes.

Similar to RRSPs, there is no limit on foreign content, potentially making the accounts a good place to park foreign investments that pay dividends or interest. Under conventional non-registered accounts, foreign dividends are considered income and are taxed at the full rate. They are not eligible for the dividend tax credit. In a TFSA those dividends would be tax free.

If you happen to favour leveraged investing you can benefit by using a TFSA as collateral for low-interest investment loans. However, avoid using borrowed money to invest in a TFSA; the interest costs won’t be deductible as they are in a conventional investment account.

2. Retirement Planning: You may want to melt down your RRSP as you approach 65 years of age, pay a little tax while you are in a low tax bracket, and move the proceeds into TFSAs in order to minimize future clawbacks of Old Age Security benefits.

In the year you turn 71, when you must convert your RRSP into an Registered Retirement Income Fund (RRIF) or an annuity, you could pay tax on the minimum RRIF payments and then move $5,500 of the remaining money into your TFSA each year, sheltering that income from taxes for the remainder of your life. The advantage here is maintaining tax-sheltered savings for emergencies or estate planning.

TFSAs could also supplement RRSPs if you have maxed out your contribution room and still want to continue putting aside money for later years.

3. Estate Planning: TFSAs will make it easy to bequeath large tax-free nest eggs. The amounts could total $1 million or more over 40 years of savings. TFSA holders can name spouses or common-law partners as beneficiaries and rollover the proceeds tax-free to them upon their death.

4. Income Splitting: As with spousal RRSPs, spouses or common-law partners can contribute to their partner’s TFSA. And when it comes to income splitting for taxes, attribution rules will not apply to income earned in a TFSA.

5. Pension Plans: Some specialists suggest that low-income earners may choose TFSAs instead of employer-sponsored pension plans because the latter will generate taxes in retirement, while the former will not.

The Fundamental Implication: TFSAs offer you an additional choice on how to manage your savings and investments. Consult with your professional advisor for the best ways to use this new account to maximize your wealth.

A Tax-Saving Strategy for Seniors

If you earn income eligible for the Pension Income Tax Credit, you or your spouse or common-law partner may cut your total tax bill by using an income splitting strategy.


Tax Planning Points

Increasing your spouse’s income above a certain level or reducing your income below a certain level will result in a claw-back of OAS.

Increasing your spouse’s income to more than a certain government set level will trim the old age amount tax credit. Talk to your financial advisor

If your spouse is under 65, income from RRIFs, RRSP annuities, and other annuities do not qualify for the pension amount tax credit, while payments from pension plans do.

Under pension splitting guidelines, you may transfer as much as 50 per cent of the qualifying income to the tax return of a lower-income spouse or common-law partner. This allows a greater portion of family income to be taxed at a lower rate and generates a higher level of after-tax income.

Pension splitting sidesteps attribution rules, where transferred assets are generally attributed back to, and taxed in the hands of, the person making the transfer.

Who Is Eligible

Ottawa allows spouses or common-law partners to shift as much as 50 per cent of eligible pension income to the other as long as they:

  • Are married or in a common-law relationship in the year they choose to split the income;
  • Reside in Canada on December 31 or at the time of death; or
  • In the case of bankruptcy, reside in Canada on December 31 of the calendar year in which the tax year (pre- or post-bankruptcy) ends.

In addition, they cannot be living apart at the end of the year and cannot have been living separately for more than 90 days during the year because their relationship broke down. You may split income if you are living apart for medical, educational or business reasons.

The Effects of Pension Income Splitting

1. Spouses or partners who qualify for the pension income tax credit may claim the first $2,000 of qualifying income. Tax withheld from the pension, remitted to Canada Revenue Agency (CRA), and reported on the T4A slip, is also transferred to your spouse, in proportion to the amount of pension you transfer.

2. If the transferred income is taxable income from pension plans and superannuation plans, your spouse will be able to claim the pension income amount. If the income is the taxable portion of annuities, RRSP annuities and RRIF payments, your spouse must be older than 65 to claim the pension income amount of $2,000.

3. Pension income splitting will not affect tax credits such as the child tax benefit, the GST/HST credit, Canada Child Tax Benefit and related provincial or territorial benefits. However, the new tax benefit may affect individual tax credits, such as the age amount credit and the OAS claw-back.

4. If your spouse or partner is in a lower tax bracket than you, transferring pension income to your spouse will result in a lower combined tax bill, and may also result in a lower OAS claw-back. For low income seniors, it may boost your tax credit due to the age amount.

What Is Eligible

If you are age 65 years or older, the income that qualifies is the same as the income that is eligible for the Pension Income Tax Credit, which is available on as much as $2,000 of certain forms of pension income. This includes the total of:

1. Income from a Registered Pension Plan (RPP);

2. Annuities from a Registered Retirement Savings Plan (RRSP);

3. Payments from a Registered Retirement Income Fund (RRIF); and

4. The taxable portion of annuities from a superannuation or pension fund or plan.

For individuals under the age of 65, qualifying income comprises money from pension plans and superannuation plans, including foreign pensions.

Payments from RRSPs do not qualify, so if you are older than 65 and plan to withdraw money from your plan, talk to your tax accountant about the possibility of converting the RRSP to either an RRIF or an RRSP annuity. (There is no age restriction for the spouse or common -law partner who receives the income allocation.)

Other income that does not qualify includes payments from the Canada or Quebec Pension Plan, Old Age Security (OAS) payments, and Guaranteed Income Supplements (GIS).

The allocated pension income is treated as income of the lower-income spouse for all purposes under federal income tax rules. In effect, some couples may now receive a second pension tax credit where previously only one was available. In addition, splitting pension income could mean higher Old Age Security entitlements for some couples.

For those individuals eligible to split their pension with their spouse or partner, the degree of benefit will likely vary noticeably, so talk to your tax accountant to ensure that you are making the right decision and that you take the maximum benefits allowable.

Get Healthier Kids and a Tax Break

Fitness in Canada has both health and tax benefits, so while your children are skipping, biking or swimming in a fitness program, you can take a non-refundable tax credit of as much as $500.


Club Memberships

If your child joins a club or other organization for two months or more you can claim the fitness tax credit on your tax return if:

  • More than 50 per cent of the programs available to a qualifying child as a result of membership are eligible programs, or
  • More than 50 per cent of available time is devoted to eligible programs for qualifying children.

For example, membership in a local boys and girls club entitles each child to participate in a wide range of programs, some of which are eligible, such as a biking club, weekend hip hop dances, open swim or gym or a ski club. Other programs not eligible for the credit would include career planning, board games or a reading club.

A receipt for the full amount of the annual membership cost can be issued if more than 50 per cent of the programs qualify. A receipt for the full annual membership fee paid can also be issued if more than half of the club’s scheduled program hours is devoted to eligible programs.

If neither of the 50 per cent tests are met, a receipt can be issued for a pro-rated amount.

Cost of Uniforms

Often a portion of the registration or membership fee is attributable to the cost of equipment or uniforms that are provided for use during the program.

At the end of the program, the equipment or the uniforms normally have little or no resale value, in which case the portion of the registration or membership fee attributable to their cost will be included in the eligible fitness expense.

In other situations, in addition to paying registration or membership fees, you may purchase uniforms or equipment from third-party suppliers or through the organization offering the program.

In these situations, the purchase price for the uniforms or equipment will not form part of the eligible fitness expense.

To claim the Children’s Fitness Tax Credit your child must be under the age of 16 at anytime during the year and be involved in a program that provides a “considerable amount of cardiorespiratory activity”, as well as training in muscular strength, balance, or flexibility. The credit is being eliminated for taxation years after 2016.

Calculating the Credit

You calculate the non-refundable credit by multiplying the eligible amount in fees by the lowest marginal tax rate. (A non-refundable tax credit means you must have income which you can apply the credit against.)

The fees must be paid in the year of the tax return.

If you paid a family membership to a qualifying program, the amount of the fee that is attributable to eligible children will qualify.

Program Eligibility Requirements

There are a variety of fitness programs eligible for the credit, including hockey and soccer, karate, football, basketball, folk dancing, swimming, hiking, horseback riding and many sailing activities. For other programs, the CRA may determine their eligibility on a case-by-case basis, but generally a physical activity program must:

  • Be supervised.
  • Be suitable for children.
  • Last a minimum of eight weeks, with at least one session a week (children’s camps must last five consecutive days and devote more than 50 per cent of program time to physical activity). For children 10 and younger, activities must last for at least 30 minutes; those for older children must last at least an hour.

Exceptions to the credit include:

1. Fees charged for regular school physical education programs, although fees charged for extracurricular programs at a school are eligible.

2. Recreational activities involving motorized vehicles (such as automobiles, motorcycles, power boats, airplanes and snowmobiles).

3. If your child registers for a golf club or organization that sponsors more than just physical activities, only the portion of the membership fee that is activities-based is eligible.

4. If fees include accommodation, travel, food, or beverages, that portion must be deducted when calculating the tax credit.

So let’s say you send your child to a hockey camp and pay a $700 registration fee for the one-week program. The camp provides hockey pucks, jerseys and goalie nets that are retained by the organization at the end of the program. The $700 fee you paid includes $200 for accommodation and $150 for meals.

The portion of the fee that is eligible for the credit is $350 ($700 minus $200 minus $150).

Unlike other tax credits, to claim the fitness credit you must have a receipt that includes:

  • Name and address of the organization
  • Name of the program
  • Total amount paid and the eligible amount
  • Date paid
  • Your name as payer
  • Your child’s name and date of birth
  • An authorized signature if the receipt is not produced electronically
  • The statement “This program qualifies for the Children’s Fitness Tax Credit.”

While it is not necessary to submit this receipt with your tax return, you should keep it for six years in the event that Canada Revenue Agency (CRA) wants to verify your claim.

Children With Disabilities

The age limit is higher for children with disabilities. You can claim the credit for a child with a disability who is under the age of 18 and eligible for the Disability Tax Credit. And there is a separate $500 non-refundable credit for eligible children with a disability subject to spending a minimum of $100 on registration fees for an eligible program.

This additional amount, according to the Department of Finance, “provides general recognition of the extra costs that children with disabilities encounter in becoming involved in programs of physical activity, notably with regard to specialized equipment, transportation and attendant care.”

While fitness programs can be costly, they are usually beneficial for your children. Talk to your financial advisor about how you can offset some of the expense by taking advantage of this credit.

Know the Red Flags of Investment Scams – Your Health Depends on It

lores_sepia_security_lock_padlock_bzIt seems that if you are going to fall victim to a fraud, it may in one way or another stem from a relationship with a family member, co-worker, friend or neighbour and you may very likely live in British Columbia or on the Prairies.

That’s the profile that resulted from a survey for the Canadian Securities Administrators (CSA) that also indicated nearly five per cent of the adult population has lost money in an investment fraud. About half were introduced to the fraud through someone they knew. Making the situation worse, fewer than 24 per cent of victims report the fraud either because they are embarrassed, lacked proof or didn’t lose much money.

Attempted fraud also scored high, with nearly three in 10 respondents saying they were approached within the past three years. About one-third of those approaches were through e-mail spam. Yet only 17 per cent of those approached reported the attempt.

Half of victims also feel law enforcement authorities don’t take financial fraud as seriously as other crimes, and 70 per cent believe crooks tend to get away with fraud or, if caught, receive light sentences at most.

Three quarters of fraud victims said they did not recover any of their investment in the most recent scam they were involved in.

But victims aren’t hurt just financially. More than 90 per cent of respondents said they believe investment fraud is as serious as such violent crimes as robbery and assault when it comes to emotional, mental and physical health.

Among the effects of fraud are a decline in the ability to trust people, wariness about future investments, stress, anger, depression, feelings of extreme loss or isolation, significant weight loss or gain, increased vulnerability to illness, and panic or anxiety attacks.

The CSA, which represents the country’s 13 provincial and territorial securities commissions, recommends that all investors educate themselves about the warning signs of fraud and remain objective when it comes to controlling their money.

Here are 10 tips to help you avoid falling victim to an investment fraud and suffering both the financial and emotional damages that can result:

1. Know what you are buying. Never make an investment you don’t understand. Ask questions and make sure you get answers. Always discuss potential investments with your accountant for a second opinion and to discuss how the investment might fit into your long-range financial goals.

2. Ask for documentation. Fraudsters do not like to leave a paper trail. If there is no documentation or the documents are hard to understand, question the investment. Never accept a verbal contract and never sign anything you haven’t read or don’t understand. Have your accountant go over everything with you.

3. Check registrations. Make certain the security is qualified for sale and has been properly registered with a regulatory body. Also be sure you’re dealing with a registered broker.

4. Spread your risk. Diversify the investments in your portfolio. Putting all your money in one major investment is widely considered a road to disaster.

5. Take notes. Every time an investment salesperson approaches you, write down the name, the date and the time. Never assume that a salesperson is an “expert.”

6. Be wary of extravagant promises of high-return and low-risk; excessive use of technical or financial jargon, and offers of free seminars, workshops or other perks.

7. Don’t be taken in by high-pressure sales tactics; heavy emphasis on a company’s track record, or strong promotions of tax savings or tax shelters, particularly during the annual Registered Retirement Savings Plan season in January and February.

8. Avoid thinly traded or little-known securities that can be vulnerable to price manipulation.

9. Don’t believe claims from “insiders” with “special” information.

10. Contact your province’s securities regulator if you have doubts about an investment or the seller of an investment.

Bottom Line: Common sense, information, awareness, skepticism and advice from your accountant all play a role in protecting yourself from investment scams.