Now that 2016 is off to a great start, the time is perfect to take a few moments and review some of the basics of your foundation as a real estate investor and business owner. Getting back to basics can save you time, money, taxes, and stress, and a good real estate accountant can help. Here are four tips to help you get started.Get the right plan
1. Get the right plan
In January of each year, my family and I like to review how we did in the past year, and review our goals for the coming year. We consider these against our overall plan, and make adjustments as needed. For example, we look at reviewing insurance coverage, review how our properties are doing and whether we need to make any major investments in them, or minor changes. And, of course, we also look at our overall plan and structure from a tax and accounting perspective.
Make sure you take the time to meet with your advisors at some point during the year. Address with them whether your existing structure, accounting system and expectations for profits are:
- Reasonable for your current situation
- Capable of adapting to future plans
The right structure, and a flexible remuneration plan, is critical to ensuring your taxes are minimized. Avoid locking in choices, such as monthly salaries, that restrict tax planning decisions. And consider getting a tax estimate to help with your cash flow planning.
2. Save the date
We have all of the standard tax deadlines incorporated into our personal tax calendars (e.g. our year-end tax deadlines for each company, our HST deadlines, and so on). I encourage you to use a tax calendar to plan over the year. This makes it easier to meet your filing requirements for Canada Revenue Agency. In turn, this can save you money and ensure you receive less attention from the CRA by meeting their deadlines and paying on time. You can find a tax calendar on our web site at bdoreinvestor.ca/calendar. If you have questions about what your filing deadlines are, please ask.
3. Get organized
The end of 2015 and beginning of 2016 is also a time to ensure you are as organized as possible. We are constantly tweaking our systems to ensure they work smoothly, but if you are still swamped with paper and working from a shoebox, one of the biggest things you can do to reduce your stress is to get a system in place. To have the right plan and meet your CRA filing requirements, you must get your bookkeeping in order. This isn’t really a “sexy” part of real estate investing, but is critical to your success. Being caught up and organized means:
- Your accountant can receive your information in a timely manner, and in turn prepare the financial statements and tax returns on time
- Your JV investors can get timely information
- You can better analyze what is going on with your properties, and make improvements to your portfolio
For tips on getting organized, talk to your accountant about a well-documented organizational system. Make your system as digital as possible for even easier access. When you can access your documents via your smartphone when your banker is asking for details to finalize a mortgage, the banker will be impressed how quickly you can provide information. And, imagine the confidence this can inspire in current and potential investors.
4. Take advantage of family income splitting
One way that the CRA allows families to split income is using loans between family members or other entities, such as a corporation. The lower income family members use the loan to invest and in turn are eligible for income from the investments. Real estate investors often use this strategy in two ways:
- With corporations, where a higher income spouse contributes funds to the company, which in turn buys real estate. When properly structured, profits can often be directed to the lower income spouse, provided that the higher income spouse receives, as a minimum, the prescribed interest rate on the loan. The prescribed rate is determined quarterly by the CRA. (Currently, this interest rate is waffling between 1% and 2% and likely to continue to do so for a period of time.)
- Loans provided to family members of age who use the funds to acquire all or a portion of a personally owned property.
A word of warning though: failing to pay the interest between family members, trusts, corporations, etc. on time in one year can put a structure permanently off side, particularly with family trusts. This interest is due on January 30th (not January 31st).
George E. Dube, CPA, CA
Real estate accountant, real estate investor, speaker, author