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Archive for March, 2017

Principal Residence Exemption


For the 70% of Canadians who own a home, it is a place to live, raise a family, and connects them to their community.

Due to Canada’s tax system’s Principal Residence Exemption, when we sell our homes, any increased value or “capital gains” are not taxed.

This tax break matters to Canadian homeowners. Collectively, we have about $3 trillion in home equity and our homes are often our largest financial asset.

However, starting with 2016 income tax returns, there are some changes in how homeowners qualify for the Principal Residence Exemption.

Until now, the Canada Revenue Agency has not required Canadians to report on a home sale during a tax season. However, if you sold your home in 2016 or later, you will need to complete a Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return in order to report your sale.

The good news is that, in terms of taxes, nothing has changed. The same tax benefit is available to anyone who sells their home, provided the property was the principal residence for every year you owned it – even if you use part of your home for business purposes. There is no “new tax” involved, only a requirement you report the sale details on your tax returns.


Reviewing a condo status certificate

Lawyer Mark Weisleder shows us what to look for in the Status Certificate of the condo apartment you are thinking of buying. Robert.

“Here are 5 items I look at and questions I ask when reviewing a status certificate in advance to give the buyers comfort before making their purchase decision.

Have units sold and closed in this building in the last 3-4 months? If units are selling and closing, it means that other lawyers and lenders have approved the building, and that CMHC most likely has not refused to lend on the property, which has occurred many times when concerns have been raised. This should give you some comfort that all is in order in the building.

  1. What is the condominium corporation number?

Condominiums are registered in numerical order, with the first buildings being registered about 50 years ago. There are approximately 1,000 condominium corporations in the Ottawa area. That means if you are number 999, your building is likely less than 2-3 years’ old. If its number is in the 500 range, then it is likely 25 – 27 years’ old. If its number is in the low 200s, then it was built around the mid 1970s.This can give you some clues as to when the roof may need to be repaired and whether there is enough money in the reserve fund for major repairs that may be required.

  1. Who is the property manager?

When the property manager is a familiar name, there is comfort that the condominium board is being given the correct advice in how to properly maintain the building now and in the future. If you hear names such as Brookfield, First Service or Dell, this is typically a positive attribute for the corporation.

  1. Does the reserve fund match the reserve fund study

The reserve fund study should be updated every 3 years. Be suspicious if there is no current one. The amount in the reserve fund today should be similar to the amount that was projected in the last reserve fund study. If there is a shortfall, then do the following calculation. If there are 100 units in the building, it is likely your unit is 1% of the expenses. That means if the reserve fund is short 1 million dollars, your unit share would be $10,000.00. If there are 200 units, your share is one half a percent or $5,000.00. This is likely your worst case scenario. Just adjust your purchase price accordingly. You can do the same math if you need to cost a special assessment or lawsuit affecting the building.

  1. Is Air BNB permitted?

The status certificate will tell you how many units are leased to tenants. Many buildings have minimum lease periods of 6 months to 1 year, which would prohibit Air BNB. More and more condominiums are trying to prevent this, due to security and insurance issues.

  1. Pets and Parking

Make sure you understand in advance whether pets are permitted at all in the building or whether there are weight restrictions on pets that are permitted. There is no point wasting time on buildings where the buyer has a pet that will not be permitted.

Make sure you physically see the parking space and the locker before signing any offer, so that there is no confusion with what you expect to receive on closing. It is possible that the number on the floor may not be the same as the legal unit number. That can be determined by just asking the property manager for details.

 

Mark Weisleder is a Partner, author and speaker at the law firm Real Estate Lawyers.ca LLP. Contact him at mark@realestatelawyers.ca or toll free at 1-888-876-5529

Note: Minor changes have been made in order to reflect the Ottawa market.


The Risks and Rewards of Renting your Condo on Airbnb

Until about three years ago, if you were a condo investor, you really only had two choices of what to do with your unit:

1) Rent it out on a standard 12-month unfurnished lease. Under this option you might get somewhere around $1600/month for a typical junior 1 bedroom downtown.  With this strategy your vacancy rate would be close to zero over the last five years in Toronto.

2) Furnish it, and rent it out short term for three-six months at a time. Under this option you might get around $2000/month for that same 1 bedroom, although your vacancy rate is typically higher.

Today you have a third option: furnish the unit and rent it out by the night on Airbnb.com. Under this option your little 1-bedroom unit in a central downtown location could fetch as much as $3000-4000/month if fully occupied. The potential rewards for using Airbnb are obvious – you can make a huge return on your investment.

If you own a centrally located downtown condo, your monthly positive cash flow could be as much as $1000-$1500/month which would give you an off-the-charts ROI. You might have heard or know someone who is making insane cash flow on their condos using Airbnb. At first glance, this seems like a very attractive option for condo investors, but is it worth the potential risks?

You face risk primarily from three sources: the condo board, the CRA, and from your insurance company.

  1. Risks from the condo board / property management.

This is the biggest source of risk to consider.

In 98% of all condo buildings in Toronto (and in Ottawa:RH) you will find a clause in the declaration that states that short-term leases are not permitted. Short-term leases are usually defined as anything less than six months, but sometimes it can be as little as three months, even one month. Airbnb rentals are by the night, and most travellers usually average three nights or less, so by definition it is not allowed.

So what could happen to you if you decide, like many have, to rent out your condo on Airbnb even though your condo’s bylaws forbid it?

1) The condo board can decide to take legal action against you. Not only that, they can also charge you for any expenses related to pursuing legal action against you. So if you lose, you will also have to pay the condo corporation for their troubles.

2) They can deactivate your key-fobs, thereby making it impossible for your Airbnb tenants to get into the building.

3) They can deny access to the building and/or your unit to anyone attempting to occupy the unit in violation of the short-term lease rule.

  1. Risk from a taxation/CRA perspective

Using Airbnb is a bit of a grey area from a taxation perspective. Since you are essentially operating a hotel, then you could be expected to charge and remit taxes just like any other commercial hotel.

This means charging HST to all your tenants and remitting that HST to the CRA. It means your yearly tax accounting could get real complicated.

Depending on your municipality and local rules, there might be local hotel taxes that go to the city that you would technically be responsible for collecting.

Or you could just not do any of this and risk fines and/or penalties if you get caught.

  1. Risk from an Insurance perspective

Do you think your insurance policy on your condo allows for you to rent out your condo by the night? Yeah, probably not.

If something ever happened in the unit and you need to make a claim, or worse, if something ever happened to someone in the unit and you were being sued, your insurance company would not cover you if they found out that the occupant was from Airbnb.

Conclusion: Using Airbnb is not worth the risks for condo investors

Perusing Airbnb.com you will quickly see there are dozens of landlords using the website to rent out their condos downtown. However, in my opinion, the potential risks far outweigh the potential rewards to make this a viable long term strategy for investors.

There may come a day when someone figures out an Airbnb model that works for condo investors and addresses the risks outlined above, but for now, my advice to my clients is stick with standard 12-month leases on your properties.

Stories of tenants (people who do not own the property) who are subletting their unit out on Airbnb are getting more and more common.

Some people will fraudulently rent out multiple condos in their own name and sublet them all on Airbnb. They rent out a unit for say $1600/month and then furnish it with cheap furniture and put it up on Airbnb for $100-$150/night. They do this with three or four properties and suddenly they are rolling in cash every month like some sort of Airbnb feudal lord!

This is particularly a concern in any building that does not have front desk security/concierge as it’s easier to do this and not be caught.

TIP: If you own a condo that you are renting out on a standard 12-month lease, check to make sure your property is NOT on Airbnb.


 

This article was written by Andrew La Fleur, Toronto’s leading expert on condo investing. Since 2007 Andrew has been sharing his expertise and insider connections to help hundreds of clients every year make money by investing in the Toronto condo market. He is the founder of TrueCondos.com, contributor to New Condo Guide magazine, and has been featured in the The Toronto Star, The Globe and Mail and The Wall Street Journal.

Contact Andrew: andrew@truecondos.com or at 416-371-2333 or visit his web page at  http://truecondos.com/


 Note from Robert: The dollar amounts quoted in this article are Toronto values. Ottawa values will differ.

 


Sellers beware if information is not correct


Making misrepresentations in listings, sale agreements or SPIS forms is risky, as recent court ruling of fraud shows.

A couple purchased a property in Sturgeon Falls, Ont., back in 2009.

The house had been advertised on the North Bay Multiple Listing Service as being a “gorgeous Lake Nipissing 4 bdr Cape Cod-style home” having “2 + 2 bedrooms,” and “2/2 bathrooms.”

A Kijiji ad said the property had “a large detached garage with a one-bedroom apartment.”

The agreement of purchase and sale provided that the sellers would install a new eco-flow septic system at their own expense.

The sellers also signed a Seller Property Information Statement (SPIS).

The buyers declined a home inspection and, shortly after the deal closed, the well water began to smell and could not be used for drinking.

The buyer realized that the new septic system was too small for the property and he was advised by the North Bay Mattawa Conservation Authority that the septic system was inadequate. It appeared to the buyer that the garage loft apartment had not been included in the calculations for the size of the new septic system.

The buyers ultimately sued the sellers for damages for misrepresentation. The trial took place in December 2016, before Justice Louise Gauthier. Her judgment was released last month.

In a detailed decision of almost 22,000 words, the judge ruled that the sellers breached the agreement of purchase and sale by installing a septic system inadequate for the property being marketed and sold. In doing so, the judge wrote, the buyers had established a claim of civil fraud.

Justice Gauthier also ruled that the sellers breached their duty to comply with the Building Code Act by not installing a septic system of the appropriate size and capacity. As well, she ruled that the sellers breached the warranty in the agreement to install a new septic system because it was not capable of serving the property.

She added that a representation about the new septic system in the SPIS was not a full, frank and accurate disclosure of the suitability of the system to be installed. It did not disclose that the proposed system specifically excluded the loft apartment and was based on inaccurate descriptions of the main residence.

Many court cases have dealt with negligent misrepresentation, but in this case the decision is notable for its finding of fraud.

The judge denied the the buyers’ claims for lost rental income for the loft apartment, for the poor quality of the water, for damage to the pipes in the loft and for the non-functioning lawn sprinkler.

In the end, the plaintiffs were awarded damages of almost $48,000 for the septic system and for the repair of a crack in a retaining wall.

For sellers, the takeaway lessons from this case:

  • Making misrepresentations in listings, sale agreements or SPIS forms is risky.
  • Litigation over real-estate contracts is an expensive endeavour.
  • The Seller Property Information Statement, intended to disclose information to buyers, has resulted in hundreds of court cases.

Bob Aaron is a Toronto real estate lawyer and frequent speaker to groups of home buyers and real estate agents.
He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818.