Bonds and real estate attract both novice and seasoned investors for various reasons. While interest-paying bonds are often seen as a steady course of action that require little maintenance, the gains in real estate are much more meaningful.
One of the reasons why real estate is more profitable is because it brings with it many tax advantages. Let’s take a closer look at how both investments stand up to taxation.
Bonds are simply a transaction with the federal government. Taxation is pretty much a forgone conclusion. The interest income received from bonds held outside of registered accounts such as RRSPs are taxed at the end of every year. However, this does not apply to Canada Savings Bonds or some types of provincial savings bonds. If the bond is purchased at face value and held to maturity, there is no capital gain or loss. But there will be a capital gain or loss if the bond is purchased at a discount or premium and held to maturity. A premium will incur a capital loss. A discount will incur a capital gain. Remember that capital losses cannot be deducted against regular income; it can only be used to reduce capital gains. Property, on the other hand, allows for several exceptions when it comes to taxation.
Real Estate Taxation
Depreciation is one way that property investment helps soften the blow of taxes. This is because CRA makes allowances for wear and tear that decreases the value of your property, even when the underlying value of the property continues to appreciate. There are more than 20 types of depreciable asset schedules that CRA lists under capital cost allowance classes.
Remember that land is not depreciable: only building and chattels. Class 1 permits 4% of the value of the building as a tax deduction, but there are other eligible allowances that can bump this up to a 6% depreciable allowance. Understanding the different schedules helps an investor maximize their taxable deductions.
However, it is very important to understand and plan for the RECAPTURE of capital cost allowance when you dispose of an asset. Selling a property triggers recapture. The simplest explanation is that you are required to pay back the deferred allowances. Please consult with your financial advisor on these and all tax strategies.
In a flourishing neighborhood, real estate values traditionally increase. The best part is that there is no taxation on appreciation for personal residences. For investment real estate, only 50% of capital gains is taxable. For corporate entities, CRA tracks your capital gains and losses on Schedule 89 of your income tax return. It is critical to file an election through a Form T2054 to receive the funds that have accumulated in your capital dividend account within two years of dissolving your company. After two years, CRA deems the money forfeit. PS: the CDA is tax-free money; some accountants are unaware of the T2054 and business owners subsequently lose out on substantial wealth.
ABOUT July Ono.
JulyOno.com is a real estate investment company. We have been actively involved in the Lower Mainland area real estate investing for a number of years. Our mission is to provide local housing and commercial workspace to quality tenants while at the same time providing an above average return on investment (R.O.I.) for our investor partners and for ourselves. It is truly a win-win-win way of investing!
July offers her investor partners hands-free investment opportunities. If you are interested to learn how to earn an above-average return on your investment, backed by a solid asset, and without the hassle of being a landlord, please contact July Ono.