2. Majority of VRMs are 5 year contracts with the odd 3-year, and yes Amortization can be set at 25 or 30 years.
3. As to forming a joint company, I've "been there, done that!" It sounds much better in principle than in practice. My advice is do your first deal or two in personal names and establish that you can actually pull it off, work together well, and make a profit. Corporation adds layers of complexity and cost and tax advantages are not as good as one thinks. Considerations:
- Incorporation costs
- Annual corporate minutes
- Annual financial statements
- Annual income tax filing
- Corporate Annual Return
- Annual GST Return
- Bookkeeping
- Financial Management of the JV
- Dividend declaration and processing
Also good to know, many bank lenders will not lend to corporations, so you limit who you can borrow from. For those that DO lend to corporations, personal guarantees are required regardless. Some will lend to holding companies only, not operating companies. Personal guarantee means the lender can come after (sue) you personally if you default, whereas when financing is in your personal name, typically your liability is limited to just the property, not your other assets.
Private lending on flips generally don't really care personal or business as your down payment is going to be higher and they are going to be rewarded for the risk they take.
As to income taxes, you will want professional advice. Flipping house income within a corporation - as I recall - attracts the higher GRIP (General Rate Income Pool) tax rate, not the small business LRIP (Low Rate Income Pool) You will want to seek advice on this beforehand. My wife and I did the buy and hold strategies initially corporate, then over time transferred everything to personal names as too much of a pain. Too high of a "PITA Factor!" (Pain In The Arse).
As a personal note, you (and I) being self-employed are in good positions to manage our personal income amounts simply by choosing how much income to pay ourselves from our business corporations. For example, if my wife and I sell a property in 2017, we can/will limit our T5 income from our mortgage brokering business as an offset, hence manage what tax bracket we fall into. I call this "managing our line 150s" which is the line for Total Income on your personal tax return.
4. As to capital gains vs flipping income, there is no time rule, per se. If you are ever audited, the CRA will look at and for original intent (perhaps even this email). If your paper trail indicates that you had every intention to keep the property, they will allow the lower capital gains tax. If the paper trail shows otherwise then CRA may require you to pay the higher taxes. For example, if you pursue an "open" mortgage, it's harder to argue you were NOT planning to flip, whereas a 5-year "closed" mortgage might indicate otherwise.
Finally, on another note, there are many doctors and dentists who discover it is more fun and less work to be the bank on these real estate projects, than an active equity partner and there are many Mortgage Investment Corporations (MICs) that exist to attract and deploy capital on good projects. My wife and I have a re-advanceable Line of Credit on our own home. We aggressively pay down our mortgage as the interest expense is NOT a tax deduction, and the principal repayment serves to increase the limit on the LOC by the same amount. We can then borrow on our LOC and invest it in property or mortgages and the interest is a legal tax deduction. We don't mind paying tax, we just want to keep out of the higher brackets.
Hope this helps. Call me if you want to explore ideas further. I am a big fan of KISS (not the band!).
Cheers
Chris
On Mon, May 9, 2016 at 4:48 PM, T wrote:
Thanks Chris, very helpful and detailed info as always! T
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