Rule Five Of Six: It’s Not How Much You’ll Make, It’s How Much You’ll Keep That Matters

Posted on 06. Aug, 2010 by in News

By Don R. Campbell, Cutting Edge Research Inc.

Inevitably, tax issues follow you wherever you go.  An important component of any successful investment is in the tax planning. We all seem to understand that it is not how much you make that matters, it is how much you keep (just look at the deductions on your last paycheque), yet not many people consider the importance of understanding the tax implications of their investments. 

An interesting and curious observation: you can make $50,000 on an investment and depending on where it is located, the nature of the investment, and how you structured yourself throughout ownership and at sale, you may end up keeping $40,000+ or less than $25,000… That is why knowing the tax rules before you get in is so important to your bottom line.

The rules vary from region to region/state-to-state.  Each rule will affect your deal and may even inadvertently affect your investments and taxes due in Canada.  Some investors have even been caught with double taxation, meaning that they didn’t plan in advance and found themselves paying tax twice on the one profit (two different regions). 

Sure, in many cases you can apply to get the tax back (or get a ‘taxes paid credit’) from one of the regions (either Canada or where you owned the property), but please note the key words are “Apply to.”  That means a process, which means opening yourself up to greater tax scrutiny and in turn means waiting time. Time to get your money, when you were planning on having it right away to pay down financing, for instance.  You may not get your money for many months, yet the bank will want their financing as soon as property is sold.

Before you sign an offer to purchase, make sure you have investigated the tax implications.  Ask questions such as:

 ·  Is there a tax treaty between Canada and the country?

·  How will profits (income and capital gains) be taxed in both places?

·  What effect does the time you spend in each country have? 

·  Do you get all of your money, or is there an ongoing holdback?

When money is being transferred, many countries insist on a tax hold-back.  In other words, when profits are being transferred to a foreigner, it is the obligation of the management company / developer to send a portion of that profit to the government who will hold it until all proper tax filings are done at the end of the year.  This can take a big bite out of your profits as well as your expected cash flow (plan for it by asking the question).

Property taxes are also an issue that is often overlooked.  Find out if you are going to be paying substantially more property taxes because you are from out of the country.  In many cases, the local’s property taxes are substantially less than that paid by foreigners, as are the utility rates.  Ensure that you are analyzing the cash flow based on the foreigner taxes, not the local.


Property Management Cash Flow & Performance

In addition to the tax issues, if you are renting out the property for all or part of the year, you must know how the property management company will conduct the finances and how money will be transferred to you.

·  Will it be sent by wire, cheque, or do you have to open a foreign bank account?

·  Can this cash flow be expected monthly, quarterly, annually?

·  How much do they hold back for future expenses/their fees?

·  Do they pay the property taxes on your behalf?

·  What rights do you have, as a foreigner, to get your money out if the property or the management company doesn’t perform? 

·  What occurs when there is a deficit in the cash flow?

·  How will you be transferring the funds to the management company if required?

When buying any property at a distance you are in essence putting all of your cash in the hands of a second party. What is your trust level with them? What experience do they have with foreign investors?  Do you believe that they will be treating your money as if it was their own?

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