Four tips to ensure you can deduct interest on your debt

Ms. Sherle owned a principal residence and a rental property. She owned her residence free and clear without any debt secured by the property. She had taken out a mortgage to purchase the rental property and was able to deduct her interest on that mortgage since the property earned rental income. That is, she directly used the mortgage proceeds for the purpose of earning income, so the taxman allowed the deduction for her interest costs. She then swapped the properties so that her principal residence became a rental and her rental became her principal residence.

Ms. Sherle still wanted to own her residence (the former rental) free and clear of debt, so she borrowed funds against the new rental property (her former home) and used the proceeds to pay off the debt on her new residence (the former rental). Follow me? CRA then denied Ms. Sherle her interest deduction going forward. They went to court over the issue, and CRA won the battle in court.

The ideas

I mentioned last week that your intention or purpose for borrowing money is irrelevant when it comes to deducting interest. Further, the assets you pledge as security for the debt are also irrelevant. All that matters is direct use of the borrowed money. So, what could Ms. Sherle have done differently to enable a deduction for her interest? More importantly, what can you do today to ensure that you’re entitled to deduct interest on your debt? Here are a few ideas:

1. Sale to a friend: Ms. Sherle could have sold her principal residence to an accommodating party – say, a friend or relative – in exchange for a promissory note. She could have then borrowed money from the bank to repurchase that property from her friend or relative. Her friend or relative could have then used the cash to repay the promissory note owing to Ms. Sherle. If Ms. Sherle then used the property to earn rental income (as she did), then she would have been able to deduct the interest on the new debt.

2. Sale on the open market: Suppose you have non-deductible interest on some debt. If you have other cash or marketable securities available, consider taking that cash or selling those securities for cash, using the cash to pay down your non-deductible debt, and then borrowing to invest in new assets (perhaps replace those same securities you just sold) with a purpose of producing income. Presto, you should be able to deduct your interest costs now. Just be sure to count the tax cost associated with selling any marketable securities beforehand. If you don’t like the tax hit you’re going to face when selling those securities, consider the next idea instead.

3. Transfer to a corporation: Suppose you have non-deductible interest on some debt and you have other assets, perhaps marketable securities available. Consider transferring those assets to a corporation (even if these assets have appreciated in value there should be no tax to pay if you make an election under Section 85 of the Income Tax Act when making the transfer; see a tax pro). In exchange, take back a promissory note for the cost amount (that is, the adjusted cost base) of the assets transferred (the promissory note cannot be for more than the cost of those assets, otherwise you could trigger some tax). Then, borrow funds from the bank to subscribe for more shares in your corporation. The corporation can use the new cash to pay off all or part of the note owing to you. You can then use the cash to pay down your non-deductible debt. You should now be able deduct the interest on the new debt since the proceeds are used to invest in shares of your company.

4. Take out paid-up capital: Once again, suppose you have non-deductible debt. Suppose you also own shares in a private corporation and you have “paid up capital” in those shares (generally, you’ll have paid-up capital in shares to the extent you have subscribed for those shares using cash). Your corporation can then make a tax-free return of all or some of that paid-up capital to you (see a tax pro for different ways to do this). You can then use that cash to pay down your non-deductible debt. Finally, you can then borrow funds to reinvest in more shares of the corporation, or to lend money to the corporation (even at zero interest; CRA’s Interpretation Bulletin IT-533 confirms that interest will generally be deductible in this case).

Variable Rate vs Fixed Rate – What should I take?

The question mortgage consumers are asking is: Should I go Variable Rate or Fixed rate?

The answer is: Depends!

Variable rate is based on the Bank Prime. As the Central Bank Rate increases or decreases, so does the variable rate.

The fixed rate is based on the bond market. As the bond market increases or decreases so does the fixed rate.

The decision of whether to go variable or fixed will depend on the consumers’ tolerance for risk as well as their ability to withstand increases in mortgage payments.

The worrywart, who is constantly looking at interest rates and can’t sleep at night wondering if it is time to lock in, should go with a fixed mortgage rate. The seasoned veteran who has plenty of equity in their home or has little time left on their mortgage, can afford to go variable rate and take the risk.

Most first time homebuyers with minimal down payment tend to go fixed. Over time however, the variable mortgage has always been proven to be better than fixed.

Something to keep in mind is that variable rate mortgages allow consumers to lock in to a fixed rate at any time without costs.

Generally, most economists are stating that the Central Bank will remain steady for the next few months and perhaps will only start to move upwards in early 2012.

So know your options and be an informed client 

For all your mortgage needs call: Eduarda (Eddie) Pita - 416-920-9931

Visit us online at www.eddiemac.ca

Tips on how to reduce your mortgage and save for the long term.

1. Always go biweekly on your mortgage payments and NOT monthly. Monthly payments will work out to 12 installments and biweekly will end up to be 13 monthly payments a year.

2. Always try to exercise your pre-payment privilege each year. Most banks yyou can put 10-20% on the original mortgage towards the principal. So when you have extra money, your tax refund or vacation pay, put it towards the mortgage principal.

3. Go variable but make your mortgage payments based on the fixed. This way you will be throwing more principal towards your mortgage

4.   Sometime’s it not only the mortgage that people have to pay. It is also the other debt such as car loans and credit cards. It is best to refinance the mortgage plus the debt and make one payment and that way you are able to save money and be more aggressive on your mortgage payment

That is why is important to speak to the mortgage broker to teach you all the options you can exercise.

Become an informed client.

For all your mortgage needs call: Eduarda (Eddie) Pita - 416-920-9931

Visit us online at www.eddiemac.ca

Borrowing: 10 things you need to know

You’re in the driver’s seat when it comes to borrowing money. You don’t need to book an appointment with your bank manager to ask for a loan anymore. Credit is easily available, as long as you have a good credit history, and lenders are anxious to get your business.


My advice is to shop around as carefully as you shop around for the stuff you buy on credit, such as cars, furniture and home renovations.


But before starting to compare loan rates and features, here are 10 things you should know about borrowing.


1. Your credit history is important

To know how good you look to potential lenders, check your credit report at Canada’s two major credit bureaus, Equifax and Transunion. A credit report is a snapshot of your credit history. It shows how quickly you pay your bills and how often you’ve had collection issues. It might even show you’ve been a victim of fraud or confused with another person. While you have the right to see your credit report, you can get a copy for free only if you send a written request with two pieces of ID. Online requests are faster, but will cost you money.

2. Your credit score is important to lenders

A credit score is not the same as a credit history. You’ll pay about $25 to get copy of your credit score by ordering it online from the credit bureaus. It’s based on a mathematical formula that considers your payment history and other factors, such as how much of your credit limit you have used. The score is a three-digit number, ranging from 300 (low) to 900 (high). The higher the better? There’s a great guide to understanding your credit report and credit score at the Financial Consumer Agency of Canada.

3. Make sure the information is accurate
Make sure the information in your credit report is correct and up to date. If it’s not, talk to the credit bureau. Remember, the credit bureau has to contact the credit granter (such as a bank or a cell phone company) to see if the information is incorrect. To avoid delays, you can also contact the credit granter and ask it to follow up with the credit bureau. Once an error is confirmed, the credit bureau has 30 days to correct your credit report (except in Alberta, where it’s 90 days). If the credit granter refuses to fix the error, you can submit a brief statement to the credit bureau, saying the information is in dispute. This will be added to your credit report.


4. You can improve your credit score
To polish your image as a borrower and raise your credit score, you should always pay your bills on time. If you can’t do this, pay at least the required minimum amount a few days before the due date. Try to keep your balance well below the credit limit on your credit card or line of credit. Finally, you should be careful about making a lot of credit applications at once. Your credit score suffers if too many potential lenders ask about your credit in too short a time. (It looks as if you’re desperate.)


5. You need to build up a credit history

Your credit score will be low if you don’t have a history of borrowing money and paying it back. You can build up a credit history by applying for a credit card and using it. Once there’s activity, the card issuer will tell the credit bureaus about your outstanding balance and your record of making payments on time. You may be asked to get a secured credit card, which means you have to deposit a sum of money with the card issuer. This reduces the risk if you default on your payments. Check out information about secured credit cards and a comparison of the rates and features. It’s easier to get a loan when someone co-signs with you. But if you can’t repay, the other person is on the hook.

6. You may need a co-signer
If you have a limited or poor credit history, you will be seen as a high-risk borrower. You may not be able to get credit unless you find someone with a high credit score to sign the loan with you. Lenders know a co-signer cuts the risk, since the other person has to make all the remaining payments if you stop. You’re asking for a big favour when getting friends or family to co-sign a loan. So, you should write a contract setting out the payment schedule. This won’t hold up in court if you default, but it makes the relationship more professional.


7. Be careful with a personal line of credit
A line of credit often has a lower interest rate than a loan. It’s certainly more flexible. Once you’re approved for a certain credit limit, you can take out as much as you want and pay back only a required minimum amount each month. But remember you’re making interest-only payments, so you can pay the monthly minimum and never make any progress on trimming your debt. Remember, too, that a line of credit has a floating rate that can go up. If you prefer fixed rates, stick to a conventional loan.


8. Secured or unsecured line of credit?
Financial institutions love lines of credit. They know it’s hard to resist temptation when you’re handed a large amount of potential spending power. A line of credit backed by your assets, such as investments or a principal residence, usually has a lower rate than an unsecured line of credit. Both are based on the bank’s prime rate, such as prime plus 1 per cent or prime plus 3 per cent. You can save money if you get a line of credit secured by your house at the same time you apply for a mortgage or refinance an existing mortgage. Always try to pay more than the minimum amount so that you’re not spinning on a treadmill of debt.


9. Credit cards are a costly way to borrow
Most standard credit cards have annual interest rates of 18 to 20 per cent. And you’ll pay 25 per cent or more if you miss making a couple of minimum payments in a year. If you carry a balance on your credit card from month to month, you will lose the grace period of 20 to 25 days on new purchases. Cash advances on a credit card are also costly, since there’s no grace period. You’ll pay interest from day one and a fee for cash advances as well. So, use the credit card as a convenient payment method, but look for low-cost credit elsewhere.


10. Avoid payday loans

A payday loan is one that you promise to pay back from your next pay cheque, usually in two weeks or less. These loans are offered by privately owned payday loan companies and cheque cashing outlets, not by the big banks. Lenders ask for proof you’re over 18, with a permanent address, regular income and active bank account. To be sure you repay, they ask you to write a post-dated cheque or authorize a direct withdrawal from your account. Payday loans are expensive because of all the fees that may be charged. On a $300 loan for two weeks, you can pay $50 in fees. That’s equivalent to a 435 per cent annual interest rate, according to the FCAC.

By Ellen Roseman | Thu Mar 17 2011

Courtesy of: http://www.moneyville.ca:80/article/845459--borrowing-10-things-you-need-to-know

For all your mortgage needs call: Eduarda (Eddie) Pita - 416-920-9931

What are your financial Steps to Take If You're Getting Divorced

If you're facing the emotional turmoil of an upcoming divorce, part of your worry is revolving around your personal finances. Divorce will affect your personal finances badly but, hopefully only in the short term. There are financial steps you should take during your divorce to shield yourself as much as possible.

1. Separate Your Credit Card Debts
Any debt (no matter in whose name) is open to a fifty-fifty split until the divorce is signed.

2. Remove Your Name from Your Spouse' Cards
Before you destroy any credit cards your spouse may have given you, call the creditor and remove yourself from the account. If you don't, the bank will continue to report the debt on your credit report, even if you are only a co-signee. This will increase your debt-to-income ratio by unfairly penalizing you for the debt of your spouse. Your credit score plummets if your spouse is late on their credit card payments.
3. Close Joint Bank Accounts
Separate your bank accounts while the divorce process is going on. If you still live in the same home, keep a bank account open for household expenses only and establish auto debits with payees, to prevent your spouse from withdrawing funds for his or her own ends.

 4. Decide if you want to sell the matrimonial house or buy the other spouse out.
Get a certified appraiser, and not a real estate agent to give you a letter of opinion, of what your house is worth. Pay the cost of the appraisal and get 2 or more reports (one from each party) to get an honest appraised value of your house.

5. Plan for the Future
You are about to become a one-income household. This may increase or reduce your lifestyle. To deal with the upcoming change to your personal finances, make plans for lowering your car payment, mortgage and any other large fixed payments and discover new ways to maximize your money.

Become an informed client.

For all your mortgage needs call: Eduarda (Eddie) Pita - 416-920-9931

Visit us online at www.eddiemac.ca

60% of Ontarians live paycheque-to-paycheque

Shutterstock

By John Goddard | Wed Sep 07 2011

Eight years working in administration for non-profit dance and theatre companies left Iona Frost professionally fulfilled but behind in her retirement savings goals.
She lived sensibly, meeting her rent, Internet and other payments, and getting into shows for free through bartering and volunteering.

Internet and other payments, and getting into shows for free through bartering and volunteering.

But her retirement-savings targets proved hard to hit, she says, putting her roughly into a category with a majority of other Ontario workers in a survey to be released Thursday by the Canadian Payroll Association.

Sixty per cent of those responding to an online poll this summer said they live paycheque-to-paycheque. Nationally, the figure stands at 57 per cent.

Most people said they likely need more than $750,000 to retire and they are not on track. Instead, they are getting into trouble with credit-card debt and overspending, unable even to keep three months worth of expenses on hand in case of emergency.

On the last score, Frost stands out as an exception.

“I have lived by that principle of three months savings,” she said Wednesday. “When something unforeseen comes along it can be a real blow, even an unexpected dental bill.”

At 37, her problems had been low pay and little room for advancement, which led her four months ago to upgrade her skills and establish herself as an independent consultant under the name SpringForward. One of her first clients was the salsa school Go Dance Mambo.

“So far so good,” she says. “I was able to make some great connections at my last job and one of my volunteer jobs turned into a business opportunity.”

In the survey, 74 per cent of Ontario respondents said they have saved less than one quarter toward their retirement savings target.

“Even the older age groups are not saving for retirement,” said association chairperson Dianne Winsor. “More than 40 per cent of Canadian employees 55 to 65 are still less than a quarter of the way.”

At 49, Khadijah Ignatova said she is behind as well.

Five years ago, she arrived in Canada from Bulgaria with a master’s degree in Russian language and literature. With help from Thorncliff Neighbourhood Office, she found a minimum-wage job as a security guard.

She meets her expenses, including rent, TTC pass and cellphone, she said. Instead of plunging her extra money into retirement savings, she plans to invest in a Masters of Education degree.

“I’m going to look for a decent job,” she said. “If I’m not able to save for retirement, I think I’ll find a way to survive.”

In the survey, 50 per cent of employees nationally and 53 per cent in Ontario reported they are saving 5 per cent or less of net earnings.

Financial advisors recommend that workers put 10 per cent into savings, said the association, which consists of professionals administering company payrolls and deductions.

A total of 2,070 employees responded to the survey between July 6 and Aug. 2, using something called a convenience sampling methodology.

Calculating a definitive margin of error is not possible with the methodology, researchers said, but would likely be in the range of plus or minus 2.2 per cent 19 times out of 20.

Courtesy of 

http://www.moneyville.ca/article/1050864--60-of-ontarians-live-paycheque-to-paycheque?bn=1

For all your mortgage needs call: Eduarda (Eddie) Pita - 416-920-9931