What To Know About Rental Income in Alberta

In Canada, rental income is the income you earn from a rental property that you own and rent to someone else.

Typically, rental income comes from renting apartments, houses, and rooms but also includes office space and other commercial properties.

In this article, we are going to discuss everything you need to know about rental income in Alberta as an individual (not a business or trust).

While earning an income rental seems like a quick and easy way to make more money, there are many factors that you have to take into consideration, such as how to determine your rental rate and how to claim your rental income on your taxes.

We’ll also look at the benefits and risks of earning a rental income, as well as tips on how to save money on your rental income.

Determining Your Rental Rate

It can be difficult to determine what you should charge for rent. You want to ensure the cost is not too high so your rental property remains attractive.

However, you don’t want to price your rent too low and miss out on the additional income.

Check the Current Property Value

In order to calculate your rental rate, begin with the current property value (not the same price it was initially purchased at). This will give you an idea of how much the property is worth in comparison to other rental properties in the area.

Do Your Research

You should also look at comparable rentals in the area for similar properties by browsing rental listings that are the same size with the same number of bedrooms. You should also take the condition of the other properties into consideration.

Use This Formula

Now, take the current property value and multiply it by 1%.

For example, if the value of the property is $200,000, then 1% is $2000. This is a baseline rental rate you can then compare to the similar properties you researched.

Other Factors

There are other factors you should consider when determining your rental rate, such as:

  • Maintenance costs
  • The demand for rental property
  • Demographics
  • Price-to-rent ratio (affordability when it comes to renting versus buying in the area)

Taxes on Rental Income in Alberta

When you collect rental income in Alberta, you must report that income on your tax return. Rental income is taxed at a marginal rate similar to interest income and can range from 25% to 48%.

Keep in mind that only your net rental income is taxable. This does not include deductions made for expenses such as property taxes, insurance premiums, and utilities.

What Can I Deduct From My Taxes?

You can also claim capital cost allowance (CCA) against your rental property and other assets used for earning rental income, like tenant improvements and new appliances.

CCA claims are depreciable, meaning that you must deduct the cost of your capital investment over a number of years.

If your rental expenses exceed your rental income, this is considered a rental loss and is usually deductible against your other sources of income.

However, there are some limits on claiming a rental loss, and CCA deductions cannot be used to create or increase a rental loss.

Not all expenses are deductible when it comes to your rental income, even if they relate to your rental property. These are known as “capital expenses” and refer to expenses that have a lasting benefit to your property.

For example, you cannot claim the cost of replacing your roof or adding a deck to your rental building.

However, even though these improvements can be claimed as deductibles, they can be added to the tax cost of your property, which allows you to claim the expense as a CCA over the course of several years.

Expenses that are considered deductible are known as “current expenses” and include expenses used to maintain, repair, or otherwise restore your property.

For example, building a fence is considered a capital expense and cannot be claimed – but sanding and repainting an old fence is a current expense, and the cost can be claimed.

Current expenses should be claimed in the year they were incurred instead of spread over time.

How Do I Know If It’s a Current or Capital Expense?

Figuring out whether your expenses are current or capital can be confusing. Is it a maintenance job or long-lasting improvements? Is re-wiring a home a current or capital expenditure?

This is why it is recommended that you speak with a qualified tax advisor before you carry out repairs, maintenance, or renovations to ensure that you make the proper claims on your taxes.

How do I file my taxes when I claim rental income?

If you are claiming rental income as a sole proprietor and not a business or partnership, you can include this income in your personal taxes by filling out Form T776.

You can also claim expenses on this form as well.

Be sure to keep all receipts from rent and expenses when preparing your personal tax return.

Benefits of Gaining Rental Income

friendly landlord shakes hands with new tenants

There are a number of advantages to buying a property and renting it to tenants. Here are some of the key benefits:

Fewer Taxes

As we discussed above, you can claim certain expenses from your rental income, thus reducing the taxes you owe.

You can claim expenses such as mortgage interest, property taxes, insurance, maintenance, upgrades, property management fees, and utilities (if they are included in the rent).

Passive Income

Owning a rental property pays out on a monthly basis. This recurring income requires relatively little effort to earn and is a great way to make money on the side or create additional financial security.

The rental income you collect will offset the mortgage cost of your building, putting more money in your pocket!

Of course, you do have to factor in cash flow and prepare for inevitabilities such as cleaning up when a tenant moves out and repairs.

Property Appreciation

In today’s housing market, it seems tempting to sell your house and cash in on the rocketing house prices. However, once you sell your home, you can no longer benefit from any future appreciation.

Instead, you could rent out your home to secure your property and wait for the right time to sell.

Plus, having tenants ensures that issues with your home are noticed immediately and can be fixed in a timely manner.

Risks of Gaining Rental Income

Of course, there are some disadvantages and risks to gaining rental income that needs to be taken into consideration:

Tenants

When you own rental property and rent to tenants, you become a landlord. Despite your due diligence when choosing renters, you could end up with a difficult tenant.

For example, you could end up with a tenant that pays their rent late, demands unnecessary repairs, leaves the water running, keeps the heat on while away, etc.

You could also end up with an unsavory tenant that destroys your property.

While the majority of tenants in Alberta are respectful, you could end up with one that costs you money and decreases the income you make from their rent.

Repairs and Maintenance

When you own a rental property, minor and major repairs will arise. You may be able to save money by doing the work yourself, but larger issues may require a professional contractor.

As a landlord, you should expect to face regular maintenance and repair issues. From broken toilets to rotting stairs, it is your responsibility to ensure that the property is safe and livable.

If the building you invested in requires a lot of work, you can expect to pocket less of the rental income.

Your Assets Become Concentrated

If you’re looking to purchase a rental property as an investment opportunity, it’s important to consider that doing so will concentrate your assets.

Rental properties are non-liquid and non-diversified assets and can be exposed to risks from significant declines in tenant demand and local property values.

Tips for Saving on Rental Income

When you own a rental property, you are running a business that can be affected by the rise and fall of revenue and expenses.

Here are some tips for saving rental income so you can put more money in your pocket while creating a safe and comfortable environment for your tenants.

Keep Up With Regular Maintenance

Regular maintenance is a preventative measure that will protect your investment and keep your tenants happy (happy tenants reduce tenant turnover and increased costs).

Plus, regular maintenance will help you avoid more costly issues in the future.

Reduce Tenant Turnover

Speaking of tenant turnover, having tenants continuously coming and going is going to cost you more out of pocket for cleaning and updating – and you may lose out on rent as you advertise and vet a new tenant.

The key to reducing tenant turnover is keeping your tenants happy. Create an open environment of communication so you can learn about issues and solve them in a timely manner.

Fixing issues is far cheaper than the cost of turnover.

Reduce Property Expenses

Even though rental income is considered a passive income, there are many property expenses that come with being a landlord.

From heating bills to electricity bills, snow removal, and garbage removal, there are many financial responsibilities. However, you can always find ways to reduce these expenses.

For instance, you can improve the energy efficiency of your property by using less expensive alternatives such as LED lights and modernizing the heating system.

Maximize Your Tax Deductions

Ensure that you are maximizing your tax deductions and offsetting your expenses against your tax bill!

This is perhaps the best way you can save on rental income – and all it takes is one call to a professional tax accountant.

Rental Income Frequently Asked Questions

Do you have more questions? We have more answers! Check out these frequently asked questions:

Do rental income tax laws vary from province to province?

As long as you are renting out your property as an individual (and not a trust or partnership), the tax rules apply across all provinces of Canada.

Can claiming rental income trigger an audit?

Typically, rental income is not a common audit trigger but constantly claiming losses from a rental property will catch the attention of the CRA.

If you find yourself facing recurring losses from your rental property, be sure to keep careful records to show the CRA that you are doing everything you can to turn a profit.

Do I have to claim rental income from family members?

Yes, if your family member is paying you rent, this income must be reported on your tax return.

However, if you rent property to a family member below fair market value, you may be able to claim an acceptable loss and avoid paying taxes on this income.

As a landlord, can I increase the rent at any time?

In Canada, you cannot increase the rent during any fixed-term rental agreement. If your tenant is not on a fixed-term agreement, you cannot raise the rent during their first year of tenancy.

Can I increase my rental income to any amount?

The ability to raise rent depends on the province you are in. In many provinces, the amount of the increase is controlled by the government.

However, in Alberta, there are currently no controls on rent increases, but it can only be increased if there has been no rent increase in the previous 12 months (or since the start of the tenancy).

Rental Income in Alberta – We Can Help!

Although this guide is a great introduction to rental income in Alberta, the only way to guarantee that you fully benefit from earning a rental income is to speak to a licensed tax professional.

Our team at Liu & Associates has the knowledge and expertise when it comes to Albertan and Canadian tax landscape.

We can help you sort out your rental income and expenses so you can maximize your tax return.

Let’s chat today!

The Connection Between Corporate Finances and Individual Finances

They say that you should never mix business with pleasure – but when it comes to finances, the two are connected in a number of ways.

Because of the connection between corporate finances and individual finances, it’s important to understand that, while you can approach both in very similar ways, it’s not always a good idea to allow the two to mix.

Before we talk about how to keep your corporate and individual finances separate, let’s first look at their similarities and differences:

Similarities Between Corporate Finances and Individual Finances

The similarities between corporate finances and individual finances all come down to money management. No matter the amount sitting in your accounts, how you handle it determines your overall financial success! 

Discipline

When it comes to managing finances, both corporate and individual, discipline is important. In order to be successful, you need to focus on spending only when necessary.

If you’re running a company, it can be tempting to spend on unnecessary assets but you need to limit your spending to expenses that are pertinent to running and growing your business.

For personal finances, it’s important to curb spending in order to build up savings.

Investment

Whether you are looking to expand your business or your bank account, you need to make investments in order to grow your funds. In your personal life, this could mean purchasing a home. In business, investing could involve hiring new staff or purchasing new equipment.

Budgeting

Both personal and business finances require budgeting. This involves laying out how much money comes in versus how much goes out and seeing what is left over.

Budgeting takes time and effort – even more so for businesses and companies. In order to effectively budget, you need to involve formal documentation such as income statements and balance statements.

Overall, budgeting requires you to set a spending limit and stick to it so you can achieve your financial goals over time.

Differences Between Corporate Finances and Individual Finances

It’s great that you can approach both corporate finances and individual finances in the same way when it comes to budgeting and investment, but there are some ways that business finances are handled that can be detrimental to an individual.

Temptation

We talked about how corporate finances and individual finances both involve a degree of discipline but one notable difference between the two is that managing personal finances comes with significantly more temptations.

Business finances tend to be more impersonal and purchases are made in the best interest of growth and success.

However, individuals tend to struggle with the temptation to make unwise or extravagant purchases.

Corporate financial decisions are usually made more rationally than personal financial decisions

Collaboration

When a business makes financial decisions, it usually comes as the result of collaborating with staff members, co-owners, financial offers, and accountants. This is to ensure that spending solutions make sense for the company.

Individuals, however, are often not required to confer with family members or any other person to make financial choices.

Leverage

One benefit corporate finances have over individual finances is the use of leverage. Businesses can use leverage as an investment strategy and borrow money to invest in the company’s future.

When done right, leverage is a practice that can help support small businesses by accessing capital in order to expand.

Using leverage when it comes to individual finances is extremely risky and result in devastating losses such as losing your car or your home. 

Keeping Corporate and Individual Finances Separate

Businessman separates the wooden puzzle with a picture of money

Even though there are similarities between corporate and individual finances, it’s important to keep them separate.

It’s important to remember that a corporation is an independent entity that should be free-standing from your personal finances.

Here are some reasons why you should keep your corporate and individual finances separate:

  • Leverage: As we mentioned above, leverage can be highly beneficial for a company but potentially devastating for an individual.
  • Taxes: You can take advantage of tax deductions and write off business expenses when you keep your business finances separate from your personal finances.
  • Business Credit: Obtaining working capital for your business and business credit is key to securing larger business loans.
  • Professional Image: Keeping your company and personal finances separate makes you look like a serious business owner and not just someone who monetized a hobby.
  • Time and Money: When you keep your corporate finances separate, you can utilize the skills of a professional accountant to streamline your financial process, save you time, and save you money.

How to Keep Your Corporate Finances and Your Individual Finances Apart

When it comes to corporate and individual finances, the “how” is probably just as important as the “why”.

Here are some tips for keeping your finances apart:

  • Hire an Accountant: A Certified Personal Accountant (CPA) can ensure your company’s bookkeeping is done properly and that your finances remain separated.
  • Open Separate Accounts: Creating individual accounts for yourself and your business will help you distinguish between your finances.
  • Business Credit Card: A business credit will allow you to make company-related purchases without using your personal card. It will also help you build credit for your business.
  • Separate Your Receipts: Ensure that your business receipts and your personal receipts are organized and stored separately so you can easily access them without confusing the two.
  • Structure Your Business: Establish a legal structure for your business in order to disentangle your personal finances from your business finances.
  • Pay Yourself: Instead of randomly pulling money from your business to take care of your personal finances, pay yourself a salary to help your company stay on budget.

Let’s Grow Your Business!

Our expert team of accountants at Liu & Associates is proud to offer you the accounting services you need to grow your business and achieve success!

From taxes to bookkeeping, we have you covered! Check out our Corporate Accounting Services or contact us for more information.

2021 Tax Guide: Keeping Track of your Receipts

person sitting on hardwood floor amongst tax paperwork

The COVID-19 pandemic certainly threw the way we work into a tailspin as more and more employees found themselves working from home.

Thankfully, many individuals were able to take advantage of this situation and continue working in a safe environment.

However, this massive shift will change the way in which 2020 taxes will be filed this year. Mainly, individuals are now eligible to claim home office expenses if they were able to work from home.

If you are one of these people, you are probably wondering what exactly you need to provide to the CRA to make this happen. 

Depending on the way in which you choose to file your work-from-home taxes, you may be required to hang on to receipts related to home office expenses and purchases.

Before you start digging around for crumpled up receipts, here’s some information on who is eligible for home office expense claims and what claims you are eligible for:

Am I Eligible to Claim Home Office Expenses?

If you worked from home because of the pandemic more than 50% of the time over a period of at least four consecutive weeks, you can claim home office expenses.

However, if you were reimbursed by your employer for any home office expenses, these cannot be claimed.

For example, if your employer paid for your computer, desk and chair, these purchases cannot be claimed on your taxes.

Any purchases out of your pocket, as well as the space in your home you use to work, can be claimed on your 2020 taxes.

In order to make these claims, there are two methods of filing you can choose from:

Two Simple Ways to File Your Taxes

woman fills out tax form using pen and calculator

Previous to the pandemic, those who worked from home had to calculate their expenses and home office space in order to claim deductions on their taxes.

Thankfully, the CRA has introduced a simplified method for those who had to work from home during 2020.

Keep reading to find out the methods available for home office claims to determine which best suits your situation:

Temporary Flat-Rate Method

For the 2020 tax year, the CRA has introduced a temporary flat-rate method to streamline the way in which you claim your work-from-home expenses.

The flat rate is $2 for each day you worked at home because of the pandemic (from March 2020 to December 2020) to a maximum of $400.

These days can be either full-time or part-time days and do not have to be consecutive – although vacation days, sick days and days off do not count in your calculations.

If you choose the temporary flat-rate method, you simply need to claim the amount and submit the T777S form (statement of employment expenses). 

You also do not have to keep receipts, calculate the workspace allotment in your home or have any forms signed by your employer. 

However, you cannot claim any other employment expenses. So, if you feel your expenses will amount to more than $400, you can go with the detailed method of filing your 2020 taxes.

Detailed Method

This is a more involved process but necessary if you feel you are entitled to more than $400 in work-from-home expense deductibles.

When you choose the detailed method, you have to fill out the T777S and have form T2200S signed by your employer. 

You will also need to keep all of your receipts as well as calculate the percentage of your home used for work. This means figuring out the square footage of your office space and dividing it by the square footage of your home.

When you figure out the percentage, you will use that number to determine how much of your rent, utilities, etc. you can claim.

As an employee, you are eligible to claim a portion of your hydro, rent, heat, internet and cell phone minutes. If you work on commission, you can claim a percentage of your home insurance and property taxes. As a self-employed individual, you can claim your mortgage interest, mortgage payments, internet, furniture and capital expenses.

Not sure what you can claim? Get in touch with one of our expert accountants to discuss what deductions you are eligible for and what information you will need to submit to the CRA.

How to Keep Track of Your Receipts

With the detailed method of claiming your home office expenses, you may be required to produce receipts for purchases and services that you have paid for – especially if you end up facing an audit.

Luckily, you are probably not going to be faced with piles of receipts that need to be organized as you would if you owned your own business.

However, instead of shoving these slips of paper in a random drawer, here are some ways that you can keep track of your receipts for your home office expenses:

  • Make notes on your receipts. To keep your receipts organized, make a note on them to indicate whether they are for supplies or if they need to be calculated by percentage.
  • Go paperless. There are many apps and programs out there that will help you input and organize your receipts electronically. You can also take a picture of your receipt on your phone and keep track of it that way.
  • Establish a holding station for your receipts. When you bring a receipt home, you’re probably going to toss it aside and deal with it later. Grab a jar or envelope as a holding station for your receipts until you get around to organizing them.

You can also create a Google Spreadsheet to track your expenses month to month. That way, when it’s time to file your taxes, you have all of the amounts available and can compare your receipts to what you spent.

Ready to File Your Taxes?

If you’re new to filing taxes as a work-from-home employee, the process can be a little confusing.

Let our team of accountants guide you through your 2020 taxes! We are ready and happy to help you get the most out of your tax return.

Let’s chat today!

Will My Small Business Taxes Affect My Personal Taxes?

Man and woman in business attire sit in front of laptop computer

A common question among small business owners is “How will my business’ taxes affect my personal tax’s, and vice versa?”. While owning a small business does not exempt you from paying personal tax, the type of business structure you choose will have an effect on your business taxes. Read on to learn about some of the most common business structures, and how they impact both your personal and business taxes.

Sole Proprietorship

Running your business as a sole proprietorship means that you are your business. Your company has no legal identity separate from yourself. In the eyes of the government, a sole proprietorship does not exist as a taxable entity. Instead, the CRA deals with you directly. In a sole proprietorship, all company profit is to be reported as personal income.

Pros

  • You do not pay federal business income tax

Cons

  • Because you’re reporting all income as personal, you’ll be paying twice the usual amount of self-employment taxes
  • There are some liability risks that are associated with sole proprietorships

Incorporated Businesses

When you incorporate your business, you add on a layer of protection against liabilities and debts resulting from the operation of your business; however, it also adds on a layer of taxes. In an incorporated business, you have to pay taxes on any profits that your company makes. While this business structure is usually only considered by larger companies, if your business is a fast growing start-up, setting up your business as a corporation may be a good idea.

Pros

  • Company has a separate identity from yourself as the owner.
  • Liability and debt protection

Cons

  • Have to pay business income tax

Limited Liability Company

A limited liability company (LLC) allows you to receive many of the benefits of being a corporation when it comes to protecting your personal assets, while still allowing you to claim all business profit as personal income. Similar to a sole proprietorship, you and your company are considered to be the same entity. LLC’s are one of the most common business structures for small businesses.

Pros

  • Some financial and legal protections
  • Do not have to pay business income tax

Cons

  • Since you’ll be claiming all income as personal, you will be paying extra self-employment tax

Questions? Call Liu & Associates

If you are a small business owner with questions about business and personal tax, give the team at Liu & Associates a call! Our expert accountants can help make sure that you are setting yourself, and your business, up for success.

Does Paying My Taxes Late Affect My Credit Score?

It’s no secret that paying your taxes late comes with consequences including interest and penalties that could negatively affect your finances. Is a negative impact on your credit score another possible impact?

It’s easy to assume that any debts or money owing will be held against your credit score. When it comes to late taxes, it works a little differently.

Does the CRA Report to Canada’s Credit Bureaus?

In general, the Canada Revenue Agency will not report to Canada’s credit bureaus if you owe a small amount in income taxes, paid your taxes late, or received any basic penalties.

The CRA’s privacy policy restricts the amount of information they are able to share with outside organizations, including Canada’s credit bureaus. However, there is on exception: in the event that you owe enough in taxes for there to be a court case and a collection agency becomes involved, CRA is able to put a tax lien on your credit report. If your debts owing become public information via a court case or collections, your taxes owing will impact your credit score.

What Should I Do If I Owe Taxes?

Most of the time, an individual ends up paying taxes late if they are not in a financial position to pay taxes on time. In order to avoid  late taxes affecting your credit, it’s best to deal with them immediately before the debt becomes too large. Ignoring the problem will not make it go away and could end up making it worse with ruined credit or even bankruptcy.

Even a small amount owing needs to be taken care of as soon as possible before interest charges inflate the original debt.

If you do owe taxes, here are some steps you can take to deal with the debt:

  • Contact the CRA immediately: The Canada Revenue Agency doesn’t want to drag you through court cases, so they are often willing to work out a payment plan. If you can prove that you absolutely do not have the means to pay your owing taxes in a short amount of time, you may be able to work out a multi-year payment plan.
  • The Taxpayer Relief Provision: If your tax situation meets certain criteria, your case may be forwarded to the Minister of National Revenue. Should your case be approved, you could receive tax penalty and interest relief.
  • Save and spend responsibly: You should consider establishing a savings account for tax purposes and other emergencies. Being able to pay a portion of your tax bill is better than not paying anything.

What Does Affect My Credit Score?

Knowing what actions affects your credit score is important in keeping your credit score high.

While your taxes only affect your credit if they become a substantial debt, many other elements come into play when determining your credit score:

  1. Payment History: The largest part of your credit score is based on how well you pay your bills and owing amounts on credit products. It takes into consideration late, short, and missed payments – all of which can negatively affect your credit score.
  2. Utilization: Credit bureaus look at how much debt you have versus how much available credit you have. If you continually run your credit cards to their limits, this will lower your credit score.
  3. Credit History: The amount of time you’ve had your credit products also impacts your credit score. Debts that you’ve carried and maintain good payments on for many years look better than newer debts.
  4. Credit Product Variety: Credit bureaus also like to see a variety of credit products, not just credit cards. This includes loans, mortgages and lines of credit.

Why Take the Chance?

Any amount owing in late taxes, whether it be a large amount or small one, can spell trouble for your finances. Contact Liu & Associates today for more information on how you can avoid interest and penalties when you owe money on your taxes.

What Do I Do After Declaring Personal Bankruptcy?

Did you know that the average Canadian household owes close to $1.78 for every dollar earned?

It’s no wonder debt is a financial issue for Canadians, with many of them facing owing amounts so high that there is no hope of paying it off.

If you find yourself in this type of financial crisis, bankruptcy is an option for clearing your debts. However, it comes with certain obligations you are expected to fulfill.

What is Bankruptcy?

Bankruptcy is a legal process for individuals who seek relief from some or all debts when they cannot repay these debts to creditors.

Filing for bankruptcy requires a licensed insolvency trustee, who files the bankruptcy and sends a notice of bankruptcy to the creditors.

The creditors then cannot proceed with any lawsuits, garnishes or payment requests.

After filing for bankruptcy, you are eligible for discharge from the trustees after 9 months. However, the bankruptcy itself remains on your credit report for at least 6 years.

What Happens After My Bankruptcy is Filed?

Once the bankruptcy is filed, you are required to fulfill a few obligations with the trustee.

Your responsibility during the bankruptcy includes:

  • Sending your trustee proof of your income and a monthly budget once a month.
  • Notifying your trustee of any changes with your work or income.
  • Attending 2 credit counselling sessions. During these sessions, a credit counsellor will guide you through budgeting and money management techniques.
  • Making monthly bankruptcy payments to the trustee.

During this time, you can expect to no longer have to deal with creditor calls. When your bankruptcy is filed by the trustee, an “automatic stay” is forwarded to the creditors.

An automatic stay indicates to the creditors that they are not allowed to take collection action against you.

What Should I Do After I File Bankruptcy?

Once your bankruptcy is discharged, you will no longer be required to deal with the trustees.

However, although your obligations to the trustee are compete, there are measures you can take to protect yourself from future bankruptcy and rebuild credit.

1. Check Your Credit Reports

Even though filing for bankruptcy clears your debts, you want to make sure nothing was missed on your credit report before beginning to reestablish credit.

About 3 to 6 months after your discharge from bankruptcy, you should check your credit report.

This is not the same as checking your credit score, which you can do for free now through most bank’s websites and apps.

According to Canada.ca, you can order a copy of your credit report through Equifax Canada and Transunion Canada without affecting your credit score.

2. Start a Budget

The reason bankruptcy proceedings require you to attend credit counseling is to try to prevent a bankruptcy from happening in the future.

You should continue what you learned from the credit counseling even after your bankruptcy is discharged.

Additionally, before you begin to build credit again, you want to make sure you can afford payments on a credit card.

Healthy financial habits will help you avoid a future bankruptcy as well as help you rebuild your credit quickly.

3. Build New Credit

Although the bankruptcy remains on your credit report for a minimum of 6 years, you can begin to build credit again immediately after your discharge.

While some financial institutions will deny you credit due to your bankruptcy, many lenders will look at you as if you have never had credit before, since bankruptcy essentially clears your credit status.

In order to reestablish credit, you should begin with a low limit secured credit card. Secured credit cards, as opposed to prepaid cards, offers you revolving credit.

This means that you can borrow against the card as long as you keep the balanced paid. Secured credit cards require a security deposit.

Be sure to use the card responsibly and only spend what you can afford to pay off each month.

Is Bankruptcy the Right Option For You?

Whether bankruptcy is the right choice for you or there is another viable option to help with your debt, you should speak with a professional accountant to ensure you are heading down the right financial path.

Contact our experts at Liu & Associates for more information about bankruptcy and other debt-solving options.

 

When Do I Need to Report Rental Income?

Renting property seems like a lucrative entrepreneurial opportunity as more and more individuals are renting out portions of their home and even offering space through popular accommodation services such as Airbnb.

Acquiring rental income is a great way to offset the cost of a mortgage or justify an investment in a secondary property. However, if you are renting your property to a third party, you are required to report your rental income on your tax return. While it may be tempting to not disclose this income to the CRA (Canada Revenue Agency), not doing so can lead not only to penalties but also missed opportunities for some tax savings.

What is Rental Income?

When it comes to claiming rental income on your taxes, rental income is considered to be any earned income from a rental property you own. This includes houses, apartments, rooms, office space and other real or movable property.

Rental income from Airbnb, income suits and any short term rentals must be claimed as well.

The duration of the rental, whether it be for one night, a week or a month, does not exempt the income from having to be claimed on your income taxes.

Exceptions to Claiming Rental Income

There is one exception to having to claim rental income on your income taxes – if you are renting a space below fair market value.

Renting below fair market value means that you are charging a rent significantly lower than rents charged for other properties that are similar to your property in your area.

Typically, home owners will charge family members below fair market value rent for allowing them to stay in their home.

If this is the case, you do not need to claim the income. However, you cannot claim any rental expenses or rental loss on your taxes.

The government considers this situation to be a “cost-sharing arrangement”.

Claiming Rental Income at Tax Time

If you are in a situation where you rent a property, or a portion of your property, at or above fair market value, the CRA requires that you pay taxes on the income earned.

In order to claim rental income on your tax return, you must declare the net income on line 160 of form T1. From there, you can subtract any qualifying expenses as well as capital expenditure depreciation expenses. The difference is your reported rental income.

Here are some common rental expenses that can be deducted against your rental income:

  • Advertising
  • Insurance
  • Mortgage interest
  • Repairs and maintenance
  • Property management
  • Utilities

To ensure that you are claiming the appropriate expenses for your rental property, contact the expert accountants at Liu & Associates for more information.

What Happens If I Don’t Claim Rental Income?

When the CRA expects you to claim any sort of income on your tax return, not doing so can lead to unpleasant consequences:

  • Interest accrual. If you owe taxes on rental income, and fail to report it, the amount can be subject to interest.
  • Penalties and fines. The CRA is within their rights to implement penalties for filing your taxes late. This amount is backdated to the time when the rental income should have been reported. Interest is also charged on the penalty amount.

Withholding your rental income from the CRA not only leads to financial consequences, but it also means that you miss out on the valuable deductions listed above.

Avoid the Confusion of Claiming Your Rental Income

Get in touch with the professional accountants at Liu & Associates to find out more information about how to properly claim your rental income as well as all of the tax benefits you can reap by renting out your property.

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8 New Year’s Resolutions to Save You Money in 2020

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When it comes to making New Year’s resolutions, there seems to be two goals everyone tries to commit to: get in shape and save money.

While our professional accountants at Liu & Associates may not be able to help you tone up your beach body, we can definitely address the goal of saving money.

The idea is to start small and to not overwhelm yourself with financial goals. Consider the following 8 resolutions you can try this year to begin saving money and brightening your financial future:

1. Create a Budget

The best way to keep your spending and saving on track is to create a budget.

Budgets don’t have to be elaborate plans that are difficult to follow.

Begin By tracking your spending for a month or two to see where your money is going. Calculate your income and expenses. From there, adjust your spending habits to free up some saveable money.

2. Set Small Savings Goals

Saving money can be a daunting task – but most people think too big and bite off more than they can chew. When the savings plan isn’t working out, they tend to throw in the towel.

Start with smaller savings goals. You can even begin a savings challenge where you save $1 the first week and add a dollar each following week.

3. Start an Emergency Fund

Did you know that 75% of Canadians do not have any money set aside in case of an emergency?

Medical issues, loss of employment, household damage and car repairs can come out of nowhere. You want to avoid relying on credit or loans to deal with these issues.

For 2020, look into opening a TFSA. This is a tax free savings account available for Canadians over the age of 18. Although there are caps on how much you can place in the account per year, these accounts are flexible, great for emergency funds and withdrawals are tax free.

4. Consolidate Your Debts

If you carry multiple balances across different debts, you are likely paying varying interest rates.

To save money on interest payments, consider moving all of your debts to one place. You can apply for a line of credit, personal loan or credit card to cover all your debts.

5. Plan Trips and Vacations in Advance

The earlier you book a flight or hotel, the better rate you can receive. Try to plan your vacations and trips as early as possible.

This also gives you an opportunity to save money instead of making all of your purchases on a credit card and having to pay it all back later.

6. Switch Service Providers

There’s always a better deal out there – shop around for cable, internet and cell phone rates.

Most companies will offer you an introductory rate for signing up. Just be aware of the expiration dates of these deals and what you will expect to pay once the promotion ends.

Also consider bundling services to save money each month.

7. Create Meal Plans

Meal planning is a great way to cut down on your grocery bills and avoid the temptation to eat out.

(And, if you’re looking to get in shape, it can help with that too!)

To create a meal plan, simply decide what meals you are going to prepare for your family for the week, taking into consideration any leftovers that can be used again or served as lunch. Make your grocery list in accordance with your plan and stick with it.

8. Learn About Money

This could be the year for you to improve your financial literacy. Take time to learn more about money management, budgeting, investing and paying off debts.

 

If you have any questions about making changes to your personal finances, or learning more about financial literacy, feel free to contact us at Liu & Associates for more information!

How to Choose an Executor for Your Will and Estate

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When creating a will, there is more to consider than simply what goes to whom. After you are gone and passed, someone will be responsible for executing your will.

Although you will not be around for the aftermath of dealing with your estate, you want to make sure you appoint the right person for the job – and choosing that individual can be a stressful and confusing endeavor.

What is an Executor?

An executor is the person responsible for following through on your will after you have died. This individual is in charge of sorting out your finances,  making sure your debts and taxes are paid and distributing the remainder of your estate to your beneficiaries and heirs.

It is also the job of the executor to identify everything in your estate, including bank accounts, pension payments and life insurance payouts.

The executor does not control the estate – they are legally obligated to fulfill your requests faithfully and fairly.

Choosing an Executor

When choosing someone to be the executor of your will, it’s important to put feelings aside and look at the situation objectively.

Being an executor is not a position of merit or perceived importance – it’s  a large responsibility and you want to make sure that the individual chosen can fulfill it.

When choosing an executor for your will and estate, consider the following:

  • Someone you can trust. You want to be sure to choose an individual who can execute your will fairly and objectively.
  • Someone who lives close by. An executor who lives out of town, province or even the country is going to face the long distance struggles of dealing with your family and assets. They will also face logistical challenges if a house needs to be sold or if local laws differ from where they reside.
  • Someone who has a flexible schedule. Sorting out an estate takes time and there are many deadlines that must be met. You want to ensure that the individual has the time to properly execute the will and meet the deadlines.
  • Someone who has some knowledge of taxes and finances. The majority of a will’s execution involves finances and having a basic knowledge of these things will make it easier for the executor of the will. For more complex estates, or foreseeable family conflicts, you may want to consider appointing an estate professional to plan your will and estates.

Professional Wills and Estates Planning

Wills and estates planning is recommended if you own a business or a large and complex estate. You may also want to consider hiring a professional to plan your will if you suspect that family conflict will make executing the will difficult.

Financial experts, such as the professional accountants at Lui & Associates, can ensure that your financial wishes are carried out correctly and legally.

We can tailor a plan to meet your specific needs, paying close attention to aspects of wills and estate planning such as:

  • Estate valuation
  • Tax elections
  • Tax planning
  • Estate freeze
  • Family trusts
  • Asset transfers

Having a professional prepare your will and estates ensures that your beneficiaries are protected legally and financially.

Our experts at Liu & Associates can handle any issue in regards to will or estate planning. Contact us today for more information about having your will and estates planning done proficiently and professionally.

The Benefits Of Having A TFSA

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In 2009, Canada introduced a unique way for Canadians to invest and save money – tax free!

Known as a TFSA, the Tax Free Savings Account is a flexible and simple way to grow a savings account.

What can you save for? Basically, anything you can think of:

What is a TFSA?

A TFSA is a tax free savings account available to Canadians who are 18 years of age or older.

As its name suggests, TFSAs are completely tax free. This means that savings are placed into an eligible investment and grow tax free. All interests, dividends and capital gains are tax free. Even withdrawing from a TFSA is considered non-taxable income.

TFSAs can be used for anything – tuition, down payments, retirement income, emergency funds. They are suitable for both long term and short term savings goals.

The Benefits of a TFSA

1. Draw Income During Retirement

Most retirement incomes are taxable, meaning that you have to pay taxes on any amount you withdraw. Withdraws from a tax free savings account, on the other hand, are not considered income and are not taxed.

If you can establish a healthy TFSA, you can draw on that account for your retirement income before having to touch your taxable RRSPs.

2. Flexibility of Savings

A TFSA gives you the flexibility to save for short term goals such as a vacation, long term goals such as retirement or to have an emergency fund.

You can use a TFSA in so many different ways in so many different stages of your life. Here are some ideas as to how a TFSA can be used:

  • Savings for Education. You may already have a registered education savings plan (RESP) set up for your child – and you probably have already accessed the maximum government grants. If that is the case, you can use a TFSA to save more for your children’s education.
  • Rainy Day Savings. In this uncertain world, you never know when you may need money for good times or bad times. You can use a TFSA in case you lose your job, incur uncovered health care costs or if your home or car require unplanned repairs.
  • Care for Elderly Parents. If you’re responsible for caring for aging parents, a TFSA can help with the cost of healthcare at home or in a long-term care facility.

With a TFSA, you can invest or save – the choice is yours!

3. Reduce Tax on Investments

You can use a tax free savings account to shelter investments that would usually be taxed at a higher rate.

Tax shelters are legal investment vehicles that aim to reduce or eliminate your tax liability. Some are risky and should be avoided, but TFSAs are a safe way to shelter your investments and reduce your bill.

4. No Income Required

In order to open a TFSA, you do not require any proof of income.

As soon as a Canadian turns 18, they only need to prove they are a resident of Canada and provide a social insurance number to begin a tax free savings account.

Once an individual turns 18, they start accumulating contribution room on a TFSA, regardless of employment status.

The contribution room is the maximum amount you can contribute to a TFSA per year. If you do not take advantage of the contribution room, the remainder carried forward to the next year.

5. Does Not Affect Government Benefits

Because withdrawals from a tax free savings account are not considered to be taxable income, taking money from a TFSA does not affect government benefits such as the child tax benefit or retirement supplements like the Guaranteed Income Supplement (GIS).

Ready to Start Saving – Tax Free?

Our expert accountants at Liu & Associates are ready to answer any questions you may have about opening a Tax Free Savings Account! Contact us today for more information.