On The Beach Education Corporation

Canadians in general are very generous people. We donate more per capita to charitable organizations than any other country in the world. This also makes us a prime target for donation schemes. Donating to a charity is not about getting more back in your taxes than the amount you donated.

This is an excerpt from Canada Revenue Agency (CRA) website under Charities and Giving, Information for donors, Avoiding fraud at this URL:

www.cra-arc.gc.ca/chrts-gvng/dnrs/lrt/2-eng.html

“People are sometimes approached to donate to charity through tax shelter arrangements. Before you decide to donate in this way, you should be aware of the risks associated with participating in certain tax shelter donation arrangements including:

Gifting trust arrangements

Leveraged cash donations and

Buy low, donate high arrangements.

Promoters of such tax shelters must obtain a tax shelter number from CRA. The CRA uses the tax shelter number to identify the tax shelter and its investors, but offers no guarantee that taxpayers will receive the proposed tax benefits.

CRA reviews all tax shelters to ensure that the tax benefits being claimed meet the requirements of the Income Tax Act. CRA has audited many of these gifting arrangements. Generally, CRA reduces the amount of the tax credit to no more than the taxpayers’ cash donation, and in many cases it is reduced to even less than that. In some cases the credit is reduced to zero. CRA may also charge interest and penalties.”

It’s your money, it’s your tax return and it’s your penalty when the auditors finally catch up to you and the tax scam. The following link takes you to an article about updates to the Income Tax Act regarding Tax Shelter Donation Arrangements and Tax Shelter Amendments. It also goes on to explain that penalties may be applied to individuals and third party promoters of such scams: CRA Update.

I am blogging about this because people in my network have been stung. It may take 3 years or 7 years but the government eventually catches up. When they do, be prepared to have the tax credit disallowed plus penalties and retroactive interest. You can always appeal their assessment but you know what a hassle that is.

p.s. I have been advised by a Chartered Accountant, two Certified General Accountants and two accounting professionals that they routinely advise their clients not to invest in these types of deceptive charities. The Income Tax Act is very clear in their definition of charitable giving and what it’s not as it pertains to tax credits.

One of the keys to successful preventive maintenance is training your tenants to take care of it for you. This requires education and training on your part. For example, if your properties have issues with humidity you need to train your tenants to use the fans to circulate the air to promote evaporation. This reduces the wear and tear on the apartment, reduces the incident of mold growth and damage to drywall.

What may seem obvious to you may not be so to other people. Instead of assuming everybody knows what you know, create a system of documents like a training manual to review important items.

One of the first issues I encountered in Thunder Bay, Ontario is that the winters are cold, really cold, like -30C to -40C. A lot of older buildings don’t have the proper ventilation or seals to prevent ice from building up on the inside of the windows. When tenants take a shower or cook, the steam goes in to the air. This humidity condenses on the coldest thing it touches which is the window – and, voila, you have an inch of ice coating your window.

The only way to prevent this from happening is to turn on the fans in the bathroom and/or the kitchen to promote evaporation.

This simple explanation gives people a reason to use the fans and in turn gives them the education to teach others.

To view a sample letter that we give to all of our tenants, click HERE and feel free to use it to educate your tenants.

One of the most common mistakes that entrepreneurs make is creating something that no one wants to buy. I’ll use the example of an author. You’ve written a book. You get it self-published. You have a thousand books in your garage and it’s only now that you start selling.

The problem with this model is: how do you know if anyone wants to buy the book. You’ve spent time and money on a business venture with no guarantee of a return. One of my mentors, T. Harv Eker, of Peak Potentials Training explained the art and science of the pre-sale.

First, you have an idea for a book. You create the outline and chapter summaries.

Second, you begin your sales and promotion now before you create it.

Third, you take pre-sale orders.

Fourth, you collect the money in advance of delivery.

Fifth, when you have the money to cover your initial costs, you place the publishing order.

The sales, marketing and promotion of this book will take about 6 to 12 months. The more time spent in promotion the better because you can collect more pre-sale orders. There is a limit to a customer’s patience which you can mitigate through continuous communication as to the progress of the book.

If you fail to produce enough sales to cover the cost of publishing, then the answer is pretty obvious. You need better marketing. And if this still does not produce results, it’s because no one wants the product. The book is a vanity project.

The principle of the pre-sale can be used in any business. Builders and Developers use pre-sales to sell real estate that hasn’t been built yet. In property management, I use the pre-sale technique to get tenants to pay their deposit now for placement 2, 3, 4, 5 months down the road.

The technique for getting the money up front is dependant on your ability to create a compelling need for the product and/or a lucrative discount or both.

That is a mantra that a mentor spoke to me. I have never forgotten it but I have forgotten who said it. My bad. I am reminded of this mantra because it still applies to me today. I am a big thinker with big goals and I want them now. You may have similar feelings. So how do I manage my impatience? I surround myself with the people and the resources to keep me on track.

Being energetic is great. Energy dissipated in many directions at the same time is not conducive to results. Spinning your wheels is not productive. It may feel like you’re doing a lot of stuff but it’s just being busy for the sake of being busy. This is the difference between someone who lives from pay cheque to pay cheque and someone who is financially independent. I know this because I’ve been-there-done-that.

I am listening to Robert Kiyosaki’s Conspiracy of the Rich and he reminded me what real work is. Real work is 90% mental and 10% physical. The vast majority of people spend 90% of their time in physical labor and 10% or less on mental efforts. I remember the effects of being conditioned in school. Between kindergarten to Grade 7, I was a voracious learner. Between Grade 8 to 12, my enthusiasm lost steam with every year until graduating year I couldn’t wait to get out of school. We have been conditioned to think that thinking is painful and boring instead of pleasurable and exciting.

Knowing this, you can begin the shift. The first step towards change is awareness. And this is why we give ourselves unreasonable goals. We do not take the time to use our mental facility to think through the steps for achieving an unreasonable goal. Remember: thinking is linked to pain. Something you don’t want to do due to all those years of negative conditioning. Ergo, we set ourselves up for fall after fall which only reinforces the other conditioning: to stay in your comfort zone. It’s safer.

Be unreasonable.

My unreasonable goal dated November 25, 2001 was to be a millionaire by November 25, 2010. And I thought giving myself nine years was on the verge of unreasonable but I stretched the possibility that it may be possible. If I had given myself a two year goal to achieve that status, I would have given up or done things to sabotage that goal. And I definitely would not have put much thought in how to achieve it. By giving myself just under a decade, it gave me the breathing room to plan and strategize how to accomplish it. And that was painful work at first. But you work through the pain of having to think and you can create a new conditioning.

Thinking Equals Freedom. True freedom. Huge net worth. Lots of cash flow. Financial independence. Emancipation. Stop being a slave to your conditioning. Be free.

Okay, for you Canadians who insist on buying investment property in the United States of America, you really need to do your due diligence in TAXES before you buy. You need to consult with a professional advisor who is familiar with being a Canadian resident and owning U.S. real estate because you are in for a nasty surprise if you don’t.

Most Canadians attend a seminar where a real estate guru makes these promises that this is the only way to hold an entity. That may be true for that person, but it does not necessarily mean it’s true for you.

One of the complications that arise is that these gurus do not know Canadian law. This is the nasty surprise scenario: You decide to create an LLC (limited liability corporation) to be on title for U.S. property. In the United States, an American citizen who creates an LLC can hold real estate in this entity and the income is taxed as a flow-through entity at their personal marginal tax rate.

Not so if you are a resident of Canada. According to Canadian taxation law, an LLC is not treated like a flow-through entity. It is treated as a corporation. All corporations that own real estate are considered passive entities and are taxed at the highest marginal tax rate (46%) with the exception of active entities. To be an active entity that holds real estate, you must have five full-time employees and show T4 slips for them. If your business meets this litmus test, then you are considered an active real estate business and are taxed at the corporate tax rate of 18% as of January 1, 2010.

When you understand this, then you can make a truly informed decision as to how to hold your real estate.

p.s.  you also need to understand FIRPTA (if you don’t know what this is then you really shouldn’t be buying real estate in the USA) and the implications of the 30% and 10% withholding taxes

We create businesses to make a living, have ownership, have control, make a contribution, take advantage of an opportunity, exploit a skill/talent/intellectual property, ultimately for profit. Some people labor for years and others for less. It takes determination, passion, strategy, planning and a whole whack of savvy stuff to get a business operating profitably, then systematically returning a profit. The key to starting up a business and getting it turnkey is TIME. There is a learning curve involved. It takes time to create a successful business even when you have mentors.

Real estate investing is a business in and of itself. There is a learning curve in first understanding how real estate works, then mastering how to invest. I see many people enter this arena and give up. It’s not only frustrating at times; it’s a huge commitment of time and energy.

I’d just like to comment on something I’ve been seeing lately, and that is people suddenly switching from a business they know well to starting up a completely new business they have no understanding of. This is a recipe for disaster or mediocrity, for one or both businesses.

In my personal experience, I’ve started up over nine network marketing businesses in the past. I was in the middle of my real estate learning curve when I started up network marketing business #10. My time was split between two businesses. Neither did well for a few weeks until I made the decision to drop the network marketing business.

In other examples, Steve and I have met people who have run a business for 8, 10, 15 or more years. These people have a lot invested in their business. They’re tired or stuck or bored with the business. They want passive income. They decide to switch their time and energy to becoming real estate investors. This is all well and good, but their existing business starts to suffer from lack of attention. They want to create a passive income stream. The amount of time, energy and money that is required to invest in your start up business as a real estate investor is a hundredfold in comparison to spending that same amount of time, energy and money on your existing business.

For example, in order to create an additional $2,000 per month passive income in real estate, it took me less than two years. That was my learning curve. I spent a lot of time, energy and money investing in my education.

Now what if you spent that same amount of time, energy and money investing in your current business that isn’t doing so hot? What if you made a two year plan to systemize your business? The results are astonishing. The return on investment is huge, far more than could be accomplished in your first two years as a real estate investor. Once your business is systemized, it runs without you on a daily basis, you are making money whether you’re at work or not, you’ve created a four hour work week, now all this spare time can be used to get up to speed on your new passion: real estate.

Real estate is a fantastic business. Just don’t sacrifice what you have already built in search for greener pastures. Real estate investing takes a lot of work, just like any business. The end result is passive income but all forms of passive income require some form of active management. The more passive the investment, the less risk. That’s why a Guaranteed Investment Certificate offers 0.2% interest. This is a fraction: two-tenth per cent interest. That’s the best rate my bank can offer me.

Even if you don’t have a business right now, it’s prudent for you to observe how you spend your time, energy and money. Do you rush off to different projects, do you scatter your energy, do you start something and don’t finish, do you finish other people’s projects, how do you focus, what kind of results do you create, do you wait for something to happen? Because how you are right now is how you are in business. P.S. this is how I used to be in 2001. I didn’t have staying power. I got bored quickly. None of the many businesses that I had started had a firm foundation upon which to grow because I quit early in the game.

I’m not saying that all businesses are meant to be kept and grown and systemized. This article is meant to help you look at the highest and best use of your time, energy and talent to get what you desire faster, sooner and more. Sometimes what’s in your back yard is where you’ll find your acres of diamonds.

We are in a seller’s market. There is over bidding, multiple offers, deals are getting snapped up in less than a week, often the very day they are listed, in certain markets. If this is what you are experiencing as a real estate investor, then you are most likely feeling frustrated and impatient. I know because you tell me. This is my solution for you. Go out there and find your deal. Stop waiting for MLS to list a property. The best properties never make it to the MLS because it’s “who” you know, not what you know.

Do you know what “waiters” do? They wait and serve. Real estate investors are do-ers. They create results. To get the results you desire, travel to your niche market, drive through the neighborhood that you have identified as your ideal demographic, select the prime real estate in that neighborhood and make an unsolicited offer.

“Hurry up and wait” is the axiom in acting. You do everything possible to be ready, on time, on schedule, on set, on call, on demand when the director calls for action. Real estate investing calls for the same axiom. I call this having fast patience. Be ready to act now when the time arrives in due course.

In conversation with some new investors, their current challenges in buying real estate is that it’s a buyer’s market, people are paying well above list price. Anything listed is gone in a week. How does an investor get an edge in a market like this?

One of my top ten rules: never be in a hurry to buy. Haste makes for bad mistakes. Better to be thorough and informed than cursory and ignorant. You end up paying the price sooner or later.

There is a significant cost for paying too much, not just in real estate. It is applicable for everything you buy. Use the 10% rule. Consider that the actual cash that you earn is 10% net profit. If you earn $100, less taxes and overhead, your net profit is $10.

Consider that most businesses do not earn a 10% net profit. The average is between 3% to 5% net profit.

Now let’s reverse engineer these numbers.

If you pay $20,000 over list price for an investment property, you would need to earn $200,000 in gross income to net $20,000. This is extreme math but the example is used here to point out how easy it is to spend too much without realizing the true cost, or in this case, the true amount of income required to pay for something. This is why you never want to pay over list price or over market value. You actually want to negotiate price concessions so as to have instant equity the day you buy.

As a rule, I do not enter into multiple offer scenarios. The bidding environment is akin to an auction where emotions rule and over-bidding is a common and expected event. That’s why they do it.

How does a real estate investor get an edge in this kind of market? Stop waiting for the MLS to offer a new listing. Drive through the neighbourhood that you have identified as your ideal demographic. Pick three to five of the best buildings that you would like to own. Contact the owners and make a solicitation to buy. You may contact the owners directly and do a FSBO (for sale by owner) or use the services of a Realtor.

Fast Patience refers to being patient and waiting for the right deal. Fast refers to taking immediate action when the offer presents itself because time is of the essence. Patience refers to being prepared and ready to take immediate action when the opportunity presents itself.

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There is no harmony in this Harmonized Setback Tax.

Get ready for having your bottom line drop out from under you. In theory, the harmonized sales tax appears to be a beneficial transition by eliminating the embedded Provincial Sales Tax in goods from raw materials to the retail shelf. Also, most businesses will be able to claim input tax credits which is their ability to have the HST tax refunded. It all sounds great unless you are a real estate investor.

The fact is that real estate investors cannot claim input tax credits on their purchases. We must pay the full amount and bear the tax burden. The only way for us to recoup this cost is to increase rental revenue and decrease expenses. In provinces with rent control, legislation prohibits real estate investors from recouping even half of this increase. See the table below. As for decreasing expenses, this becomes more challenging as buildings continue to age.
The 2010 rent increase guidelines are:

For many property owners, the HST will be more than just a 7% increase in your costs. It could represent as much as a 35% reduction in your bottom line. In the example below:

Consider your $50,000 of expenses that you currently pay 5% GST will now be charged at 12% HST. Seven per cent of $50,000 is $3,500. Subtract $3,500 from your bottom line and you are left with $6,500 instead of $10,000. This $3,500 of extra tax represents a 35% profit loss. This is an over-simplified example but it shows the impact that a 7% tax increase could have on your financial statement.

Erosion of profit margin means less money for the capital reserve and contingency funds which in turn means no upgrades or renovations which forces owners into deferred maintenance. And this is never a good thing. Our mandate as real estate investors is to provide safe, clean, affordable rental accommodations in a good state of repair and fit for habitation that complies with health, safety, housing and maintenance standards. The HST will have a negative impact in an industry already plagued with government intervention which continuously erodes our ability to provide decent accommodations for our customers.

While the majority of consumers and business owners will experience a benefit with the HST, property owners will bear its financial brunt. There is no benefit in running a real estate business if we are not able to compete on the same level playing field as other business owners. Government should give real estate investors the ability to claim input tax credits and thereby give us the financial support to maintain our properties.

July Ono

President

On The Beach Education Corporation

www.onthebeacheducation.com

The province of Ontario has forms that the landlord must use to communicate with their tenants from enforcing late payment of rent (N4), willful and negligent damage (N5), causing substantial interference with the reasonable enjoyment of the residential complex (N5), persistent late payment of rent (N8), 90-day rent increase notices (N1) and a host of other forms. Each form has its own set of termination dates so I will cover the most common eviction notice, the Form N4 Notice to End a Tenancy Early For Non-Payment of Rent.

You can go to the Ontario Landlord Tenant Board (LTB) website at www.ltb.gov.on.ca to view these forms.

As corporate policy, all tenants who do not pay their full rent on the 1^st day of the month are automatically served a Form N4 on the second day of the month. I give tenants a grace period until 12:00pm noon of the second day. The reason for acting so swiftly does two things: (1) it trains your tenants that you want your rent paid on time, and (2) the sooner the notice is served, the sooner you can process the eviction if it is required.

The Form N4 is a legal notice that could lead to you being evicted from your home. The operative word here is “could” and does not necessarily mean it will happen. The notice has a termination date which is the deadline date for the tenant to pay their rent before the landlord can apply to the LTB for an eviction hearing. The operative wording here is “apply”.

The termination date is calculated 14 days after the landlord gives the tenant the notice. So on the 2^nd day of the month, fourteen days after is the 16^th day of the month. This is the day that the landlord can apply to the LTB for a hearing.

If by the 16^th day of the month, the tenant has not paid their rent, we fill out a Form L1 Application to evict a tenant for non-payment of rent and to collect rent the tenant owes. The form is 7 pages and the landlord must include a copy of the Form N4 that was served which is 2 pages. The application fee is $170.00. The application is faxed to the nearest branch that services the area which is listed under Regional Offices and Locations on their website.

And then you wait anywhere from two days to two weeks for a response from the LTB. When you receive the Notice of Hearing, your application is assigned a 7-digit NOL number with the date, time and location of the hearing.

You must attend the hearing in person or send an authorized representative. The representative must have written authorization to act on your behalf.

The hearing is scheduled anywhere from two weeks to two months. It is usually within two to three weeks. In the case of the Christmas season, it can be as long as two months to get a hearing scheduled.

The tenant that we evicted on February 10^th started with an L1 application submitted on November 17, 2009. We received the Notice of Hearing on November 24, 2010. The hearing was scheduled for January 12, 2010.

All hearings begin at 9:00 a.m. and go all day. The files are called up in numerical order by NOL number.

In about half the cases, the tenant shows up to plead their case to the adjudicator. In these instances, the adjudicator favors the tenant and will recommend the landlord give the tenant the option to pay installment payments on their back rent. However, if the tenant has a history of non-payment of rent, this is where your previous Form N4’s on file are proof that the tenant is a risk. The landlord can plead their case to proceed with the eviction.

In my case, the tenant did not show up and I won the application. The judge approved an Order Under Section 69 of the Ontario Residential Tenancies Act, 2006. The Order is mailed out to the landlord. Two originals of the Order was received on January 18, 2010. One original is for the landlord’s file. The second original is delivered to the tenant.

The Order stipulates that the tenant must move out of the rental unit on or before January 25, 2010, along with other information about the amount of rent and compensation that is owed.

The tenant remained in the rental unit on January 25. The Landlord is then allowed to file the Order with the Court Enforcement Office (Sheriff) to enforce the Order on the following day. I filed the Court Enforcement Order at the court house on January 27. They mail out the Notice To Vacate; one gets mailed to the landlord and one gets mailed to the tenant.

We received our copy of the Notice To Vacate from the Superior Court of Justice on February 1, 2010. The eviction date was scheduled for February 10, 2010 at 10:00 a.m.

The tenant failed to vacate the premises. The Sheriff arrived at 10:00 a.m. on February 10 to evict the tenant. The tenant was not home so the Sheriff posted the notice on the door. The rental unit is now technically in the landlord’s possession. However, the tenant has an additional 72 hours to remove their personal belongings. The tenant is permitted access to their unit between the hours of 8:00 a.m. to 8:00 p.m. but cannot stay in the unit overnight.

The 72 hour period ended on February 13, 2010 at 10:00 a.m. The tenant pleaded for thirty more minutes. I arrived back at 10:30 a.m. and the tenant pleaded for more time. When I refused, the tenant demanded more time and refused to leave. This is when you call the police. The police arrived within five minutes to escort the tenant off the premises.

If you feel the tenant is a disturbance and a continuing threat to the building and the other residents, you may fill out a Trespass Notice to Prohibited Person available at the police station. This Notice must be served to the tenant prior to their vacating their unit and prohibits them from entering the building or else they will be arrested and fined.

On February 13, 2010 at 11:00 a.m. I took possession of the rental unit. All of the contents now legally belongs to the landlord to dispose of as they see fit. And that’s how an eviction process works from beginning to end.

This incident was a worst case scenario. The LTB does not schedule any hearings during the month of December so delinquent tenants are given a month grace. In a portfolio of 243 rental units, this is the only eviction we have had to process to this extent. The majority of our tenants pay on time and issuing the Form N4’s ensures compliance.