Working Capital The Real Estate Podcast

Benefits of Real Estate Ownership with Author and CPA George Dube|EP10

Jul 7, 2020

In This Episode

George E. Dube, CPA is a veteran real estate investor and real estate accountant who can help you save taxes, structure assets and protect your business and investments. George works with real estate investors and business owners from across Canada and around the world. He is a frequent guest speaker, who has addressed a variety of tax and accounting topics with implications for business owners, real estate investors, and realtors.

In this episode, he discussed how he got into accounting and real estate, how real estate, in general, has a lot of tax advantages for individuals, especially in investors, his advice to those who want to grow their portfolio, benefits of ownership, various tax structures as well as the answers to commonly asked accounting tax questions relevant to individuals who are investing in Canada and many MORE!

 

Resources and Links:

Email George: georgedube@bdo.ca

George’s website

81 Financial and Tax Tips for the Canadian Real Estate Investor: Expert Money-Saving Advice on Accounting and Tax Planning

Legal, Tax and Accounting Strategies for the Canadian Real Estate Investor

 

Transcript

Jesse (1s):

Welcome to the Working Capital The Real Estate Podcast my name’s Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate, whether you’re looking at your first investment or raising your first fund joined me and let’s build that portfolio one square foot at a time. Right? Ladies and gentlemen, I have the pleasure of having mr. George Doobie on the show today George is a veteran real estate accountant, and Investor whose practice focuses on providing the knowledge and tools. Clients need to increase and preserve their value of their business. George has also a partner at BDO George has written and contributed to articles in various national regional publications. He has coauthored two books, 81 Financial and Tax Tips for the Canadian Real Estate Investor and Expert Money Saving Advice on Accounting and Tax Planning Legal welcome aboard.

George (53s):

Thank you. A pleasure to be here, looking forward to this.

Jesse (55s):

So it’s funny. I actually just read the, I just read before the show in the 81 Financial Tax Tips I’m like, I actually have that one as well. So this one here, this must be a newer book, the legal tax and accounting strategy.

George (1m 10s):

Well, I actually it’s the both of them are a little bit older now, to be honest with you. And so what we’re going through a process right now of is trying to update those MORE online is compared to a physical book that we’ve we’ve done in the past. There’s been quite a number of Tax changes since the original additions came out. And, and even with the 81 Financial Tips it was redone, Oh, five ish years ago. I’m going to suggest, but again, that’s behind the times now, just as a result of the government wanting to get more of its a Dean’s into people who are investing in real estate.

Jesse (1m 45s):

Yeah, for sure. I, I had the pleasure of reading a nice long, boring CPA article about how we don’t have perfect integration here, a, between the corporate side and the a and the person who writes

George (1m 56s):

Yeah. The th and that’s absolutely true, but that’s also, that’s what creates opportunities as well. So I’m not going to necessarily complain.

Jesse (2m 2s):

Hi, and you need a day job, right?

George (2m 4s):

Exactly. Exactly. As much as we may complain about changes to the tax system, I’d be unemployed otherwise. So that wouldn’t be good at all.

Jesse (2m 12s):

Yep. Fantastic. Well, listen, I’m about halfway through this book. It’s fantastic. We were talking a little bit about before the show, how, you know, real estate in general has a lot of tax advantages for individuals, especially in investors. I think that’s across the board, whether you’re in the States are you’re in Canada. Obviously your focus is a little bit more Canadian centric. If I have that, if I have that, right. Yeah. And maybe you could go into a little bit of a, your background of, you know, Accounting real estate, how you got into, into both, and maybe it a bit of your role at the BDO.

George (2m 46s):

Sure. So you might have to stop me or slow me down or turn me off on parts guy. I can go on forever about some of these things, but a in terms of kind of starting off on the Accounting side of me. And I knew I wanted to be in an accountant back in high school. Cause I, I, a limited amount of a mind space to be doing something the same thing over and over. So I had a couple of different older friends that I had his role models that were in Accounting and I saw, Hey, what an opportunity to be having my fingers involved in multiple businesses. And at that point, admittedly, real estate was not even a thought process. So, so it wasn’t until probably a, it would be about 2001, I guess it was 2000, 2001.

George (3m 27s):

And I was sick as a dog for a week on the couch. My head was spinning. I couldn’t read, I couldn’t do anything. And had one of the, these infomercials come up talking about basically, if you could follow the course and everything, you’d be a multimillionaire in three or four weeks or whatever their timeframe happened to be for that. A and so while I didn’t take that part seriously, like, you know, I’ve got some real estate clients at, at The this point, I had my own office. And so one weekend I pop into the boardroom and I made two piles of files for my real estate clients. One P side of the boardroom table. I had clients that were winning or making money. And the other side were losing, are losing money and start to trying to study that and went over.

George (4m 12s):

And at the time went to, I think it’s gone now, but the particular chain of a bookstore and bought several thousand dollars of more nerdy Accounting tax Legal real estate oriented materials. And I just started studying because in university you’re more or less taught that shall not invest in real estate using corporations and et cetera, et cetera. It’s bad. It’s real, it’s horrible. It’s not say tannic, but we’re getting pretty close to it type of thing. As you start getting into it. Why do we have that? This is a pretty awesome and, and learning more about going to different group meetups, starting to chat with people in terms of what’s the real side of this. And then that doesn’t of course get real until you do it yourself.

George (4m 54s):

And tying back into the real estate side with the accounting firm, I needed an accounting office cause I was renting space. And basically my practice was going, I was subletting from another accountant and we were both growing too fast. I was the subletter. So he, we can guess who is moving and, but created this opportunity for us the first property. And, and so while I wasn’t a hundred percent sure at that point in time, I was actually a real estate investor within a month or so I knew I was a real estate investor. And that really got me going even further such that when I will be attending now different real estate groups, if you will, they really liked the fact that yes, I I’d spent a year and a half probably really studying what I would suggest.

George (5m 43s):

And more importantly, it was also investing. Not that I had a huge portfolio, not that I was investing in every type of deal possible, but there was some practical experiences that people could start to lean on me for. And then learning of course, from client mistakes, client opportunities and just talking to people I like to talk.

Jesse (6m 2s):

Yeah, that’s really interesting. I feel like that story is not dissimilar from a lot of people that are in the Accounting side. I know a few of my friends that, you know, started in In auditing and then they started working with clients and then started like you did seeing The the amount of wealth they can be created through real estate. So, so if we back up you’re, you’re younger, you’re looking for an office, it looks like this would probably be a mixed use or was it purely commercial?

George (6m 26s):

It was mixed to us at the time. It was just getting going. I mean, barely out of school,

Jesse (6m 31s):

The

George (6m 32s):

You had are, are, are, are first child. She was just born and I couldn’t afford an entire office per se myself, but my brother-in-law at the time was working with me in the accounting firm. And so part of his job, if you will, was okay, well we need to go find some new a facilities here. And we found this mixed use place and he and his wife were looking for a place to live. We kinda made a deal in the sense of, well, why don’t The for the accounting firm going to take the main floor. And in this particular case, it was a three story building, old Victorian house. They were going to take the second floor in the accounting firm was going to take what’s called an attic, I guess, but it was a walkup and we could put several desks up there, et cetera.

George (7m 19s):

And then the basic concept was in a couple of years, the accounting firm will take over the rest of the building. They would move out and live happily ever after. And, and what ended up happening probably as you can guess, is we needed the space a lot faster than otherwise expected. And, and the property we had acquired in my mind, it was interesting in the sense that the building itself perhaps was nothing special, but learning just some very, very basics in terms of negotiating. So the, the purchaser happened to be standing in the, a, the yard talking with a neighbor and the neighbor basically kind of haulers over what would you take for the property? And he said, and so we knew what the list price of course was in the hallway.

George (7m 60s):

I just want to get rid of this thing here in the throat, the dollar figure. So that helped negotiations needless to say, because he didn’t realize my brother in law was standing within a few feet of them. He quickly took care of the property. One of the nice things that it was, it was certainly in need of repair. They had several different not-for-profit organizations using the different rooms of the house and certainly need a lot of fix up. And so it was relatively inexpensive, but their needed to be some tender love and put into place, which my brother in law largely did. And we organized some other folks to, to assist with that. And what we quickly found out through experience and was just putting some love and tender and Karen to that place, obviously the value of it shot up a pretty quickly.

George (8m 48s):

And then we realized, Hey, wait a minute. If you can do it once you can do it twice, we can do it two times. You can do it four times. It’s cetera. The big catch was simply, Hey, that was a lot of fun to do the first time, but that’s never going to happen again. Somebody else is going to be doing that for us, that that’s not our skill sets. We out a desperation, more so than anything else, but other people will be better at it than us. So why not repeat the process over and over and over a period of time, that’s really how I would suggest I got truly into the real estate side of things. So one interested academically, but, but to really interested from a practical perspective where the accounting firm gave me the opportunity to get that first true property out of again, business necessity, and, and then realizing, Oh, my goodness of that was wonderful.

George (9m 36s):

Let’s do it again.

Jesse (9m 38s):

Well, that’s fantastic. So the, the, the deal itself, you know, I know that the Jake and Gino Podcast, they always talk about, ah, the three kind of pillars and its, you know, the fine write a finance rate and manage right. In terms of the financing on that first deal, was there anything creative? Was it run to the mill? How does that work?

George (9m 55s):

I don’t it, to be honest, I don’t recall many of the details too to it now, but it was a traditional at the time. I wasn’t yet experienced enough to play with the idea of having short term financing and then refinanced that shortly thereafter. So it was more something where a hundred percent leverage in church through the bank and through lines of credit, etc. That a we went about and did that. And in hindsight, yes, I absolutely positively wished I would have had enough experience at that point to have a very short term, a mortgage or some form of debt financing onto that live and learn wasn’t my first mistake, won’t be my last, but it didn’t kill me, but, but it was more traditional admittedly at the time of, for me for doing that, quite honestly, I don’t recall the exact terms or anything, but it was traditional.

Jesse (10m 44s):

Well, it’s funny. We were just talking with a couple of American clients a couple of days ago and it’s there. They, when they look at kinda the Canadian landscape with mortgages, the idea of having, you know, five year that you can pay off, where are they, you know, you have the 20 fives in the thirties and we’re not just talking amortization. It’s always, I feel like it always throws them for a loop when the, if they don’t know.

George (11m 3s):

Yes. Yeah, I absolutely. And I mean any effect because I was using the line of credit, I can play with the numbers more in depth to do different things, but again, I would have done that deal differently today. No question about it.

Jesse (11m 13s):

Well, you know, another thing that kind of reminded me of, we were speaking with a gent named Matt fair cloth last week and he was talking about his first deal, not dissimilar in terms of just being, not the asset class, but just kind of being interested academically and then the practicality and execution. But what was interesting is, you know, here, a lot of the Americans, 10 30, one, 10 31 speaking about, you know, they rolled out their they’re a tax deferred their Gaines and, and put into a Lake and kind asset using a 10 31 exchange, maybe on the, on the Canadian landscape. You know, if you do have investors that have built up equity and their investments, whether its, you know, a force appreciation, natural appreciation, what do you advise

George (11m 55s):

In that type of situation where they want to grow their portfolio, but we don’t have that advantage that they do South of the border. And, and, and for, for, for the Canadians that don’t know what a 10 31 exchange is basically. And again, and I won’t pretend to be an American Expert in taxes in the slightest, but I do get the question frequently. It’s a basic concept that if you’re buying a property in the United States, you have the ability where your buying a larger property in terms of dollar size that a you effectively, you’re not going to pay again on your smaller property as you’re going upscale for a dollars invested. But, and unfortunately the Canadian site that does not exist there had been talk about it a couple of governments ago in terms of the blue papers, but never hit a white paper and certainly never hit legislation The in terms of the text.

George (12m 42s):

And I actually just, my My prior meeting too, this is a frequent discussion where somebody, again, trying to grow that portfolio, should they sell a property to, to realize some funding and, and then get into a larger one in et cetera, and, and what I’ve discussed with most people, if you do the math instead of selling off a property, I, and not that there’s not purposes for that, particularly if there’s an, a business or an investment reason for it, but often there’s not a Tax reason for it. And what I mean by that is if I’m trying to keeping the example, a simple goal from a single family to a duplex, and again, it doesn’t really make any difference, but somehow upscaling, well, if I factor in what my disposition costs are going to be, I factor in my tax costs for the sale as compared to, can I refinance, take the funds without paying any tax and now acquire the larger buildings?

George (13m 35s):

Well, often I might be on day one short about 5% or so if I do go the refinancing route and, and, and I’m assuming that we’re not going beyond kind of traditional loan to value ratios. So peeling out the second mortgages, et cetera. Well, that’s fine on day one, but then if I start to measure, certainly within five years, I get to the point where, wait a minute, if I had two properties, I got two properties appreciating even just naturally. And, and, and even if I got two properties, just with a normal principal repayments, a schedule to those, I’ll be so far ahead of the game five years from now.

George (14m 16s):

If I kept the property refinanced and acquired the next one as compared to, if I sold the first property, have nothing to gain. Now it’s gone. Or if you will, and, and I’ve got the second property going if I had to buy a slightly smaller second property, but it’s hard mentally. I know for a lot of people to get around a, a, a few small apartment buildings, a couple years ago, we were having the same debate with a couple of coal ventures. And I was pleading with them, basically, let’s, let’s keep all of it, just refinance it. And by a bunch more, whereas they were looking to sell. And ultimately I wasn’t, it was kind of a two against one vote in his very favorite friendly. There was, there’s nothing wrong that so I agreed to sell, but I got lucky in a sense that we shouldn’t get a buyer for that acceptable terms.

George (14m 58s):

So not we got it all, but is something that still comes up frequent. So a lot of that device is, yes, I’m not trying to say that you shouldn’t be trying to grow the portfolio, but often that buy and hold strategy, ignoring people that are flipping and in all the normal things. And I think that’s a wonderful strategy.

Jesse (15m 17s):

Well, you know what, I’m sure there’s a question that you never get. A, and that is, that leads us into owning real estate personally vs in the corporation. We’re gonna leave the Americans to the side here. We’re not going to be talking to LLCs and, and through a flow throughs. But in terms of in Canada, you are owning a property. Let’s just give a little bit of a hypothetical two hypothetical’s. One is a, say a 30 unit apartment building you’re going in with a partner. And the other one is you buying a pre-construction condo say for $500,000 in a Canadian market.

George (15m 51s):

Sure, sure. So, so in terms, in terms, let’s start with the The apartment building because that one is a lot easier and almost invariably, it’s got to be in a corporation, or if we’re looking to, to syndicate a gift, it’s just one partner sure. Is most likely in a corporation. Well, we might put it otherwise into the limited partnership and, and have a few different investors with it, or ultimately kind of start to set up a structure, such that we’re going to have a handful of limited partnerships in one day, we might put it into a private reach or a public REIT, a limited partnership route that makes it a little bit simpler to move to the next stage if you will. So now if we’re talking a smaller property, half a million dollars, I’m not as concerned actually what the value of that property is on day one for that matter of day, a hundred or a year, a hundred, what I’d like to know those over the next three to five years, how many more of those $500,000 properties are when to inquire?

George (16m 47s):

So if somebody comes to me and says, this is a, the first and last property I’m ever going to buy, I say, congratulations, you’re better off than the vast majority of Canadians, but it certainly from a pure tax perspective, doesn’t justify for most people using a corporate structure, just not enough meat and potatoes to play with. Whereas books are go ahead.

Jesse (17m 7s):

No, no, go ahead. Whereas if we were going to acquire

George (17m 10s):

My mind, not that this is a scientifically determined or anything and it changes over the years, but my current kind of rough rule of thumb is if somebody is going to acquire over that three to five years, one in a quarter million dollars as a property. And I don’t mean equity, but I mean property value. So it’s really not that high of a threshold in my mind.

Jesse (17m 30s):

I’m not in Toronto that’s for sure.

George (17m 32s):

Certainly not, but, but, but in fairness, I mean years ago got caught in a couple of different scenarios where somebody was buying a 10 Plex, but I didn’t realize it was in the small little town that basically it was like $20,000 a unit type of thing. So I’m cautious of that now. So I don’t use units, so I to call her figure, but anyway, at a one and a quarter of million bucks, I think that it would be pretty challenging not to find scenarios where the corporation makes more sense to people in, in the vast majority of cases. And, and again, and obviously there’s going to be exceptions in a number of cases, but if I can, I think I could safely say at least 80% of the time, I’m going to advise in a corporate setup in that, in that example.

Jesse (18m 15s):

Well, you know what, it’s, it’s fascinating on our end on the commercial real estate side or even the multifamily side. Cause we have this debate back and forth. And even, even some of the lawyers we deal with are a little split on a, the liability aspect, because they’ll say you could get umbrella insurance. And you know, it’s not like in the States where people are so litigious, you know, and then there’s kind of a back and forth, but putting the liability, just putting a pin in that, in terms of the, the actual tax consequences, if we were to imagine your in the highest tax bracket and Canada a highest marginal rates and you make a a hundred thousand dollars than you hold it personally, as opposed to the guy or gal that holds that same thing in a corporation, can you walk us through what the, with the tax consequences would be for those two?

George (19m 2s):

Absolutely. So on day one, the Tax is differences potentially mil. So for, for, so the, the, the, the individual that’s infested on the personal side, ah, again, depending on a particular province we’re talking about, they are roughly speaking, going to pay tax a little bit over 50%, that money is gone forever now. So, so their giving it to the government. Congratulations on the corporate side, again, depending on the particular province we’re dealing with, then here initially on day one, I’m going to pay 50 ish percent in terms of a tax rate to the government. The big catch is of that 50%. And I’m just going again, round off the numbers.

George (19m 44s):

30% of that is a refundable tax to the corporation. So as a shareholder, if I pay myself a dividend, I can then basically bring my tax rate on the corporate side, down to 20% or using today’s tax rates. If I sold a property, had a capital gain, I’d be down to 10%. So now if I contrast my 20% versus my 50%, I mean, you don’t need to be much from an accountant to figure it out, which he would rather pay the The. But the catch is of course, is that initially on paying 50% of the corporation. And so often people, in my opinion, get into the trap of saying, well, wait, there’s either no difference, or I’m not on the personal side, quite at the highest tax bracket.

George (20m 26s):

So maybe it is cheaper on day one to go personal. And I would just suggest that over the medium and longterm, for most people, that’s throwing money away because maybe on the personal side, I’m always going to be in a high tax bracket. So I don’t necessarily have an opportunity to pay a dividend from the corporation and get a real benefit from it. But maybe I have a spouse or an adult child, for example, that is going to be an, a lower tax bracket. And if I’m qualified to pay them a dividend, it can be enormous savings as a quick example, for those that aren’t aware, it’s possible, roughly speaking to pay about a $40,000 dividend. And if that individual has no other income, it’s, they’re going to pay less than $2,000 in taxes, which I’m going to call that tax free, but maybe all the family is always in the highest tax bracket.

George (21m 15s):

So the nice thing with the corporation again, is that that refundable tax accumulates, it never goes away. So we track it year over year, and now maybe we get to the point of saying, Hey, wait a minute. Now there’s $5 million refundable taxes in the corporation. Maybe it’s time to get it to my kids. Maybe it’s time to sell up to George E Jesse to Santa Claus, the Easter bunny, whoever, but now I’m going to have a discussion to say, Hey, wait a minute. There’s a whole, there’s a $5 million as a refundable taxes in my company. Why don’t we split that again? If I’m doing it personally, I’ve got nothing to split. I’ve got no assets to sell, at least in the corporation, sooner or later, I’m going to be able to play with that money. I’m going to, you lose some of the time value of money, of course, but I’ve got an asset that I’m accumulating that I never had the opportunity to personally.

Jesse (22m 1s):

So I think what trips up, some people correct me if I’m wrong is the looking at that example, they say your in the highest say you are in the highest tax rate. Personally, you pay that 50%, but on your example, you have the The on hand tax credit with, with the corporation. So if it’s 53% and then you get that 30%, once a dividend is paid, I think it’s the idea that yes, that happens at the corporate level. But then again, the dividends still has to go to a person. So if you do pay to yourself, then there’s the tax consequence of the personal. And then can, can you go through how that would work? Is once the personal, you hear the argument, well, you paid corporately, you are now double Tax, even though there’s kind of a dividend tax, the tax credit.

Jesse (22m 45s):

So yeah. Could you, so what would it affectively be if you did pay out a dividend to that person that was happens to be in the highest tax bracket?

George (22m 54s):

Sure. So somebody in the highest tax bracket, and again, there’s a bunch of different what ifs and errors and whatnot. So I’m going to try and be a little bit more general, but making a long story short, if for, for somebody to a maximum tax bracket, they are unlikely, want the dividend because their going to ultimately, sorry, I guess I should back up. If we pay a dividend and from the corporation, the corporation does not receive a deduction. So if there was a hundred thousand dollars a profit in the corporation and we paid a $75,000 dividend, the corporation is still taxed on a hundred thousand dollars. In contrast, if we paid a bonus of $75,000, the corporation, we taxed a $25,000.

George (23m 34s):

So, so now we’re the double Tax comes into place and in your car. And you’re absolutely correct in saying it is that if I have now that $75,000 personally, I’ve paid, Tax already in the corporation and yes, I’m going to pay tax personally. So the big question is how much Tax personally. So again, if I had no other source of income and I’m going to be in good shape, whereas the highest tax bracket, I will have paid unquestionably, more tax than I otherwise needed to, I’m going to pay more tax. And if I just owned it personally, so I’d be probably again, depending on a variety of scenarios, relatively easy for me to show, I could have paid 65% tax if I wasn’t watching things correctly.

George (24m 18s):

And I think people just, as you said, they get fixated on that. Not realizing, wait a minute, with a little bit of Planning, you can make sure that that doesn’t happen.

Jesse (24m 25s):

Yeah. And I think you nailed it right there with the word Planning because you just coincidentally this, this last week or two, my father was approached by the developer for land. He owned it, bought back in the eighties and the developer said, well, I assume you guys a, just thinking that, you know, you’re not sophisticated. You bought land in the eighties. I assume it’s a, it’s not an a corporation. We’re like, no, actually it isn’t a corporation. So all of a sudden we have the flexibility to issue shares and things that at the time they’d made that decision, but planned right, for something that they didn’t know was going to happen, but eventually did. But you know what? This actually kind of moves into the next topic. I wanted to talk to you about where it doesn’t matter if the CRA is listening, cause this is completely plausible where you can make and real estate and actual say 50,000 are a hundred thousand dollars in cashflow, but pay no taxes on a, via a depreciation or a capital cost allowance in Canada.

Jesse (25m 21s):

Maybe you could talk a little bit about CCA and what it is and how, if at all it differs from, you know, the American, you know, depreciation,

George (25m 33s):

Knowledgeably comments on the U S side. I do understand that the rates are different from the Canadian versus the U S perspective. But I, I couldn’t tell you exactly what they are in the United States. The, the idea of CCA are Capital cost allowances. It’s the tax equivalent, if you will, to Accounting depreciation or amortization. And, and the basic idea is that if, if you go out and you by a stapler revenue, Canada says, that’s fine. Just deduct the cost right now. Whereas if you go out and buy an assets, such as a building that has a life of greater than one year, they don’t want us to do a lot of the cost all up front. They want us to do it over time. And so rightly or wrongly, a number of years ago, revenue Canada set up different, a capital cost allowance classes that they all the time a play around with and tweak in terms of their eyes, what would be more reasonable for a tax depreciation rate if you will.

George (26m 25s):

But the basic concept is I’m gonna write the cost of my building off over time, which from the real estate perspective is an investor’s perspective. Predominantly is wonderful because wait a minute, I was really hoping the building was a depreciating versus depreciating. So you’re also going to let me write off the cost of the building. So now I’m going to effectively be able to shield. Some of my cashflow is you described it from taxes quite legally, no problem whatsoever. And now I am going to have more tax dollars available for me cause I’m not paying them in taxes. My money is working harder for me. And so will we get quite a number of people who will advise, never take depreciation on the properties?

George (27m 9s):

And

Jesse (27m 10s):

Because we, we have the option, not all countries, sometimes it’s mandatory,

George (27m 14s):

A fair. And, and, and so I acknowledge in some rare instances, the primary example, being a, I personally own a property and I might move into it myself as a My for my own family in a couple of other, a little scenarios. But for the most part, if I understand it correctly, revenue, Canada’s giving me money while I own the property to invest with without having to pay in the interest rate loan. And if I sell the property, I have to pay them back. Okay. That that’s, it’s an interest free loan. I think if I understand the math correctly, so why wouldn’t I take that and be able to make my money work harder for me again, I appreciate in some cases I’m not allowed to, or on a capped at the amount that I can take.

George (27m 57s):

I’m not saying it’s always available just as you said, but I certainly want to be doing some calculations. The the vast majority of our clients and mom, myself personally, for my portfolio. Certainly my portfolio is I had appreciation a hundred percent to the last dime I can get I put in there for depreciation, but, but I, but I acknowledged a certain cases I’m either not allowed to, or something special is going on, but I may defer that decision.

Jesse (28m 27s):

Well, I’ve always been curious about this and I think it was a, I think it was a couple of YouTube videos I watched where you were explaining this. I remember when I first incorporated and maybe it was eight or nine years ago. And the one difference I’ve found that well, you know, with CCA, basically not being able to create a loss personally with CCA, and I think you touched on it, but maybe you could clarify if you hold it in a corporation, can you create a loss with, with CCA? And can you carry that loss forward a In in future years? How do, how does the mechanics of that work?

George (29m 1s):

Sure, sure. So is, and you nailed it to on the personal side, w we’re not allowed to take the CCA or the depreciation if it’s going to create or increase a loss. So, and often from a tax perspective, particularly the first number of years of ownership of a property, because we typically will have a higher interest expense associated with that property. We’re not going to be able to depreciate the property. So it’s kind of held in reserve, which is unfortunate in many cases, whereas an a corporation, assuming that, and again, without getting to the exact technical jargon, assuming that the PR the purpose of the corporation has to be a rental corporation property corporation.

George (29m 43s):

I am allowed to create losses and those losses I can carry forward for 20 years in Canada. So, so that now I like to use the example. If I have five properties in that corporation and a handful of years from now, I sell one of the properties. Well, I’m hoping from a tax perspective, I’ve accumulated some losses in the corporation in the first number of years. I mean, ideally I know we never have a loss. I’m always making so much money, but being practical about it and probably accumulating some losses for a period of time. And so now I go to sell my first property. And because I’ve got this large balance of loss as that may be available to offset or a partially offset the gains, I’m not paying as much tax.

George (30m 27s):

This is a otherwise wood on a personal side. I have to go properly again, some of the rules there, but I haven’t been able to accumulate those losses. And so while I have a little bit of an ability to play on the personal side, not nearly to the same degree as I do on the corporate side. So that corporate side, once I sell all five properties, I mean, yes, it comes time to pay the Piper and sooner or later on, I’m going to have to do that. But I’m deferring the tax, which is again, allowing my money to work harder for me. So on the corporate side is just a huge advantage. And, and maybe my intention is to do buy and hold those properties. I’ve given to my kids, great grandkids, et cetera, but there’s going to occasionally be a property that for whatever reason you don’t like that, something’s odd with it.

George (31m 10s):

For some reason it’s being sold. And it may be done for various strategic reasons, but nice to have that reserve available on the corporate side, which just doesn’t exist on the personal side. Or I get really, even more lucky perhaps. And again, all my properties are making zillions of dollars and that, that loss carry forward balances going to push it out even further in terms of when I’m ultimately going to owe taxes.

Jesse (31m 34s):

So in the event that you did hold it personally without getting too to, into the weeds and say, you know, you had a pre tax or a cashflow of $5,000, but you had an ability to a use $7,000 worth of CCA. You could only take that down to zero as far as I understand on the personal side, is that right?

George (31m 51s):

Yes. And so I’ll just use one technical term there to say my tax bill income was 5,000 versus the cash flow, but yes, the concept is correct

Jesse (31m 58s):

In the, and now that additional 2000 that kind of gets lost that 2000 camp

George (32m 5s):

Into a future year in that personal structure, correct. It doesn’t get carried forward, but it’s, but it’s not lost in that. We just weren’t allowed to take it in the first place. So w for those that aren’t aware, I mean, the, the capital cost allowance classes ignoring some recent changes in terms of enable to, to increase these amounts and what have you. But if we use simple math that we had a hundred thousand dollar building, and I’m just going to use the old rate of the 4% in terms of a one of those classes for buildings there. And I’m going to ignore the first year rule and a couple of other technical, but because we use a declining balance method for most of our capital costs allows classes. So on the first year, if it was 4%, I’d be allowed to take $4,000 of depreciation.

George (32m 49s):

The next year I’m taking 4% of $96,000. So it’s an ever decreasing amount. So it’s not that I lost the 2000, the 2000, which is never to appreciate it, but it’s because I’m kept that in my example, for percent, I also, you can’t reach back to get, Hey, wait a minute. I shouldn’t get Forrest percent now. Plus all the fours I’ve missed before. That’s what I can’t catch up on. So I don’t lose them, but I can’t take advantage of him either to, to the degree I can with a corporation. So

Jesse (33m 17s):

When you say are kind of moving from CCA, just from a purely Accounting Accounting lens, when it comes to investing in real estate, where do you see as the, as the largest benefit that you find with real estate as an asset class, as opposed to any others,

George (33m 33s):

Somebody is paying me to get rich. That’s awesome. I love the cards.

Jesse (33m 37s):

Well, not a bad scenario.

George (33m 39s):

Yeah. I mean, it’s just the whole idea of tenant’s going to pay me and take care of the property to some degree. I appreciate that degree can vary depending on the tenant, but if I’m, if I’m fair about the process and a reasonable, for the most part, I’ll be treated that way. And I appreciate there’s some exceptions there, but it allows me to weigh as well of ’em in many cases, deferring taxes, being able to split income with other family members if I use some more advanced structures. So if I bring in a family trust, if I use a private rate, if I get more into the GP general partners, limited partnerships, I have more ability to play around in the sense of, Hey, who would I like to be working with?

George (34m 20s):

Maybe there’s some skill set. There’s a lot of skill sets I don’t have. I’m really, really good at a few things that I do do, but that means there’s other people that I could be working with. How can, how can we form our relationship and, and, and do it so that everybody’s a winner. And I find with the real estate, there’s so many different creative ways of not necessarily, you mean creative, but just basic ways of working with people. And that includes the tenant’s, the contractors, property managers, et cetera, what a huge source of opportunity for all involved. If we’re doing a little bit of Planning and we’re a reasonable with each other.

Jesse (34m 56s):

Yeah. It’s, it’s all the My private equity buddies. It’s almost like the LBO of real assets. You know, you, you can take a fairly leveraged position, but actually have an asset there. So I do want to talk about family trusts, but before we do, I was always curious as to, you know, I see on our end on the commercial real estate side, when we’re investing client’s that are buying assets are much bigger than, than myself and my partner. You know, you always see these LPGP structures where, you know, for those that, for those listening, the general partner and the limited partner where usually the scenario’s, you have a general partner or a sponsor of the deal, and then you can have multiple limited partners who give up Capital have unlimited or have liability, but also can’t actively manage.

Jesse (35m 40s):

I think the statute says, but in those scenarios, I always see the GP and we always do it the same way it has to be on title. And you always see some nominal rate of 0.0, zero 1% of the LP. So maybe cause you talk about it a little bit in your book, a in terms of structuring an LPGP investment. So maybe you could touch on that, give us a little bit of a Coles notes of what’s happening there

George (36m 4s):

In fairness, more of its from a legal perspective as compared to a tax perspective and that structure. And so the, and again, not that I’m a lawyer in the slightest, but the basic concept is I understand it has to say that that, that GP, if you will supposed to be the magnet for a lawsuit, if there’s going to be a problem, you don’t want the asset attack. Why you want some shell company attack for the lack of a better word, and the GP will manage the properties you correctly mentioned. As I understand it, that the, the GP will hold legal title to the property in that, as I understand, the limited partnership has not allowed two from a legal perspective, but, but, but it’s effectively like when we’re preparing to start a financial statements, for example, for the limited partnership, we certainly have the property as if the limited partnership owned it.

George (36m 51s):

And it certainly has beneficial ownership to it as compared to Legal Ownership. But the, so the idea of having then that micro portion of the total LP that’s owned by the GP, again, in order to be a partner, there has to be some form of Ownership. So make it a small as possible. So that if the GP for in, in the unlikely event, that it is attacked a and loses, it’s such a small percentage of the LP that’s going to disappear. It wouldn’t be presumably worth much of a legal fight to even find in the first place. And again, not that I’m a lawyer, but I’d guess not a whole lot of people that know what they were doing would want to attack the GP because it’d be a waste of their time as well.

Jesse (37m 31s):

Mm. And the tax consequences of this structure, what does that look like? I mean, you know, when you do say, say there’s a disposition, or there’s just positive cashflow, a hard to do if you’re syndicating deals in Vancouver or Toronto, but in that event, what is the, I guess that those are the two sections, you know, you do have cashflow, how does the LP acknowledge that from a tax point of view? And then if there is a, an actual liquidity event and there’s a disposition,

George (37m 57s):

You sure. So, so now the partnership, and, and again, for our American listeners here, a Watchers as well, they’ll be a little bit more familiar here. We’re starting to have a flow through vehicle if you will. So the partnership actually has never taxed a partnership. Can’t be taxed. It files tax returns and disclosures and whatnot, but it’s going to allocate the profits, whether its from normal opera rental operations or its from a, a liquidity event, it’s going to allocate that to the limited partners and, and that small portion to the GP. So, so now I have as an, as a limited partner and ability to change how I get taxed.

George (38m 39s):

So I may want to be taxed as an individual. I may want to be Tax through a corporation, a on potentially directly through a family trust. Although not likely I may want it through another partnership I can do just about whatever I want to do. And the beautiful part too, that is that doesn’t impact anybody else. It’s also investing. So I get to mold what’s right for me and my family and, and you can do the same for yours and et cetera, et cetera, et cetera. So it is a nice vehicle for being able to attract investors and, and not to turn them off because you’ve got a pre-setup corporate or whatever structure that has predefined tax implications.

Jesse (39m 22s):

And would that, would that be different? Another, a part of your book, you talk about joint ventures and you know, people say joint venture JV, and I often say it very loosely. And then I have, you know, my lawyer friends telling me, don’t say it loosely, they are, there are definitions for these things. You know, what would that look like

George (39m 39s):

In comparison to say a joint venture again, and joint ventures, they can have a lot of different flavors to them as well. Maybe the simplest version, if you will, as simply that to individuals, they agree to buy a property and their going to split it 50 50, and perhaps both of them are entitled. Maybe one of them is on title. So that legal Ownership was with one name, a beneficial Ownership another, or maybe I make form a joint venture with my own corporation are a couple of My corporations and I’m splitting a mass at amongst them. But in some way or another, I mean the slang terminology that drives me bonkers admittedly. And I think I put that in the book several times.

George (40m 20s):

I don’t like the terminology, a joint venture partner because the partnerships are very, very different from joint ventures where often from a tax and a legal perspective. Again, not that I’m a lawyer really trying to distinguish between those a well, we don’t want to get and any confusion from a revenue Canada perspective or as I understand it from a legal perspective in terms of going back and forth or even wondering which one we’re playing with at the time.

Jesse (40m 45s):

Well, we’re coming close to the end of the hour here. I just do want to touch a little bit cause I find it interesting. And, and you know, a lot about this, the, the family trust or the trust that

George (40m 56s):

That corporates are that structure. Mmm. You know,

Jesse (40m 59s):

Why would you use that? W what are some of the benefits

George (41m 1s):

To that stretcher in a, in a very simplistic way as sorry, if I can go just a little bit of history, there is to suggest that kinda of the first 25 ish years I’ve been practicing, I might be involved in setting up a a hundred, 200 corporations each year. And about two family trusts were starting in 2018. He started setting up quite a number of family trust. And my family trust is set up that year as well. So it’s something where now I see for what I’m going to call more of our serious investors. I expect most of them will have a family trust in the next five ish years. So, so I think it is something where in many people may not have paid much attention to before I wasn’t using them nearly as much as I do today.

George (41m 45s):

And, and so to get them back too, to more directly your question, what I like to think about what the family trust is, its a way in a traditional example to have mom and dad control assets control income, but they don’t directly own anything. And now they are also able to define who is going to be eligible, not a, not allowed to, or maybe allowed is okay, but, but not having an ability to enforce who might be able to receive income or assets if the trustees allowed. And again, on a traditional example, a mom and dad would be too of the trustees. Maybe the only trustees.

George (42m 25s):

I love to see a third trustee that’s not related, but the trustees can then determine on an annual basis who is going to receive what it’s a great opportunity in some cases for income splitting, although there’s a variety of rules that restrict what we can do there MORE, if you will, on a longer term basis, it provides an ability to be able to bring those assets to the next generation in more tax favorable manner. So again, if I can use an example, if I own my property personally, if I own shares of corporations, the second of myself and my spouse pass away as a real rough number, I’m going to give 25% of my estate to the government.

George (43m 11s):

Whereas if I have a family trust, I pass away, I didn’t own anything. So he in theory, not in practice, but in theory, all of that went to the next generation and don’t get me wrong. There’s some hoops and hurdles to go through and he catches their, but in theory, I can get that down to zero in practice. It’s not going to be zero in most cases, but it’s going to be a lot closer to zero than 25%. So to have the ability to, and again, from a legal perspective, I understand there’s more protection available cause I don’t own anything, but to have flexibility, another classic examples of they got three kids and I’m trying to decide later on who do I give my real estate to?

George (43m 53s):

Should it be equal between the three, but one of them is really involved. One of them is not. One of them is a nuclear physicist. And now I’m trying to figure out with mom, what’s a fair way, not necessarily an equal way of dividing things out. And I may be kind of taking into account. Maybe one of the kids has a rougher time in life for maybe one of them’s making a gazillion dollars. Maybe one of them has 18 kids. I start to factor in all sorts of different things and all, by the way, I’ve got another business. Cause I had a consulting business are a manufacturing business or whatever business let’s get the whole picture together. And wait, mom and dad are really confused today because the kids are younger or whatever

Jesse (44m 32s):

Age they may be. I don’t know what they’re going to be like down the road. I don’t know who they’re marrying. If their going to be married, what their situation is. The nice thing with a family trust is I can postpone most of these decisions to much later in life when I’ve gotten more access to information at the time. So to me to have that flexibility, how to some of what I perceive to be legal protection. And in many cases, we’ve got clients jumping onto these because of financing reasons. So I’m starting to hit all the things that I love to talk about and that the family trust is a as a result, something that we’re using much more frequently today and that word flexibility exactly while you’re talking is what I was thinking of the, you know, when you’re say younger Investor or you’re just starting invest, you’re getting bogged down in all of these technical aspects where trying to structure, at least for me, my opinion is try to structure yourself where you leave yourself the most flexibility in a future.

Jesse (45m 24s):

And that’s why I definitely wanted you to touch on that. I’m George for listeners. If they wanted to get a hold of, of you in terms of looking at or purchasing some of the books that you’ve written or some of the work that you do at the BDO, what would be the best approach for most people? The easiest thing and it’s easy for me is Email so it’d be <inaudible> e@bdo.ca that people can go on to Instagram and things of that nature and its George E Doobie. So my middle initial is included in there and that hooks me up with Twitter and Instagram and all sorts of things of that nature, I guess today has been George E newbie the accountant at I’m going to say the bow tie efficient auto from what I’ve thanks for joining us to Working Capital The Real Estate Podcast a pleasure is great to be here.

2 (46m 15s):

Thank you.

Jesse (46m 18s):

Thank you for listening to the Working Capital Podcast my goal was to help individuals break into real estate investing as well as educate experience and investors. If you enjoyed the show, please share with a friend subscribe and give us a rating on iTunes. It really helps us. If you have any questions, want to learn more or lightening to cover a specific topic on the show, please reach out to me via instagram@jforgalsorheadtowwwdotjessefragale.com. My name is Jesse Fragale and I’ll see you back here for the next episode or the working capital real estate podcast.