Personal Tax

I have often heard from entrepreneurs that it is difficult to obtain a mortgage to buy a home. Business owners can be viewed as a higher risk than the typical employee. As a result, obtaining financing at a preferred mortgage rate is challenging.

Here is a list of my favourite mistakes to avoid:

1. Failing to Plan Ahead

There are many factors to consider when you’re buying a house. You’ll need to coordinate your corporate tax plan, your personal income levels to qualify for a mortgage as well as your personal tax situation. Failing to plan can lead to painful tax bills and less than ideal mortgage arrangements.

2. Not Paying Yourself Enough

Let’s be honest. A huge benefit of being incorporated is having the ability to keep your personal income low and defer that personal tax bill. Many entrepreneurs pay themselves only what they need to live on. If you’re planning a significant purchase of a new home, that previous personal income may not be high enough to qualify for a mortgage on the home that you want. Consider what your income needs to be in order to afford that home you’re hoping to purchase.

3. Paying Yourself Too Much

Perhaps you’ve opted to inflate your personal income because you wanted it to be high enough to qualify for a mortgage. You report a giant dividend from your company that resulted in a large deficit in the equity section of your balance sheet. Sadly, your mortgage broker is going to see that you’ve declared income that you actually didn’t have and you aren’t going to get that mortgage.

4. Giant Spikes in Draws from Your Corporation

You’ve paid yourself a minimal salary and all of a sudden, you need to draw substantially more to be able to pay the down payment for your house. You’ve typically paid yourself $60,000 annually but suddenly need $250,000. This giant spike may put you in the most unfavorable personal tax brackets when you were barely utilizing the pleasant brackets in previous years. For tax purposes, you’re far better off smoothing out the personal draws over a number of years. In this example, take $155,000 each year instead of $60,000 then $250,000.

5. Failing to Pay Yourself Consistently

Dividends or a salary doesn’t really make a huge difference in the mortgage realm as long as you’re relatively consistent about your compensation plan.

6. Not Participating in the Home Buyers Plan

If neither you nor your spouse have lived in a home that you’ve owned in the last four years, you may qualify to use your RRSPs under the Homes Buyers Plan (HBP) as part of your down payment. After March 2019, CRA allows you to withdraw up to $35,000 for your down payment. Be sure to check out the CRA website for the latest criteria and rules around this program. Don’t have $35,000 in your RRSP yet? Bump up your wage from your corporation and make a contribution to your RRSPs. Have this money sit in your RRSP account for at least 90 days before you withdraw it under the HBP in order to get the deduction on your personal tax return.

7. Not Filing your Personal Taxes

Your mortgage broker will need a copy of your personal tax return along with your Notice of Assessment. Not having this paperwork readily available can delay approval of your financing and potentially cost you your dream home.

8. Not Paying Your Personal Taxes

Your mortgage broker will require proof that your personal taxes have been paid as part of your mortgage application. If you’ve paid yourself a giant dividend from your corporation in order to get that income high enough to get the mortgage but now can’t afford the personal taxes on the dividend—you’re still not getting your mortgage.

9. Not Hiring a Qualified and Experienced Mortgage broker

Not all lenders are the same. As an entrepreneur, you have unique circumstances that take a specific skill set to fully understand. Example: My client is an owner of a successful trucking operation. He wanted to buy a vacation property and the mortgage representative at his bank was not cooperating. I supplied my client with a list of my top mortgage brokers and he had his financing arranged within the week.

Do you need help creating a corporate plan with homeownership in mind? We’re happy to help!

It’s everyone’s favourite time of year – Tax Time! This is the time of year where you get to enjoy putting together your documents and filing tax returns! Or if you are a client of Richardson Miller LLP, we do the heavy filling for you. For those who contribute to their RRSPs, the deadline is approaching to make a final RRSP contribution to reduce your 2020 taxes.

RRSP contributions vs TFSA contributions

Registered retirement savings plans (RRSP) and tax-free savings accounts (TFSA) are tax-efficient investment vehicles, and depending on your situation each can have their respective benefits.

How does an RRSP (Registered Retirement Savings Plans) work?

  1. Pre-tax money is contributed (contributions result in tax deduction).
  2. Income and gains accumulate tax-free until the money is withdrawn.
  3. Withdrawals are taxed at your marginal tax rate.
  4. Maximize tax savings with a high marginal tax rate today when you contribute and a lower marginal tax rate when you withdraw the funds in the future.

NOTE – If you make an early RRSP withdrawal: You pay a withholding tax: The withholding tax varies depending on the amount withdrawn and your province of residence. You pay income tax on early withdrawals. Make sure that they are reported on your tax return as income.

RRSP Deadline Tips:

What is the 2020 contribution deadline?

  • March 1, 2021

What is the 2020 contribution limit?

  • 18% of your 2019 earned income (up to a maximum $27,230). You are also able to contribute any unused contribution room from previous years.

How long can you contribute?

  • You have until the end of the calendar year in which you turn 71.

How does a TFSA (Tax-Free Savings Accounts) work?

  1. No deduction for tax purposes – after-tax money is contributed.
  2. All income and gains earned in a TFSA account accumulate tax-free.
  3. There is no taxation on withdrawals.

Does the TFSA have a contribution deadline?

Unlike the RRSPs annual deadline for tax purposes, the TFSA doesn’t have one. You can contribute throughout the year based on the contribution room that you have accumulated over the years.

What is the contribution limit for 2021?

The limit for 2021 is $6,000. You are also able to contribute any unused contribution room from previous years.
Never contributed to your TFSA? As of this year, the total cumulative contribution room is now $75,500 (since the TFSA first began in 2009)!

Your annual tax return doesn’t need to be overwhelming. Richardson Miller LLP is here to help you determine whether an RRSP or TFSA is more beneficial and ensure that your taxes and accounting needs are met. Contact us today!