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Death, taxes and interest payments! Part 1 of 2.

Only two things in life are certain Death and TaxesDeath and taxes, the only two things that are certain in life. You’ve heard this one before.  I think there is a third thing that can be just as stressful, ‘interest payments’ (before this article becomes too depressing, I’m going to share some things that will help to reduce our interest costs and minimize our taxes). 

Paying interest on your credit cards, loans, lines of credit or mortgage is something all of us will experience at some point in our lives or, for many of us, for most of our lives.  ‘Paying interest and taxes can be the death of us’.  That’s because taxes and interest payments account for as much as 67% of our gross incomes.  That’s right, 67%!!

Tax Freedom Day (the day in which Canada, as a whole, has earned enough income to pay all their taxes for the year) this years was June 14th.   Any income earned up to this point was paid over to the government.  Any income after this date is paid to yourself.  It’s hard to know exactly how much tax you really pay given there are several hidden taxes such as alcohol, amusement, gasoline tax, property taxes, HST, etc.  That’s about 42% of your gross annual income going towards taxes.

Now let’s add in how much we pay towards carrying out debts.  There are different stats out there but from my experience, I would say that 25% of gross income goes towards paying all debts.

Add the two together and you get 67%.  67% of your gross income goes towards taxes and interest.  Okay, that’s the bad news, and now for some positive news. Here come the tax and interest tips… and maybe this will extend your life by making things a little less stressful.

TAX TIPS

  • I’m going to skip the usually RRSP recommendations… anyone invested in the stock market over the past 10 years will know that there has been virtually 0% return during this time.  There may be a place for RRSPs but I’m just not a big fan of them.  Remember, RRSPs are not tax exempt like a Tax Free Savings Account.  Tax is still payable when you withdraw the investment.  The theory is that your investment can grow within the RRSP, tax-free, and then you can withdraw your investment at a later date and pay taxes only on the amounts you withdraw.
  • In general, to reduce the amount of tax you pay, you must take advantage of tax-incentive programs or participate in tax-deductible investments.  One of the proven winners over the long and short term has been real estate.  We all know someone that made money by buying investing in property.

REAL ESTATE RENTALS

  • Buying a rental property will allow you several different deductions and opportunities to build capital and a future income stream.
  • Rental property purchases will allow you to write off expenses associated with purchasing the property, such as legal fees, any arrangement fees, account set up fees, bank fees, maintenance and repair of the property, etc.
  • Interest payments and on-going maintenance costs can be deducted from rental income, resulting in reduced rental income or a possible rental income loss that can be written off again your personal income.
  • The property can appreciate in value, tax-free… You ONLY pay tax if and when you sell for a profit.   (Historically, property values increase every 7 years… we are in an unusual period of history at the moment.  There are no guarantees the property will be worth more tomorrow, but I like a proven winner.)  If you plan to buy an investment property, then plan to hold for 7 years.
  • When you sell the property, you will have to pay capital gains tax on the net profit (purchase price less expenses such as real estate fees, lawyer fees, moving costs, etc).  At the highest marginal tax rate, you would have to pay around 21.50% of your net sale profit towards tax.  Here’s a link to the formula.  That tax rate is in line with the RRSP withdrawal tax rates.
  • Let’s not forget that your mortgage on the rental property is being paid down for you by the rental income each and every year.  If you buy, rent and hold, then you will have a mortgage-free property in 20 or 25 years, maybe sooner if you factor in the normal rent increases every year.  Rental income is usually indexed with the cost of living.  This part of the investment is rarely considered or talked about.

Watch for Part 2 for our advice on how to minimize taxes and reduce your interest costs.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@canadamortgagenews.ca

Steve Garganis View All

As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.

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