David was interviewed for the Personal Finance section of the Winnipeg Free Press by Joel Schlesinger.

Please click here to view the article online and scroll down to read the complete article below.

Arizona bound: Canadians snapping up homes, but they need to be careful

JOEL SCHLESINGER
Winnipeg Free Press
September 24, 2011

Jim Ballance had always dreamed about owning a place down south when he retired, but the price tags had always been too high.

“We had been going down there for about 20 years, and all those properties kept going up and up,” says the 61-year-old retiree.

Prices increased by about 20 per cent a year until about 2006, when Ballance says he noticed they began to level off.

With the Canadian dollar at par with the U.S. greenback, he decided to strike while the conditions were right, buying a 2,400-square-foot condo in Palm Desert, Calif.

Since then, of course, the U.S. real estate market has only become more buyer-friendly, with prices in Arizona, California, Nevada and Florida dropping as much as 60 per cent from their highs more than five years ago.

“People will say to me ‘I bet you wish you bought now,’ ” Ballance says. “But I always say ‘If I bought now, that would be five years I didn’t enjoy being down there.’ ”

These days, Ballance is likely to find he has plenty of Canadian company in the desert. He is among a growing number of Canadians who now own property in the United States.

In fact, Canadians are now the leading buyers of U.S. real estate, says David Altro, a lawyer with Altro & Associates.

“Prices are way down and the Canadian dollar is up, which creates the perfect storm,” says Altro, author of Owning U.S. Property — the Canadian Way.

And Winnipeggers haven’t been sitting on the sidelines during this real estate buying bonanza. Former Winnipeg police officer-turned Arizona real estate guru Diane Olson says many of her clients are Winnipeggers who want to buy a second home in the Phoenix area for less than they could buy a home here in the city.

In many instances new, multi-bedroom homes — some even with pools — in good neighbourhoods are selling for under $200,000.

“It seems the average buyer is around 50 years old,” says the Realtor, whose firm goes by the title Diane Olson Team.

“Some are renting them out and not using them personally, yet, and others are using them some of the time and letting friends and family use them other times.”

Olson says prices in the Phoenix area are as low as they’ve been in the last decade, but the market is showing signs it may start going up again.

“I don’t have a crystal ball, but for the last three months the really lower-valued… properties have been going up slightly,” she says about homes with a $100,000 price tag.

“Lately, I’ve seen multiple offers on lower-priced homes, and I’ve seen them for going over the asking price, which may be telling or not.”

While market conditions may be ripe for the buying, would-be buyers need to get legal, financial and tax advice from professionals with cross-border experience before making the purchase, Altro says.

“I say take your time, do the due diligence and don’t panic because it (the market) certainly isn’t going up significantly in the short term.”

Altro says one of the main concerns for Canadian buyers is the potential tax implications associated with owning U.S. property.

The U.S. estate tax — often referred to as the ‘death tax’ — is normally the largest tax liability.

This tax applies to the U.S. assets of deceased individuals with worldwide assets exceeding $5 million.

Individuals with total assets less than $5 million are exempt from the tax that can run as high as 35 per cent of U.S. assets, including real estate.

Given many Canadians do not have $5 million in assets, the estate tax might not seem like much of a concern, but Altro says the taxation rules are set to change in two years, affecting many Canadians with U.S. assets.

Starting in 2013, the estate tax exemption will be lowered to less than $1 million in worldwide assets, and the highest tax rate will be bumped up to 55 per cent.

Altro says Canadians with U.S. real estate do have a few options to structure ownership of U.S. property in a tax-efficient manner to reduce or eliminate the estate tax and other related costs like probate fees.

The most common strategy is to hold the property in a cross-border trust.

He says this specialized trust should be set up before purchasing property so it’s the trust that legally buys the asset and owns it, but it’s the client who controls the trust.

This offers many advantages, but most importantly, assets held within the trust are not subject to the estate tax when the client dies.

“Inside the trust it can state that when you die, control goes to your spouse or kids.”

Altro says U.S. property held within the trust is also subject to more favourable capital gains taxation when the property is sold. Instead of paying as much as 35 per cent on the property’s increase in value, the capital gains tax on assets in a cross-border trust is 15 per cent.

Tax considerations, however, are just one of many for Canadians to mull over before buying U.S. real estate. They also have to look at financing.

RBC branch manager in Winnipeg Marcel Tetrault says many Canadians use a home equity line of credit, borrowing against their home here — currently at all-time highs in value — to purchase the property in the United States with cash.

“Or they’re being referred to a cross-border mortgage specialist,” he says. RBC and a few other Canadian financial institutions also have U.S. branches that can provide more traditional mortgage financing for purchases in Phoenix or other Sunbelt states.

Altro says he often recommends clients use a Canadian financial institution or one of its U.S. subsidiaries, because U.S.-based financial institutions have dramatically tightened up their lending practices since the 2008 meltdown.

Olson says buyers should also familiarize themselves with the different types of home sales in the United States. She says about a third of sales in the Phoenix area are short sales. Basically, the homeowner is selling the home for less than what is owed on a mortgage to a lender.

“If they meet all the criteria, the bank will let them, but it doesn’t pre-approve it in advance,” she says.

“A short sale should really be called a long sale because it can take up to six months, and it still may never close.”

She says foreclosures are often more straightforward and usually take less time to close — about two weeks for cash buyers. But they, too, can be problematic, Altro says.

“What you have to worry about with foreclosures is the condition of the property, because someone has lost their house,” he says. “They may have ripped out the appliances.”

Still, many homes on the market are neither foreclosures nor short sales. The homes are on the market because the owners need to sell for whatever reason, and they’re stuck listing at a price the market will bear.

“That’s why you don’t have to get a short sale or foreclosure,” he says. “You can buy from a regular seller and get that similar low price.”

I do. But what about my taxes?

David A. Altro is a frequent contributor to Paul Delean’s business column in the Montreal Gazette. Click here to view the article online or scroll down to read David’s answer to the first question, about cross border marriage and taxes.

PAUL DELEAN
The Gazette
Monday, August 22, 2011

Relocating to the U.S. and cancelling a life-insurance policy were among the subjects raised in the latest batch of reader letters. Here’s what they wanted to know.

Q: “I am a Canadian living in Quebec, in a relationship with a Vermont resident. Should we marry and reside in Vermont, can I continue to work in Canada? Who do I owe taxes to? Should we not marry, can I reside in Vermont and continue to work in Canada? Anything else I should consider?”

A: Local attorney David Altro, who works in both countries, says that if you don’t marry, you won’t have the right to live in the U.S. without a work visa or Green card.

If you do marry a U.S. resident, that person can sponsor you to obtain a Green card. “You will always have the right to work in Canada as you will always be a Canadian citizen,” Altro said. If you reside in the U.S. and work in Canada, you will pay income tax to the Canada Revenue Agency for your Canadian-sourced income and also file U.S. income-tax return Form 1040 declaring your worldwide income. Under the Canada-U.S. Tax Treaty, you’ll be entitled to a foreign credit on your U.S. return for taxes paid in Canada. If you leave Canada, there may also be departure tax issues to look into, Altro noted.

Q: “I am a single, 59-year-old male, retired, living on Quebec Pension Plan payments. Since the death of my dear brother this past April, at age 66, I have no living relatives, nor close friends that I would consider leaving my house and estate to. I do have life insurance and a will, but the beneficiary would have been my brother. Should I cancel the life insurance and will, or just forget about it and leave it to the government?”

A: You don’t specify what the life-insurance policy costs you annually. It can be a substantial expense for older people, especially if your income is limited and there’s no longer a family beneficiary that you’re looking to protect or assist. It could probably go if you have enough assets to cover funeral/ burial expenses (which you can prepay, if you desire, to simplify matters). You mention having a house, which is a significant asset.

Since you already have a will, modifying it to designate somebody else as beneficiary is a relatively simple task, and that somebody could well be a charity or church of your choice.

This way, you get to decide how your personal legacy is distributed, not the government.

Q: “I’m 61 and since August receive a monthly pension (RREGOP) as a former employee of the government of Quebec.

But I’m still working and receiving other income as an independent worker. To reduce income tax, I’d like to split my pension with my wife.

How do I go about doing that? Can my wife contribute to her RRSP using that income?”

A: The RREGOP pension is eligible for splitting and as much as 50 per cent can be allocated to your wife, said Sydney Berger, tax partner at accounting firm Bessner Gallay Kreisman. That election is done on your respective income-tax returns, by completing form T1032 (federal) and Schedule Q (Quebec), and no further steps are required.

“Pension income transferred to your wife is not earned income for purposes of calculating the annual RRSP contribution room,” Berger said.

The Gazette invites reader questions on tax and investment matters. If you’d like your query addressed, send it to Paul Delean, Gazette Business Reporter, Suite 200, 1010 Ste. Catherine St. W., Montreal, Que., H3B 5L1, or by email to pdelean@ montrealgazette.com.

© Copyright (c) The Montreal Gazette

RRIF or LRIF: What’s the difference?

David A. Altro is a frequent contributor to Paul Delean’s business column in the Montreal Gazette. Click here to view the article online or scroll down to read David’s answer to the third question, about acquiring an appartment building in Florida through an LLC (limited liability company).

PAUL DELEAN
The Gazette
Monday, May 23, 2010

MONTREAL – The taxation of annuities and the difference between Registered Retirement Income Funds and Locked-In Retirement Income Funds were among the topics raised by readers in the latest batch of letters. Here’s what they wanted to know.

Q: “When an annuity is created from a pension fund, the payout is taxable because the pension fund was set up with pre-tax money. If one were to buy an annuity from one’s savings or lottery winnings, is the payout still subject to tax?”

A: If you use non-registered funds to buy an annuity, this is what’s known as a prescribed annuity. “They offer beneficial tax treatment since each monthly payment constitutes both income and a return of capital,” said Jamie Golombek, managing director of tax and estate planning for CIBC Private Wealth Management.
Under the tax rules, each monthly payment is deemed to constitute the same amount of interest and capital, which provides a significant tax deferral since the tax owing on the interest portion of the payments is spread out evenly over the term of the annuity.

Q: “What’s the difference between an RRIF (Registered Retirement Income Fund) and LRIF (Locked-In Retirement Income Fund)? Does the province where the plan is registered have a bearing on how the plan works?
I imagine that the net left in both plans would transfer to a spouse tax-free after death but I would like confirmation on that. I’d also like to understand what amounts you can withdraw from either. Is it different for a RRIF than a LRIF?”

A: Golombek explains it this way: a RRIF is an investment plan established with registered funds (usually from an RRSP), while an LRIF is pretty much the same thing but with funds that originated from a pension plan. That makes the LRIF subject to pension legislation, which includes locking-in restrictions.
Pension funds can be governed under federal or provincial legislation and though there are many similarities, each jurisdiction has its own rules. Both the RRIF and LRIF have obligatory minimum payments starting the year after the plan is established; the LRIF also has a maximum annual withdrawal. Like a RRIF, an LRIF can be transferred to a surviving spouse at death, subject to certain conditions.
“The LRIF was first introduced along with the Life Income Fund (LIF) by some pension regulators to allow more flexibility than an annuity in terms of how much income the annuitant could potentially receive in a given year,” Golombek noted. It has since been eliminated as a retirement option everywhere but in Newfoundland and Labrador, “as the advantages of an LRIF have been incorporated into the LIF.”
In addition, a few jurisdictions, such as Quebec, have an optional temporary income provision under the LIF allowing a greater-than-normal withdrawal, subject to certain conditions.

Q: “Our family and a few partners are considering purchasing an apartment building in sunny Florida. We are planning on acquiring through an LLC (limited liability company). Is this advisable?”

A: David Altro, who is both a Quebec notary and Florida attorney, doesn’t recommend that option. “For tax purposes, the IRS will consider it a flowthrough to the owner members, whereas Canada Revenue Agency will consider it a corporation and tax it as such, so foreign credits may be lost for income and capital gains tax, resulting in the dreaded double taxation.”

The Gazette invites reader questions on tax and investment matters. If you’d like your query addressed, please send it to Paul Delean, Gazette Business Reporter, Suite 200, 1010 Ste. Catherine St. W., Montreal, Que., H3B 5L1, or by email to pdelean@montrealgazette.com
© Copyright (c) The Montreal Gazette