Short term rentals – mortgage helper traps and tips

Air bnb and other online short-term rentals are popping up everywhere.   Renting out your home or part of your home from time to time is a great way to bring in extra income.

But before you do, consider the following potential traps:

  1. Does your home’s municipal zoning allows you to sell short term rentals?  Does it require you to apply for a licence?
  2. Have you taken out extra property and liability coverage for this type of rental with your home insurance?   If not, you will likely null and void your policy with these rentals and ultimately defeat the purpose of having home insurance.
  3. If you live in a condo complex, have you checked with your strata?
  4. Consider the tax liability of rental income generated.  Short term rentals are considered business ventures, as such must be reported on your annual income tax return.  Have you planned for this tax expense?
  5. Consider potential tax implication with Canada Revenue Agency’s ‘change in use’ rule on your principal residence exemptions.   The rules have changed and you may incur additional capital gains tax now, or when you sell your home in the future.

Tips to counter these potential traps:

A. To avoid running afoul of government licensing requirements, fully understand zoning laws and abide by their requirements.

B. Speak with your insurance broker/agent about the potential change BEFORE you start your rentals.   It is not difficult for insurance companies to check if you’re violating the policy rules.  Your online ads are date stamped identifying when you’ve actually started making your home available for rentals.

C. To avoid penalties and levies from your strata, abide by its rules.

D. Speak with a tax accountant or lawyer BEFORE you start your rentals.   Understand fully the tax implications of your rental business and decide if this is still a venture worth your while to embark on.

Rental rules are complex and not as simple as just sharing your home in exchange for money.   A mortgage helper is nice but make sure you go in fully prepared and with your eyes wide open.

 

 

It’s RRSP Time Again!

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Needless to say, it’s that time of the year again when some of us are scrounging for money and time to invest to our Registered Retirement Savings Plan (RRSP).

If you’re a procrastinator and haven’t got around to contributing yet, here are a few things to keep in mind.

• Deadline for this year is 11:59pm Monday, February 29, 2016.

• If you have high income in 2015 and projected low income for 2016, you may want to use RRSP contributions (2015)/withdrawals (2016) to equalize your income of both years to save on the overall income taxes for the combined two years.

• Contribute to a spousal RRSP if you’re the high income earner in the household. This will enable you the tax deductions and equalize both your retirement income down the road on retirement.

• If you have no or low income in 2015, you probably want to skip the contribution altogether for this year. This is especially applicable if you anticipate higher income years in the near future which can benefit more from your contributions then.

• Do not exceed your RRSP contribution limit. Check your Notice of Assessment for the maximum amount you’re allowed. There’s a maximum over-contribution limit of $2,000 and going over will end up attracting a steep penalty.

Other considerations

• Don’t rush into the wrong investments when you make your RRSP contributions. Temporarily park your contributions into a cash account within your plan. Take your time and make your investment decision later when you’ve done your due diligence.

• Consider appointing a beneficiary.

• Keep in mind any RRSP withdrawals are taxable in the year of withdrawal.

• Keep in mind any spousal RRSP withdrawals may be taxable by the higher income earner if the rules are not followed. Consult with your advisor before making this move.

• You can still make contributions to a spousal RRSP after you turned 71 if you have the room, providing your spouse is not yet 71.

• And remember your RRSP is, first and foremost, savings for your retirement. Do not use it as a short term savings vehicle.