The Alberta Budget And Taxation For Your Rental Property

The proposed Provincial Budget for 2019 has a number of items that are of note for people who own investment real estate. In a precious article, we talked about how investment property owners may be impacted should the budget pass. That article focuses on different measures that will impact your costs. This article focuses on how the new budget impacts your tax position as an owner.

As a disclaimer: Amhurst manages rental properties for owners, and is not a tax authority, income tax specialist, or The Government of Alberta. This article is not written to provide tax advice for your situation, nor can we accurately predict what the government will do next. Please consult your accountant or tax professional for advice on your specific situation.

Corporate Income Tax Reduction

This is a big one for owners who hold their rental property (or properties) in a corporate structure such as a hold-co, corporation or other incorporation structure. The Alberta Government decreased the corporate tax rate from 12% to 11% on July 1, 2019, and has announced a further decrease of one percent per year each year until 2022. Decreasing corporate taxes to 8% in 2022 will make Alberta the province with the lowest tax rate in the country, and will give Alberta a lower combined (federal and provincial) tax rate than 44 American States (page 8).

In doing so, The Alberta Government will be looking to make Alberta a more competitive place for people to invest. This is important for owners who hold their real estate in a Canadian Controlled Private Corporation (CCPC) and who are seeing positive cash flow. This move decreases the income that your corporation would pay on income made over the course of the year, and also would decrease the capital gains tax if you sell an investment property.

The government also announced that they would hold the small business deduction at 2%. Small businesses are currently taxed on active income up to $500,000 at this amount. Because it is active income, rental income would not apply nor likely would selling a rental property. Discuss this further with your tax accountant to see if this is applicable to your situation.

Increasing the Capital Cost Allowance

Houses are not designed to last forever. Over time, the physical building depreciates and upgrades are made. The Income Tax Act allows for individuals and businesses to claim the depreciation on the value of a capital expenditure based on a fixed formula.

The current budget allows for an accelerated capital cost allowance (CCA), in line with the Federal program already in place. While currently unclear, this likely will not apply to new purchases of income properties. It seems to be geared towards capital for clean energy and more active income ventures. Specifics on this matter may be introduced down the line, but it appears to be more clearly for other capital programs. As noted above, speak with your tax adviser to see if this is something worth doing in your situation.

Municipal Funding and Property Taxes

In today’s economic climate the government says on page 129 that ” When hard-working Albertans see their incomes shrink and struggle to make ends meet, they have to face their fiscal realities – and so do governments “. The Province will cut municipal finding quite substantially. This includes cuts to operating funds, grants programs, capital projects, transportation projects and more.

In order to make up for a shortfall in revenue, expect property taxes to increase substantially next year. This likely will hit both commercial, owners who have already seen huge increases in the past year, as well as residential owners.

Expect in the new year that your property taxes will increase, but with the economy where it is, it may be tough to pass the cost on to your tenants. At Amhurst, we constantly watch the market to determine where and when rents can be increased. If the market does improve in the new year and the prevailing market rents increase, it would be ideal to pass any increase on to your tenants, but it is unlikely at this point. This may be a landlord cost for the foreseeable future.

The Bottom Line

At the end of the day, there is a little bit to like for owners, especially those who own their properties in a corporate structure, as well as a little bit not to like, in terms of increasing property taxes. This budget is a big step for the province in terms of fiscal pruning, but expect more significant changes in the upcoming Federal Budget.

Photo courtesy of Jason MacIntosh of The Canadian Press

3 Questions to Ask About Your Condo Budget

For condos with a December year end, November is the month where most condos put together their budgets for the upcoming year. The way that condos typically budget is they look at their expected expenses for the following year and then divide that by the unit number of unit factors. They then multiply that number by the number of unit factors owned by each unit to determine your condo fees for the following year. Unless it is a newly built condo, most condos look at the past few years worth of data to determine what is expected in the upcoming year.

If you own a unit in a condo, be it an apartment, townhouse or even a commercial unit, this is an important time as your condo fees may be on the rise. As condos begin drafting their budgets, here are three things to look at:

Is Our Reserve Fund Adequately Funded?

A large chunk of your condo fees (between approximately 20-60% depending on the size of your budget and needs of your property) goes towards your reserve fund. This is your condo’s purse to cover major equipment failure and capital improvements that your needs to do. The amount that should be in your reserve is determined by a Reserve Fund Study which is done every five years and outlines what your condo will need in terms of replacements and upgrades over the next 20-30 years.

Your reserve fund is an estimate of what will break down and what will need to be done at what time. Each year, your property manager should review the reserve fund to see what is expected that year, and if it is needed, ensure it is taken care of. Your reserve fund then will be more or less full than expected depending on when certain expenses are done.

For example if your reserve fund has $600,000 in it at the beginning of this year, and you have a new roof schedule for 2022, but your roof needed to be replaced this year. Your condo then spent $400,000 replacing a roof, now your reserve fund will have $200,000 left in it. On paper, your reserve fund will appear under-capitalized based on when expenses are expected, but given you have taken out that amount for a roof earlier than expected,and you won’t need to replace one for another 20-30 years (assuming proper maintenance), your reserve fund should be close to properly capitalized based on current needs.

It is important to ensure that your reserve fund is fully funded. If there is an emergency for your building, such as needing a new boiler, siding, or other large capital work, and your reserve fund does not have enough to cover the work, your condo may have to declare a special assessment. That means you and all your neighbours will have to pay out of pocket to cover the bill for work and to top-up the reserve fund. Your reserve fund study sets out the amount that should be in the fund at any given time in order to ensure you do not have to have any unplanned expenses.

Additionally, if you want to sell your condo, prospective buyers will want to look at the reserve fund study and financial statements to ensure it is properly capitalized. Having an underfunded reserve fund is risky for buyers, as they will think that a special assessment or large increase in condo fees may be upcoming. This makes it harder for you to sell your unit.

At budget time, it is important to ask your property manager or confirm using your reserve fund study and financial statement that your reserve fund is properly capitalized.

What Capital Projects Are Planned Next Year?

Although we all wish our homes will stay modern and beautiful forever, the fact of the matter is that times change, styles and change and things don’t look as beautiful as they used to. Every few years, it is important for a condo to make improvements to ensure that the common areas and building(s) keep looking presentable. Not only does it make owners and tenants feel at home and help attract business, it also enhances property values.

As an owner, it is important to know what capital projects are planned for the upcoming year. Whether that means something small like new lobby furniture or something larger like new windows or siding, condo owners should understand what is upcoming in the next year. This impacts your day to day living situation in the building, but also may impact your financial position.

If major repairs are being done to your property, they should ideally be coming out of the reserve fund. However, sometimes your reserve fund does not have enough money in it to cover the anticipated expenses, or your condo may elect to do a special assessment in lieu of taking money out of the reserve fund. A special assessment is where your condo requires all owners to pay out of pocket for an expense over a certain time frame, and can be quite costly for unit owners. Ensuring your condo does not have any special assessments planned for the upcoming financial year is a key question to ask at budget time

What Is Our Contingency?

While your condominium manager or budget planning team on your board will look at the previous year’s financial statements to determine what the next year will look like, at the end of the day it is a best guess.

Certain areas such as management fees or audit and legal fees should be quite close to actual, but other costs such as utilities or repairs can vary wildly depending on how the year goes. A prudent property manager will ensure that there is a little bit of leeway in your budget to account for fluctuations. They may even use a separate line item called contingency to build that into your budget directly. In either case, ensuring that your budget is not too tight is important.

At the end of the day, all the money collected and spent is your money. It does not disappear if you do not spend it, and it is not advisable to borrow money to cover a shortfall. Condominiums are also not allowed to take money out of the reserve fund to cover a shortfall in their operating account.

If your budget is a little bit looser and you do not spend it in that financial year, the money can remain in the account as a surplus that is carried into the next year. If your property manager accounts well, you should have very little surplus or deficit in your account at the end of the year. In a future post, we will cover what areas we anticipate an increase in your condo budget this year.

Unhappy with your condo’s budgeting process? Not getting enough out of your condo’s manager, contact us at 403-237-0477

Photo Credit: Chris Murray/Money Under 30