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Setting up a home business | REM

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If you or your clients are thinking of operating a business from their home, here are some things to consider.




The legal nature of a sole proprietorship

In this form of entity, you are starting a business on your own. You are not creating a corporation (which we will discuss later on). Instead, you are acting on your own, and are referred to as a “sole proprietor”.

You can give the business a name such as Joe’s Shoe Store or Sally’s Gourmet Sandwich Shop. If you wish, you can register your business name. To do so in Ontario, you must file a form with the provincial Ministry of Consumer and Commercial Affairs for a minimal fee.

Registering a business name under this format does not give you any exclusive rights to that name; however, if the name you register violates a registered trademark of a third party, they may insist that you change your business name.

If you register a business name you can open a bank account, enter into contracts, send out accounts for services provided and/or for goods supplied under that name. If you do not register a business name, then any of these types of activities will be undertaken in your own personal name instead.

Zoning bylaws, apartment rules, condominium rules and bylaws

Whether you are a homeowner or a tenant, check your municipality’s zoning bylaws to see if they permit the use of your dwelling for these purposes. This is particularly if you will have clients coming to your home to consult with you and/or to purchase goods. Zoning bylaws can also be specific in restricting activity. You may be permitted the use of the dwelling as a psychiatrist’s office, but not as a hair stylist’s salon.

If you are a tenant, you must also check your lease, which may prohibit you from carrying on a business from the premises you are renting. These issues are especially relevant if you are a tenant in an apartment building. Check your lease and the building’s rules and regulations.

If you reside in a condominium, whether as the owner or a tenant, you must also clarify whether the condominium’s declaration, bylaws and/or rules and regulations permit you to carry on any type of business from the condominium unit. For the most part, any business or service involving clients and customers coming to your unit in a condominium will be prohibited.

Banking

After registering the business name, one of the next steps is to open a business account with your financial institution. Make an appointment with an appropriate banking official ahead of time, rather than just walking into the branch without having an appointment.

GST/HST and provincial sales tax

If you are running a business, your obligation to pay HST is triggered once your business’ revenues, be they in the form of sales of goods, or billings for the provision of services, exceeds $30,000 annually. At this point you are required to register for an HST number and charge, collect and remit GST/HST to the Canada Revenue Agency on a regular basis.

Depending on the nature of the goods you sell and the services you provide, you may be required to charge, collect and remit provincial sales taxes as well.

Financial reporting

Just as an individual must report income to the CRA, any business must also report its income. As a sole proprietor your business income is simply reported on your personal income tax return under the “business income” category. You must report all sales and services billed income from which you can deduct all related expenses.

In addition to specific business expenses such as equipment and machinery purchases, cost of materials, supplies and goods for resale (if applicable), you can claim phone expenses for a specific business phone, office supplies, automobile expenses solely related to business-related use and a maximum of 50 per cent of entertainment and meal expenses – again, solely incurred for business purposes.

When your business is home-based you can claim a certain percentage of your home’s expenses as a business expense. The formula to determine what percentage of your home’s expenses can be claimed as business expenses is generally based on the percentage that your office space takes up, relative to the total area of your home. Some of the expenses that can be claimed are:

  1. Mortgage interest (but not mortgage principal), if you own a dwelling;
  2. Rent, if your home, apartment or condominium unit is rented;
  3. Insurance on your dwelling;
  4. Property taxes;
  5. Utilities;
  6. Maintenance and repairs;
  7. Phone if you use your own personal home phone number rather than a dedicated business phone line.
Incorporation

The other common form of business entity is a corporation. This is created by preparing and filling a Corporation Application with the Ministry of Consumer and Commercial Affairs.

A corporation is a legal separate entity, existing entirely apart from the individual person; it is the corporation that carries on the business, not the individual who incorporated the business.

This is the most significant difference between a sole proprietorship and a corporation.

Although the corporation is conceptually a separate entity, it requires the participation of humans to make decisions and get things done. This is achieved through the roles of a corporate director, president, secretary and treasurer. In a smaller, home-run business, you may serve all of these roles yourself; however, you are still not personally responsible for the corporation’s debts.

With that said, there are various instances where you may indeed be personally liable. For example, where:

  • the corporation’s bank requires you as the incorporator to personally guarantee loans (also known as lines of credit) given to the corporation;
  • a supplier insists that you personally guarantee payment for goods and/or services provided to the corporation; or
  • the corporation owes taxes and you are called upon to pay them.

While I have only briefly discussed corporations, a number of proprietorship issues which I have commented on are also applicable to home-based corporate businesses.

The bottom line

In summary, if you decide to start up a home-based business, whether it’s a proprietorship or a corporation, there are many factors to consider and matters to be looked into and researched thoroughly.

I always recommend talking to:

  • your accountant (not a bookkeeper) for initial financial and business advice;
  • your lawyer for legal and business advice and assistance in creating the entity; and
  • your banker for financial advice.

I feel it is important to note that some accountants attempt to do what is actually lawyer’s work. Their work and sphere of activity is distinctly different than that of a lawyer and should be dealt with accordingly.

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Real Estate

Mortgage insurance vs. life insurance: What you need to know

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Your home is likely the biggest asset you’ll ever own. So how can you protect it in case something were to happen to you? To start, homeowners have a few options to choose from. You can either:

  • ensure you have mortgage protection with a life insurance policy from an insurance company or
  • get mortgage insurance from a bank or mortgage lender.

Mortgage insurance vs. life insurance: How do they each work?  

The first thing to know is that life insurance can be a great way to make sure you and your family have mortgage protection.

The money from a life insurance policy usually goes right into the hands of your beneficiaries – not the bank or mortgage lender. Your beneficiaries are whoever you choose to receive the benefit or money from your policy after you die.

Life insurance policies, like term life insurance, come with a death benefit. A death benefit is the amount of money given to your beneficiaries after you die. The exact amount they’ll receive depends on the policy you buy.

With term life insurance, you’re covered for a set period, such as 10, 15, 20 or 30 years. The premium – that’s the monthly or annual fee you pay for insurance – is usually low for the first term.

If you die while you’re coved by your life insurance policy, your beneficiaries will receive a tax-free death benefit. They can then use this money to help pay off the mortgage or for any other reason. So not only is your mortgage protected, but your family will also have funds to cover other expenses that they relied on you to pay.

Mortgage insurance works by paying off the outstanding principal balance of your mortgage, up to a certain amount, if you die.

With mortgage insurance, the money goes directly to the bank or lender to pay off the mortgage – and that’s it. There’s no extra money to cover other expenses, and you don’t get to leave any cash behind to your beneficiaries.

What’s the difference between mortgage insurance and life insurance?

The main difference is that mortgage insurance covers only your outstanding mortgage balance. And, that money goes directly to the bank or mortgage lender, not your beneficiary. This means that there’s no cash, payout or benefit given to your beneficiary. 

With life insurance, however, you get mortgage protection and more. Here’s how it works: every life insurance policy provides a tax-free amount of money (the death benefit) to the beneficiary. The payment can cover more than just the mortgage. The beneficiary may then use the money for any purpose. For example, apart from paying off the mortgage, they can also use the funds from the death benefit to cover:

  • any of your remaining debts,
  • the cost of child care,
  • funeral costs,
  • the cost of child care, and
  • any other living expenses. 

But before you decide between life insurance and mortgage insurance, here are some other important differences to keep in mind:

Who gets the money?

With life insurance, the money goes to whomever you name as your beneficiary.

With mortgage insurance, the money goes entirely to the bank.

Can you move your policy?

With life insurance, your policy stays with you even if you transfer your mortgage to another company. There’s no need to re-apply or prove your health is good enough to be insured.

With mortgage insurance, however, your policy doesn’t automatically move with you if you change mortgage providers. If you move your mortgage to another bank, you’ll have to prove that your health is still good.

Which offers more flexibility, life insurance or mortgage insurance?

With life insurance, your beneficiaries have the flexibility to cover the mortgage balance and more after you die. As the policy owner, you can choose how much insurance coverage you want and how long you need it. And, the coverage doesn’t decline unless you want it to.

With mortgage insurance through a bank, you don’t have the flexibility to change your coverage. In this case, you’re only protecting the outstanding balance on your mortgage.

Do you need a medical exam to qualify? 

With a term life insurance policy from Sun Life, you may have to answer some medical questions or take a medical exam before you’re approved for coverage. Once you’re approved, Sun Life won’t ask for any additional medical information later on.

With mortgage insurance, a bank or mortgage lender may ask some medical questions when you apply. However, if you make a claim after you’re approved, your bank may ask for additional medical information.* At that point, they may discover some conditions that disqualify you from receiving payment on a claim.

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5 common mistakes Canadians make with their mortgages

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This article was created by MoneyWise. Postmedia and MoneyWise may earn an affiliate commission through links on this page.

Since COVID-19 dragged interest rates to historic lows last year, Canadians have been diving into the real estate market with unprecedented verve.

During a time of extraordinary financial disruption, more than 551,000 properties sold last year — a new annual record, according to the Canadian Real Estate Association. Those sales provided a desperately needed dose of oxygen for the country’s gasping economy.

Given the slew of new mortgages taken out in 2020, there were bound to be slip-ups. So, MoneyWise asked four of the country’s sharpest mortgage minds to share what they feel are the mistakes Canadians most frequently make when securing a home loan.

Mistake 1: Not having your documents ready

One of your mortgage broker’s primary functions is to provide lenders with paperwork confirming your income, assets, source of down payment and overall reliability as a borrower. Without complete and accurate documentation, no reputable lender will be able to process your loan.

But “borrowers often don’t have these documents on hand,” says John Vo of Spicer Vo Mortgages in Halifax, Nova Scotia. “And even when they do provide these documents, they may not be the correct documentation required.”

Some of the most frequent mistakes Vo sees when borrowers send in their paperwork include:

  • Not including a name or other relevant details on key pieces of information.
  • Providing old bank or pay statements instead of those dated within the last 30 days.
  • Sending only a partial document package. If a lender asks for six pages to support your loan, don’t send two. If you’re asked for four months’ worth of bank statements, don’t provide only one.
  • Thinking low-quality or blurry files sent by email or text will be good enough. Lenders need to be able to read what you send them.

If you send your broker an incomplete documents package, the result is inevitable: Your mortgage application will be delayed as long as it takes for you to find the required materials, and your house shopping could be sidetracked for months.

Mistake 2: Blinded by the rate

Ask any mortgage broker and they’ll tell you that the question they’re asked most frequently is: “What’s your lowest rate?”

The interest rate you’ll pay on your mortgage is a massive consideration, so comparing the rates lenders are offering is a good habit once you’ve slipped on your house-hunter hat.

Rates have been on the rise lately given government actions to stimulate the Canadian economy. You may want to lock a low rate now, so you can hold onto it for up to 120 days.

But Chris Kolinski, broker at Saskatoon, Saskatchewan-based iSask Mortgages, says too many borrowers get obsessed with finding the lowest rate and ignore the other aspects of a mortgage that can greatly impact its overall cost.

“I always ask my clients ‘Do you want to get the best rate, or do you want to save the most money?’ because those two things are not always synonymous,” Kolinski says. “That opens a conversation about needs and wants.”

Many of the rock-bottom interest rates on offer from Canadian lenders can be hard to qualify for, come with limited features, or cost borrowers “a ton” of money if they break their terms, Kolinski points out.

Mistake 3: Not reading the fine print

Dalia Barsoum of Streetwise Mortgages in Woodbridge, Ontario, shares a universal message: “Read the fine print. Understand what you’re signing up for.”

Most borrowers don’t expect they’ll ever break their mortgages, but data collected by TD Bank shows that 7 in 10 homeowners move on from their properties earlier than they expect.

It’s critical to understand your loan’s prepayment privileges and the rules around an early departure. “If you exit the mortgage, how much are you going to pay? It’s really, really important,” Barsoum says.

She has seen too borrowers come to her hoping to refinance a mortgage they received from a private or specialty lender, only to find that what they were attempting was impossible.

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Canadian mortgage rules: What you should know

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If you’re a new homebuyer seeking a mortgage, or an existing homeowner looking to switch or refinance, it’s important that you’re up-to-date on the new mortgage rules in Canada. Here are some of the top things you should keep in mind if you’re looking for a new home. 

The Canadian Mortgage Stress test in 2021

The stress test was introduced on January 1, 2018, as a way to protect Canadian homeowners by requiring banks to check that a borrower can still make their payment at a rate that’s higher than they will actually pay.  The purpose of the stress test is to evaluate if a borrower (a.k.a. the potential homeowner) can handle a possible increase in their mortgage rate.

For Canadians to qualify for a federally regulated bank loan, they need to pass the stress test. To do this, homebuyers need to prove that they can afford a mortgage at a qualifying rate. For homebuyers who have a down payment of 20% or more, currently the qualifying rate is determined using the Bank of Canada’s five-year benchmark or the interest rate offered by the lender plus 2%, whichever is higher. For homebuyers who have a down payment of less than 20%, the qualifying rate is the higher of the Bank of Canada five-year benchmark rate and the interest rate offered by the lender.

This stress test is also performed with homeowners looking to refinance, take out a secured line of credit, or change mortgage lenders. Those who renew with the same lender will not have to undergo the stress test.

Other new mortgage rules in Canada

As of July 2020, a number of changes were implemented for all high-ratio mortgages to be insured by the Canada Mortgage and Housing Corporation (CMHC).

A high-ratio mortgage is one where the borrower has a minimum down payment of less than 20% of the purchase price of the home. A high-ratio mortgage is also referred to as a default insured mortgage. Let’s break down what recent changes have been made.

Qualification rate

The new CMHC rules will lower the amount of debt that borrowers with a default insured mortgage can carry. Mortgage applicants will be limited to spending a maximum of 35% of their gross income on housing and can only borrow up to 42% of their gross income once other loans are included. This is down from the previous 39% and 44%.

Credit score

The new rules also require the borrower to have a minimum credit score of 680 (good score). If you are purchasing a home with your partner, one of you must have a score of 680. This is up from the previous minimum score of 600 (fair score).

Down payment

Homebuyers are now required to use their own money for a down payment instead of borrowed funds. This means homebuyers are no longer able to use unsecured personal loans, unsecured lines of credit or credit cards to fund their down payment.

Homebuyers with a down payment of less than 20% of the purchase price are required to purchase mortgage default insurance. Properties costing $1 million or more are not eligible for mortgage default insurance.

CMHC and CREA projections

Due to the pandemic, job loss, business closures, and a drop in immigration, CMHC predicted a 9% to 18% decrease in housing prices from June 2020 to June 2021.* However, this prediction hasn’t come to fruition.

Instead, 2020 ended up being a record year for Canadian resale housing activity, according to Costa Poulopoulos, the Chair of the Canadian Real Estate Association (CREA).**

The CREA predicts that all provinces except Ontario will see an increase in sales activity into 2021 as a result of low-interest rates and an improving economy. As for the CMHC, they stand by their original prediction.

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