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Reverse mortgage as an exit strategy is a good idea?

Using a reverse mortgage as an exit strategy

Kasi Johnston
Mortgage Broker News

Qualifying for a mortgage in Canada is no easy feat. In fact, over half of Canadians see it as a barrier to homeownership. On July 1, the Canadian Mortgage and Housing Corporation (CMHC) rolled out their new underwriting guidelines with three changes, including an increase to the minimum credit score required for insured mortgage, from 600 to 680.

Some lenders also continue to tighten their restrictions and request additional financial information and documentation before approval. All these changes, spurred on by the coronavirus pandemic, have many Canadians turning to alternative mortgage lenders.

An important thing to consider is that alternative lenders usually offer rates between 7.99% to 13%, compared to traditional mortgage rates that sit around 3%. Alternative mortgage lenders also require you to renew every one to three years, carry additional fees and require requalification.

With many Canadians already suffering from cashflow issues, HomeEquity Bank vice president, referred sales, Sue Pimento questions how homeowners will be able to afford these interest payments without having to sell their assets. 

“Some private lenders work in the capitalization of the first year of payments, which unfortunately is a short-term fix and escalates equity erosion,” she added.


Using a reverse mortgage as an exit-strategy

Pimento suggests brokers offer using a reverse mortgage when building an exit strategy out of a high-interest alternative mortgage. Offering a lower interest, long-term strategy will not only benefit the homeowner, but adds an additional commission stream for the broker. Clients can use funds from a reverse mortgage to pay exit penalties from an alternative mortgage, and free themselves from a high-interest loan.

“Alternative loans usually have monthly payments while reverse mortgages don’t – your clients only pay what they owe once they sell their house or pass away. This means that they will also benefit from increased monthly cashflow to enjoy the retirement they’ve always planned,” added Pimento.

A reverse mortgage can also be used to help client’s out of a second mortgage, which usually has higher rates and fees than a primary mortgage.

“With a second mortgage, the borrower has to keep up with two sets of repayments, therefore, their monthly payments are considerably higher, leading to a risk of foreclosure or power of sale, depending on the province.”

Not only is a reverse mortgage a great way out of alternative loans, it also provides an alternative solution to these high-interest loans. Since a reverse mortgage is a lifetime loan with no renewal fees, or requalification fees, the loan can’t be called.  If your clients are looking for a mortgage exit strategy, they won’t have one with an alternative mortgage, but with a reverse mortgage, they won’t need one, since it is a lifetime deferral mortgage, purpose built for Canadians 55+.


Copyright © 2020 Key Media

CRA’s eyeing tax audit for Canadian property transaction in the US

CRA’s tax audit of U.S. real estate transactions

David Rotfleisch

On June 25, Canada Revenue Agency (CRA) announced that it would carry out a tax review of six years of U.S. real estate transactions in order to find any tax non-compliance from Canadian taxpayers. CRA is looking for “real estate and property data in bulk form, in order to identify current and historical records, mortgage transactions, property taxes, real property records and deeds.”

To accomplish this, CRA will carry out a tax audit of “records on Canadian property transactions in the U.S., including municipal addresses, names of owners, square footage, sales histories and property tax assessments.”

A Canadian taxpayer who is reassessed through this audit can face substantial tax penalties on top of interest, not to mention the professional and legal fees required to respond and object to the audit. There is also a possibility of prosecution for tax fraud or tax evasion. This article will break down the typical issues that could come up in a tax audit of undeclared real estate property or unreported real estate transactions.


Unreported foreign property

The first issue that CRA could be looking for is the T1135 Reporting Requirement for a foreign property with a value of over $100,000 Cdn. This is a reporting requirement a Canadian taxpayer must comply with, regardless of whether the taxpayer is generating income from his or her foreign property.

A Canadian taxpayer who held U.S. real estate directly or through a trust is subject to this T1135 requirement depending on the fair market value of the U.S. property over time. The penalties for failure to comply with the requirement could be steep. If a taxpayer only failed to file the required form in the past 24 months, then the penalty is calculated as $25 per day for a maximum amount of $2,500.

However, if a taxpayer has not filed the T1135 form for more than 24 months when the taxpayer is required by law to do so, the penalty could be five per cent of the cost of foreign property. The calculation of this penalty could be different if the property has been transferred or loaned to a trust, or the property is in the form of shares or bonds from a foreign corporate affiliate.

Note that Canadian taxpayers with personal-use properties located outside of Canada are not required to file T1135 forms if their properties are not generating income. For more information please see our article about T1135 reporting requirements.

Unreported rental income

As a general rule, Canadian tax residents must declare and report their worldwide income. The Income Tax Act uses the Foreign Tax Credit mechanism to ensure income generated from another jurisdiction is not double taxed. However, if a Canadian taxpayer failed to report his or her U.S. rental income, the taxpayer can be subject to reassessments and tax penalties from the CRA, even when taxes had been paid to the U.S. government.

This upcoming CRA tax audit will probably involve auditors looking for unreported U.S. rental incomes from Canadian taxpayers. This could take several forms. CRA could reassess a Canadian taxpayer for failing to disclose any rental income when CRA believes U.S. rental income had been generated.

However, even when a Canadian taxpayer had been reporting their U.S. rental income, CRA could take issue with either the total revenue generated by a rental property or with the expenses claimed by the taxpayer in relation to the rental property. A tax audit over deductions can be particularly frustrating, given that CRA tax auditors have the power to make a wide range of assumptions when it comes to expenses, while the taxpayer can have difficulty producing the required documentation regarding claimed expenses in the past.


Unreported real estate sales


Finally, CRA will be looking into U.S. real estate sales of properties owned by Canadian taxpayers, and specifically unreported sales of U.S. residential homes owned by Canadian taxpayers. When the sales of these homes do not qualify for the principal residence exemption, the proceeds will be fully taxable as either income or capital gains. CRA’s power to tax U.S.-based income is subject to the U.S.-Canada Tax Treaty.

While unreported sales of non-principal residence homes will certainly be on CRA’s radar, another crucial issue that could affect many Canadian taxpayers is the failure to report the sales of a principal residence located outside Canada after 2016.

CRA’s position is that it is entirely possible for a Canadian tax resident to claim principal residence exemption on a home located outside Canada. This can often be the case for Canadian taxpayers who work in the U.S. for up to several months a year. They could own homes in the U.S. and still be considered a Canadian tax resident under the U.S.-Canada Tax Treaty.

A taxpayer in such a situation might have been assured that he or she did not need to report the sales of their U.S. principal residence to the CRA. Such advice, if given for real estate transactions after Oct. 3, 2016, would be wrong. Canadian taxpayers are required to report the sales of their principal residence to the CRA. Failure to report can incur a maximum penalty of $8,000.

Furthermore, a taxpayer with unreported principal residence transactions might also have to defend the position that it indeed the sale of a principal residence. This could involve a costly and time-consuming tax audit response and objection process any taxpayer would want to avoid.

CRA’s intention to conduct a tax audit was announced through a tender notice titled Bulk United States (U.S.) Real Property Data (re: Canadian residents). As of the date of this article, the tender is still active, which could mean CRA has yet to find a U.S. vendor to provide CRA with its desired U.S. real estate data.

If CRA has no existing knowledge of the tax owing by a Canadian taxpayer, this taxpayer may qualify for the Voluntary Disclosure program if other criteria are also met. Refer to our article about the Voluntary Disclosure Program for more information. A timely voluntary disclosure application could result in substantial savings in penalties and interest and would avoid prosecution for tax fraud or tax evasion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


© 1989-2020 REM Real Estate Magazine

RE/MAX: amidst the Pandemic Toronto Real estate market is growing

RE/MAX: COVID-19 can?t slow demand in Toronto real estate market

Ephraim Vecina
Mortgage Broker News

COVID-19 has not significantly deterred buyers in Toronto due to the market-friendly monetary and fiscal conditions driven by the federal government and the Bank of Canada, according to a RE/MAX analysis.

While employment levels have fluctuated and businesses have placed themselves on hold over the last few months, “at the same time, there has been sustained activity in the number of buyers compared to available listings,” RE/MAX said. “This is one of the chief factors in supporting price growth relative to last year’s pace, despite shifting market conditions.”

Data from the Toronto Regional Real Estate Board showed that in May, the market’s average home price grew by 3% annually to reach $863,599.

Federal measures played a large part in keeping the number of prospective buyers stable, RE/MAX said.

“Canada Mortgage and Housing Corporation has supported lenders to cover the cost of mortgage deferrals,” RE/MAX said. “In a broader policy tool, the government implemented a wage subsidy program to help employers keep staff on payroll, helping millions continue to collect pay cheques and cover their bills.”

RE/MAX also pointed at the current BoC benchmark rate of 0.25% as especially advantageous to Canadians who were fortunate to have kept their jobs during the crisis.

“This is allowing buyers to borrow greater amounts of money at a lower cost over time,” RE/MAX said. “The institution has also pumped billions of liquidity into the financial system, making lenders more confident in issuing loans.”

Copyright © 2020 Key Media

REW, B.C’s real estate leading platform expanding their established listing adding rental properties.

REW.ca shakes up the real estate market by adding rental properties?to B.C.?s most-used home platform

Vancouver is Awesome

CoreLogic launches AI driven platform for real estate agents

OneHome streamlines communication between agents and home buyers

Natalie Gagliordi

CoreLogic, a provider of data and analytics for the real estate and mortgage industries, is unveiling a new AI-based platform called OneHome that aims to improve the home-buying process for agents and consumers. 

CoreLogic said that OneHome streamlines communication between agents and home buyers during the purchase process, while also providing a virtual marketplace and AI-enabled home searches, as well as access to financing, insurance and home improvement providers via digital collaboration. 

“As we expand our reach into home marketing services and leverage our national footprint, CoreLogic is excited to bring a high impact and innovative solution that significantly improves the home-buying experience for consumers, real estate agents and other stakeholders in the home marketing, selection and buying process,” said Frank Martell, CEO of CoreLogic. “We believe that the OneHome tool is a major step forward in providing millions of home buyers with a richer and more efficient experience when buying and owning a home.”

Real estate agents are among the bevy of professionals looking to adapt their market to the new era of social distancing. The industry is beginning to move away from in-person appraisals, filings and closings in favor of digital alternatives, and consumers are seeking out virtual options when it comes to searching for and touring homes. 

For instance, online real estate database giant Zillow has recently accelerated its focus on virtual and self-tours, machine learning and e-signings to speed up real estate digital transformation. The company reported in May that it has increased its creation of 3D home tours by over 500% since February as part of its Zillow 2.0 initiative. 

For CoreLogic, which just rejected a $7 billion takeover offer from Cannae Holdings and Senator Investment Group, the launch of OneHome could help position the company as a bigger tech player in the real estate industry of the future.

© 2020 CBS Interactive.

Canadian REIT index benchmark fluctuates during Q1

REITs could roar off the floor

Michael McNabb
Western Investor

Canada’s real estate investment trust (REIT) market was not spared in the March sell-off as investors rushed to hit the sell button while the world’s economies shut down to fight the spread of COVID-19.

The benchmark Canadian REIT index (S&P/ TSX Capped REIT Index) tumbled over 46 per cent from its February highs to its March lows. It is hard to fathom that almost half of the index value was wiped out in such a short period of time.

But big sell-offs come big opportunities and we believe REITs offer an outstanding buy opportunity right now.

The two most common valuation techniques for REITS are price-to-net asset value (NAV – the value of the underlying real estate minus liabilities) and the adjusted funds from operations multiple (AFFO). Currently, the REIT sector is trading between a 20 per cent to 30 per cent discount to NAV and has fallen as low as 40 per cent. Historically, the sector trades in a band from a 15 per cent discount up to a 10 per cent premium.

AFFO multiples have also contracted as the market fears the deferral of rent collection will lead to lower funds from operations.

The focus on percentage of rent collected per month, which most REITS are now reporting on a monthly basis, is not something that we are getting too hung up on. It’s nice to see where rent is being paid and where it isn’t, but this is short-term thinking and real estate is a long-term game.

Sector-focused REITS now dominate listings and diversified REITS are few and far between. As the market has started to recover, certain subsectors have performed much better than others. It should not be surprising that money has flowed into subsectors that have had strong rent collection and perceived strong demand for their asset class.

Multi-family (apartment rentals) and industrial real estate have led the way. People need places to live and the rental market in most major Canadian cities is still very tight. Occupancy rates for Canadian REIT landlords is currently about 97 per cent, though with average monthly rents well below market averages. Upon turnover (which has slowed during the pandemic), multi-family REITs are likely to pick up some rent growth.

Society’s reliance on ecommerce and certain supply-chain disruptions brought on by the shutdown have shone a new spotlight on the importance of industrial warehousing and that subsector has performed very well in recent months.

Office REITS have experienced strong rent collections but have not performed as well as other sectors as the debate continues as to what office space will look like in a post COVID-19 world. The Toronto office market still has very low vacancy rates and office REITs are suggesting that lease terminations will be low. The Toronto office vacancy rate was 2.0 per cent in the first quarter versus the historical average of 6.9 per cent. Montreal and Vancouver were similarly well below average. The tight supply and longer-term nature of the leases can lead to big leasing spreads.

The subsectors that have struggled the most are hotels/hospitality and seniors’ residences.

It is no surprise that hotels have struggled as revenues basically went to zero for a few months and it will be a long road back for both business and personal travel.

Seniors housing has seen major pressure from increased costs for personal protection equipment and staffing, a lack of new tenants entering and a political firestorm for mismanagement in long-term care facilities.

Finally, I want to touch on retail. The retail sector in Canada is made of power centres and small grocery anchored plazas. There are no listed mall REITS, which face a different set of issues then the power centres, which tend to have strong lead tenants rounded out by other essential-service tenants. Many of these listed REITS also have redevelopment opportunities, which the market is not attributing any value to. There are some pressures with tenant bankruptcies and the changing retail landscape, but we feel the rewards outweigh the risks in many cases.

The majority of listed REITS have strong balance sheets and ample liquidity to ride out the business disruption that has occurred during the last few months. As we return to the norm and investors look for income in this world of near-zero interest rates, we believe this will be a driving force back into the sector. REITS will also be able to refinance at better terms which will further strengthen their balance sheets.

We have not seen real asset values decline during the pandemic and take comfort in the fact that private equity firms have raised billions of dollars for real estate investments. That money is currently on the sidelines, waiting to be deployed, and should act as a stop for real asset values.


The REIT sector has lagged the broader market rebound and remains attractive, especially on a long-term basis, which is why we continue to add to our weightings in the real estate investment sector.

  • Michael McNabb is an analyst and trader at Purpose Investments, of Toronto, who specializes in real estate.


© Copyright 2020 Western Investor