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30 year
mortgage opens doors
Let’s call them John and Julie. Recently married, they’re
still struggling to pay off student loans and the new
car they’ve just purchased. John and Julie have moved
into a nicer apartment, but are watching their rent
money go out the window while their more established
friends enjoy the rise in the value of their homes.
Interest rates are enticingly low, but John and Julie
still aren’t sure they can handle mortgage payments,
even though they feel that they’re missing out on a
great opportunity in today’s market, and they do want
their own place to decorate and enjoy.
There’s good news for John and Julie. Homebuyers can
now stretch mortgage amortizations – the length of time
calculated to pay off a mortgage – to 30, 35 and even
40 years. Not too long ago, it was almost impossible
to get a mortgage amortization for more than 25 years.
In 2005, the Canada Mortgage and Housing Corporation
(CMHC) announced that they would insure 30-year mortgages
with only 5% down in a special pilot project. The move
was calculated to help Canadians like John and Julie
get into their own home. Canadians went house shopping
and took advantage of the opportunity, causing CMHC
to make the 30-year mortgage part of their ongoing product
offering and even extending amortizations to 35 years.
In the spring of 2006, a 40-year amortization mortgage
was introduced to the marketplace.
The rationale behind longer amortizations is simple;
they help bring down the cost of monthly payments and
bring homeownership within reach for young couples,
new immigrants, self-employed Canadians, or prospective
homebuyers with less-than-perfect credit. They are also
good news for homebuyers who are struggling in an area
where real estate prices are rising rapidly, or need
a solution to help them through a tough financial period.
What kind of difference can homebuyers expect? Well,
John and Julie hope to take out a mortgage of $250,000.
At a rate of 6%, they would need to find $1600 per month
to service the mortgage on a 25-year amortization. But
they need only $1487 for a 30-year amortization or $1413
for a 35-year: similar to what they are currently paying
for rent.
Their mortgage planner can help them factor in any additional
costs, but these longer amortization mortgages put mortgage
payments within reach. They do increase the amount of
overall interest paid, which is why they shouldn’t be
considered to simply reduce your monthly payment if
you can afford a shorter amortization period.
So why would anyone want to spend over 30 years paying
for a home and pay more interest in the long run? With
good mortgage planning, it doesn’t have to work out
that way. The long amortization period helps new homebuyers
get into the housing market at a lower threshold. As
John and Julie finish paying off their loans, and as
their income increases, they’ll be able to shorten their
amortization period and support a larger monthly payment.
But until then, they’ll have an early advantage that
allows them to enjoy their new home now and begin building
home equity; otherwise they’d be watching their monthly
rent payment work for their landlord rather than for
them.
And that – says John and Julie – is a great beginning.
Carol Kollar AMP is a Mortgage Planner with Mortgage
Architects. She can be reached at 905 -789- 8198 or
by email carol.kollar@mtgarc.ca.
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Maximize the value of your business
Part nine of a nine-part series, “Eight critical questions
every small business owner should answer.”
If you plan on passing on your business to your children,
there are several strategies available to maximize the
value of your business for you and your family.
Transferring ownership
Whether or not your children intend to manage
the business, it is still important to transfer ownership
efficiently to preserve the value of your business and
family harmony.
Estate freeze
In some situations an estate freeze will help
transition assets and future growth to children while
you lock in the value of your business, perhaps for
your retirement. An estate freeze requires you to exchange
your common shares for preferred shares of equivalent
value on a tax-deferred basis. At the same time, your
children will subscribe to new common shares to take
ownership of the business.
Fair vs. equitable
Although the fair distribution of your assets
to your children may be ideal, it is also important
to consider fair compensation when it comes to your
business. If one child is taking on most, or all of
the responsibility of running the business, it may be
worth considering a more equitable distribution of the
business assets or ownership.
Transition
To ensure the long-term success of your business,
consider having a discussion with family members to
decide who has the interest and capability to effectively
run the business.
Once you’ve decided on who will take over your management
roles, the timing of their succession and your retirement
should be carefully planned. Bringing them in too early
may prevent them from gaining the necessary business
experience to continue growing the business. At the
same time, it’s important work with you and learn the
intricacies of your business.
Ensure security
A good succession plan should also address your personal
financial needs and security. This may involve setting
up a Retirement Compensation Agreement (RCA) where you
receive supplemental pension payments to help maintain
your standards of living during retirement. Or it could
include insurance solutions to ensure your family will
be able to purchase your shares of the business in case
of disability or death.
Plan early
By starting your business succession plan as
early as possible, you can take the time to develop
and implement the most effective strategies to minimize
taxes and preserve the value of your business. It also
gives your family time to become comfortable with new
roles, whether or not they are managerial ones.
Mike Huet is Vice-President and an Investment Advisor
with RBC Dominion Securities Inc. in Brampton. Mike
can be reached at 905-450-1042 or at mike.huet@rbc.com.
This article is not intended as nor does it constitute
tax or legal advice. Readers should consult their own
lawyer, accountant or other professional advisor when
planning to implement a strategy.
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Hiring
an Independent Contractor? Better be Sure
More employers today are utilizing flexible staffing
arrangements, employing a combination of full-time and
part-time employees and contract and casual workers.
While having a range of employment relationships can
enhance the flexibility of your operation, this also
impacts your government obligations.
If you hire an independent contractor rather than an
employee, for example, you don’t need to withhold income
tax or remit Canada Pension Plan contributions or Employment
Insurance or Workers Compensation premiums on behalf
of this worker. But if the Canada Revenue Agency (CRA)
later determines that your independent worker is in
fact an employee, you could be liable. The CRA could
assess you for years of unpaid source remittances --
the employer’s portion and the portion that should have
been withheld from the employee’s earnings – plus charge
you interest and a 10% penalty. Ouch!
Better to be clear at the outset whether you are hiring
an employee or an independent worker. The CRA uses the
following tests to determine the difference.
Control: whether the worker or the hirer decides how,
when and where the work will be performed.
Integration: whether the work performed by an individual
is an integral part of (employee), or an accessory to
(independent), the business. The CRA may also consider
whether the worker provides services to more than one
organization and also whether there is a contract between
hirer and worker.
Profit/loss: whether the hirer alone assumes the risk
of incurring losses (from bad debts, delays, etc) or
whether the worker assumes part of this risk.
Equipment/tools: whether the worker or the hirer supplies
any equipment or tools required to perform the work
and also which party covers the costs related to their
use, such as insurance, repairs and maintenance.
If you are planning to hire an independent contractor,
there are a number of precautions you can take to ensure
the CRA defines the relationship the same way that you
do. Ask the worker for a contract specifying the work
to be done and indicating that he/she is an independent
contractor who has not entered into an employment contract
with your company. Request invoices for the work he
or she performs. Also, ask the individual to use his
or her own equipment or tools to perform the work; otherwise,
charge rent for their use.
Enjoy the benefits of hiring a variety of types of
workers -- just be sure to make it clear to the government
whether you are hiring employees or independent contractors.
Mark Smith is a partner of BDO Dunwoody LLP (www.bdo.ca).
You can reach Mark at 905-270-7700 or mark.smith@bdo.ca
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