There are three types of homeowners, and as such, they each have their own set of tax tips. They are the
entrepreneur, the T4 investor and the Donald.

The entrepreneur
The entrepreneur is a familiar breed. Self employed by definition, entrepreneurs typically enjoy a plethora of tax benefits and write-offs. Whether they have a relatively small home-based business selling handbags on eBay, or a more established enterprise such as a lucrative consulting practice, these homeowners can benefit significantly from a multi-component mortgage that is set up to cash dam their revenue and expenses.

Cash damming is a Canada Revenue Agency-approved technique whereby a non-deductible mortgage can be aggressively converted into a tax deductible business loan to oneself. This technique is becoming more and more popular among entrepreneurs who usually seek every tax break under the law to maximize their cash flow and keep their hard-earned dollars in their own pockets.

When originating mortgages for entrepreneurs, the tip here is simple. Set up a re-advanceable line of credit with at least two components. One component is the amortizing mortgage that replaces all existing mortgage and consumer debt, the other is a line of credit to be used only for business purposes.

Most entrepreneurs understand basic cash flows: revenue comes into the business bank account as deposits, expenses go out of the business bank account using cheques. Setting up a cash dam for the mortgage in this scenario is not as complicated as one might think, and the entrepreneur just has to add two simple steps.

Firstly, before revenue is deposited to the business account, it should be applied to their mortgage as a pre-payment and then re-advanced from the line of credit using the proceeds for a "business loan" to be made from the taxpayer to themselves. This is the essence of cash damming - a very powerful strategy for the unincorporated entrepreneur and a no-risk strategy to build wealth through tax benefits (note: this does work the same for incorporated businesses, as an incorporated entity is its own "person" under tax law).

There may still be benefits to lending to your own company, but that requires a tax advice from a professional and is outside the scope of a simple cash dam that can be set up through a mortgage professional.

The Donald (Trump, that is)
The Donald is the consummate real estate investor that owns three or more properties - one of which will be the principal residence, the others all investment properties. Mortgage professionals love these clients as they are eternal optimists in the real estate market and are usually highly leveraged with mortgages on all properties.

The tax tip for the Donald who has a nondeductible mortgage on their principal residence is also to set up a cash dam, but this time it will be a special purpose vehicle. It will flow through the rental income from the investment properties as a pre-payment on the principal residence mortgage, and then re-advance the proceeds into their "landlord business" bank account from where all expenses are made.

Legitimate expenses for use of proceeds on the business loan clearly extend to mortgage interest, property taxes, insurance and management fees. However, principal payments on the investment property mortgages are not a valid expense and the Donald needs to ensure that any principal mortgage payments are funded separately and specifically not funded through the rental cash dam.

The T4 investor
This is your favourite client. These are fully qualified deals, easy to place at any lender, and the homeowner has strong credit and excellent debt-service ratios. T4 investors are also your typical Smith Maneuver and Tax-Deductible Mortgage Plan (TDMP) clients. Conventional wisdom has changed and financial advisers are increasingly advising homeowners that they can generate more wealth over the long term by investing early - long before the mortgage is paid off - as opposed to paying off the mortgage first and then starting to invest.

The definition of a T4 investor is a taxpayer with a mortgage and a J-O-B, hence the T4. Advanced mortgage strategies have gained popularity since a 2009 Supreme Court ruling effectively blessed many of these approaches including the Singleton Shuffle, the Smith Maneuver and TDMP. Furthermore, the distribution of multi-component, re-advanceable mortgages and lines of credit have made these tax strategies widely available to all qualified homeowners through their independent mortgage professionals.

Homeowners aged 35 to 55 in this category can effectively pay off their mortgages sooner and generate significant wealth through a properly managed tax-efficient mortgage plan. Since these borrowers are not self-employed or business owners, they will often be unfamiliar with the cash flow and tax issues that go along with an advanced mortgage strategy and are usually better off in a fully managed plan, where all the administration and cash management is handled on their behalf.

Tax traps: the tourist
For every great customer that can benefit from your tax advice, there is also the trap to watch out for. The tourist is the first one of these, and it's the label we apply to multiple property owners who just can't stay put, insisting on changing their principal residences to one of their investment properties. At first blush, you wouldn't see anything wrong with this, but one needs to be careful.

Take the curious case of Nina Sherle. In a landmark court decision last year, Sherle, a dual homeowner, decided to do such a move. Prior to changing her principal residence to her investment property, she enjoyed the benefits of a tax-deductible mortgage on her investment property and her principal residence was free and clear. In an attempt to keep her situation the same as she switched houses, Sherle mortgaged her current principal residence and used the proceeds to pay off the mortgage on the current rental, then moved into the current rental and legally made it her new principal residence. Sherle proceeded to rent out the old principal residence, effectively turning it into an investment property and deducted the mortgage interest as before. The desired result was to end up in the same situation - a tax-deductible mortgage on the investment property and the principal residence free and clear.

The Canada Revenue Agency reassessed Nina on the basis that "use of proceeds" of the mortgage on the investment property was ineligible and the court agreed, the moral of the story being that regardless of good intentions, the legal effect of doing this without proper planning is to make your tax-deductible mortgage no longer tax deductible. (For a full explanation of this and to learn how to avoid such scenarios, visit the "mortgage professionals" portal at TDMP.com).

The double-dipper
This term applies to accelerated Smith Maneuver and TDMP clients. Double-dipping, as you might infer from the name, is a big no-no under Canada Revenue Agency rules. It most commonly occurs when the homeowner invests in tax-efficient mutual funds for their mortgage strategy, the most common of these known as ROC (Return Of Capital Funds). ROC investments are very popular for advanced strategies because not only is the cash flow tax-efficient, it is consistent month over month, which mitigates cash flow risk and reduces the administration required in many debt conversion strategies.

The problem is that if an investment returns capital to the investor instead of providing some form of income, there is corresponding erosion in the tax deductibility of the original investment loan that has to be dealt with properly and reported to CRA. If this ROC distribution is used to pre-pay a mortgage (before being re-advanced and re-invested), CRA has advised that, even though the monies are ultimately reinvested, the initial use of proceeds (which was to pre-pay the mortgage) is ineligible for tax deductibility.

Homeowners in managed strategy programs will be covered for this situation as the calculations and tax reporting prevents inadvertent double-dipping. However, do-it-yourself Smith Maneuver clients will rarely go the trouble of making this calculation and tend to tax deduct everything, inadvertently or intentionally. As a mortgage professional, make sure your clients double-dip at their own risk - not at yours.

While most mortgage professionals should not be putting themselves out there as tax experts, it is prudent to have a decent background and understanding of the tax implications of a mortgage transaction. All homeowners should be encouraged to employ a tax professional both in planning complex transactions and for filing tax returns. However, such advice comes at a price that may deter some borrowers. Having a keen eye on the mortgage transaction and advising customers of potential tax advantages and pitfalls is a welcome service.

The housing market in Vancouver is "uncomfortably hot", according to the latest RBC Housing Affordability Measure, while Toronto and Montreal are on pace to set records due to surging demand. 

The report - which looks at housing costs based on owning a detached bungalow - said national affordability measures eroded slightly in the fourth quarter of 2009 but were mitigated by continued low mortgage rates and gains in household income.

"The extent of the deterioration [of affordability] will depend on the speed at which interest rates rise," the report said, adding the new mortgage rules coming into effect in April could reduce demand. "On that score, the pace of increase should be fairly steady throughout 2010 and 2011, helping to alleviate concerns of an imminent derailing of housing affordability in Canada."

While Vancouver had the most unfavourable conditions with house prices at record-high levels, Calgary saw affordability improve due to a lagging economy and the report said Ottawa had "the best of both worlds" with both strong activity and improving affordability. Atlantic Canada also saw favourable buyer conditions in the fourth quarter of 2009.

National home sales decreased by 1.5 per cent from January to February, according to the latest CREA numbers, in large part due to increased supply. Vancouver saw the biggest decline, likely due to the Olympics, while Toronto experienced the biggest gain.

"Housing markets are becoming more balanced," said CREA chief economist Gregory Klump. "There are still a number of major markets where sales negotiations favour the seller due to a shortage of inventory, but supply has begun rising. Further expected supply increases will continue to take the steam out of housing markets as the year progresses."

Despite the slight decrease, year-over-year numbers remained strong with residential sales activity up 44 per cent from the same month last year and the average price - $335,665 - up 18.2 per cent from one year ago.

Sales and prices are expected to become "more subdued" throughout the year, the CREA said. However, it expects sales activity to elevate in Ontario and B.C. before the introduction of the harmonized sales tax in July.

In February, industry experts from the broker, lender, insurer and technology realms gathered at the Business Television Network (BCN.tv) studios for what was called "After the Storm," a series of discussion panels that were broadcast to groups across Canada. CMP was with the Toronto group during this interactive CAAMP event that allowed participants to e-mail questions and thoughts to the various experts.

While the topics covered were varied, one common thread that could be taken away from it was that Canada fared better than the U.S. during the financial downturn with the help of a little planning and a lot of luck. Moving forward, the Canadian mortgage professional industry needs to pay attention to regulation, education and maintaining close lender relationships if it wants to continue to be a model for the rest of the world.

Apples to oranges
When comparing the U.S. and Canadian markets, all experts agreed that the Canadian system was different enough to escape the same hardships our neighbours south of the border face. But it's also important to look at what was so different between the two countries, and whether it is enough to keep Canada on the high road into the New Year.For starters, one major difference between the two systems was the way Canadian lenders operate.

"The way we find our mortgages, by and large, most of it is on the balance books so it's underwritten rigorously," said MCAP's Ron Swift. "In the U.S. it just kept getting moved on and no one had any skin in the game. In Canada when you lend it's your own money."

While this had a large part to do with why we avoided a U.S. scale meltdown, it also had to do with timing.

"Were we lucky? Let's not kid ourselves," said Swift. "We were headed towards the edge of the cliff, and we were able to see the U.S. go over it and stop before we got there."

For Peter Vukanovich, president and COO of Genworth Financial, it was less of a difference between Canada being lucky or smart, but just being different, primarily when it comes to insuring loans.

"In the U.S., the lender and the underwriter have the pen, and insurance is only handled when the claim comes in," he said, adding bluntly that it's as simple as "garbage in, garbage out. You just need to act like you are lending your own money."

Keeping a close eye on regulation
Currently broker share in the U.S., said Vukanovich, has gone from being around 20 to 25 per cent around 18 months ago, to around 12 to 15 per cent today.

Throughout the day, most experts blamed this on over-regulation in the U.S. in reaction to the recession (which right or wrong, brokers shouldered a lot of blame for) and fortunately Canada has not followed its example - at least not yet.

"The pendulum will swing to over-regulation," warned Peter Aceto, president and CEO at ING Direct, adding that it's "something [Canadians] need to watch for."

Swift agreed, saying that while the Canadian system is not "over-regulated now, [Federal Finance Minister] Flaherty has mentioned that the government might have to step in and do something. We have to be careful about that and be sure not to over-react to a local phenomenon."

The mention of a local phenomenon was in reference to a comment made by Jason Smith, president and CEO at Solidifi, who said that technologically speaking, Canada is treated like it is just one giant market, when, in fact, it is made up of several regional markets, each with their own strengths and weaknesses.

While he said that technology needs to adapt so as not to treat every market the same, the media and government also have to be careful when talking about bubble scenarios.

"There is one national interest rate and its low," he said, "but in terms of a bubble, it is a regional issue."

As such, it should be treated like one.

As an interesting side note, Gerrard Schmidt, president and COO of Davis + Henderson, offered that "super brokers are actually better positioned to take the increased cost of regulation," even though, he added, the big banks' mobile sales forces are growing faster than the mortgage market in Canada overall.

"Super brokers need to think about how they will compete," he said.

Education is key
Currently on Genworth Financial's website there is a homebuyer survey that asks some very basic questions, such as: True or false, by reducing your mortgage amortization period you will save interest costs over the life of the mortgage; and, which payment frequency pays down your mortgage the fastest, monthly, semi-monthly or bi-weekly accelerated? On average, homeowners answer five of the 10 questions correctly, said Vukanovich.

"If the U.S. has taught us anything, it's that people are going into this without knowing anything. Education is key, and the mortgage professional and the consumer were just not in sync. The more consumers know the better."

Unfortunately, test results like these point to the fact that consumers are very much still in the dark about their mortgages, and the onus falls on those who deal with the consumers most.

"Those who are sitting in front of the consumer, it's their responsibility to educate the consumer," said Swift. "People just want the cheapest monthly cost, but it's one thing to be able to afford homes at historic low rates, it's another when rates go up. Mortgage professionals have to educate consumers to make the right decisions."

Aside from educating the consumer, the consensus was that slowing down and making sure all the proper information is obtained is a crucial step in keeping the Canadian mortgage market ahead of the curve.

"I'm hearing a lot about the Canadianization of the mortgage world - U.S., Mexico, Europe and
Asia," concluded Vukanovich.

Now it's up to us to be sure we are setting the right example.

Debbie Thomas, partner and broker of record at The Mortgage Group, recently told CMP she has noticed a trend of insurance guidelines tightening for self-employed borrowers, who often write off a large portion of their income for tax purposes.

"The whole issue of reasonability has now been forced back and self-employed deals that used to be approved are not even close to being approved today," said Thomas. "It hasn't been an announcement or anything that has come out from the lenders or insurers, but it's something we've definitely noticed."