CANADA’S LEADING SOURCE FOR ALTERNATIVE LENDING AND MORTGAGE INVESTING EDUCATION
ACCESS TO
CANADIAN MORTGAGE
REGISTERED DISABILITY
LANDSCAPE
SAVINGS PLAN
AFFORDABLE JUSTICE
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YOUR MORTGAGE INVESTMENT CORPORATION
ACCOUNTING, AUDIT, TAX & ADVISORY SPECIALISTS
1918
300
40
12
Year Founded
# Employees
# Partners
# Offices
Kathy Steffan, CPA, CA Partner, Toronto ksteffan@welchllp.com
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Derek Chu, CPA, CA Senior Manager, Toronto dchu@welchllp.com
Toronto 647.288.9200 | 36 Toronto Street, Suite 1070 | welchllp.com
SUMMER ISSUE
CONTENTS 06 08 10
CANADIAN MORTGAGE LANDSCAPE Prakash Bector, VP, Sales & Marketing from Indigoblue Group of Companies discusses the mortgage lending landscape in Canada and the impact of the stress test.
REGISTERED DISABILITY SAVINGS PLAN Anni Zhu, Senior Manager from Welch LLP, outlines the essential information about Registered Disability Savings Plan (RDSP) for people and families dealing with disabilities.
ACCESS TO AFFORDABLE JUSTICE Derrick Leue, President & CEO of PROLINK Insurance Inc., highlights the coverage options available with Legal Expense Insurance and how it helps individuals and small businesses.
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Welch LLP Canadian Mortgages Inc. Indigoblue Mortgage Investment Corporation Indigoblue Capital Corporation Community Trust
www.pmtoday.ca Issue 13 . Summer 2019
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DITOR’S NOTE
Harry Singh MBA, CRM
EDITORIAL Harry Singh CONTRIBUTORS Prakash Bector Anni Zhu Derrick Leue ART DIRECTOR / DESIGNER Nina Salehpoor
Data is finally starting to confirm what many industry experts had predicted post 2008/09 financial crisis: alternative lending is on the rise. In previous issues, Private Matters Today outlined catalysts for the rise in alternative lending and opportunities that it has brought to the industry participants and gaps that it has filled for borrowers. The investors in private equity have also enjoyed consistently superior returns. The question that we often get asked is: where it all goes from here? Many, globally, have been waiting for the Canadian economy to come to a screeching halt through an anticipated recession. Meanwhile, others have argued that the combined effect of B20, B21, stress test and other measures introduced to slow down the sizzling markets in Toronto and Vancouver have done the job. The most recent drop in the qualifying rate by the Bank of Canada in conjunction with status quo position on prime rate would seem to signal that real estate markets seem to be under control.
The focus of this issue of Private Matters Today is educating our readers regarding the fundamentals of alternative lending, as record number of entrepreneurs, new immigrants and investors have chosen to obtain mortgage financing in the alternative market. Additionally, we have invited subject matter experts to continue to provide valuable information regarding Registered Disability Savings Plans and Legal Expense Insurance. In our next issue, we will explore alternative investments among other timely topics.
Happy reading!
Harry Singh MBA, CRM
PRODUCTION MANAGER Sanjay Ramwani FOR EDITORIAL & ADVERTISING INQUIRIES PLEASE CONTACT: Prakash Bector, VP Sales & Marketing Tel: 416-400-3977 x 20 info@pmtoday.ca Private Matters Today Inc. 135 Queens Plate Dr, Suite 410, Toronto ON M9W 6V1
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Private Matters Today Inc. is a national publishing company. We produce a national print and digital publication to providing educational content surrounding the alternative lending and investments industry. Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. The opinions expressed in articles are not necessarily those of the publisher. Information presented is compiled from sources believed to be accurate; however, the publisher assumes no responsibility for errors or omissions.
1
MARKET INTELLIGENCE
2
BANK OF CANADA PRIME
1.75%
5 YEAR BOND YIELD
1.39%
3.95%
INFLATION RATE
1.30%
ANNUAL GDP GROWTH RATE
3
BANK PRIME
2.00%
BANK OF CANADA BENCHMARK
5.19%
DEBT TO INCOME RATIO Q1 2019
173%
HOUSING STARTS
246
(THOUSAND UNITS MONTHLY)
Source: www.tradingeconomics.com/indicators . Effective as at August 6, 2019
INDIGOBLUE MIC VS. S&P/TSX COMPOSITE INDEX $115.000
UNEMPLOYMENT RATE
$111,521.05
$110.000
LUE MIC
INDIGOB
$105.000
5.9%
5.8%
$100.000
6.2%
6%
$103,224.73
$95.000
5.8%
5.7%
5.6% 5.6%
S&P/TSX COMPOSITE INDEX
$90.000
6%
5.8% 5.8% 5.8%
5.8%
5.4%
5.5% 5.6% 5.4%
$85.000 $80.000
Q1 2018
Q2
Q3
Q4
Q1
Q2 2019
Jul Aug 2018
† S&P/TSX Index performance data is adjusted for splits & dividends. Indigoblue MIC actual performance is based on an annualized dividend rate of 7% until Nov 30 and at 7.75% from Dec 2018 onwards. Indigoblue MIC monthly dividends are reinvested as part of the DRIP program.
Sep Oct
Nov
Jan
Feb
Mar
Apr
May Jun 2019
5.2%
Source: www.tradingeconomics.com/canada/unemployment-rate
MORTGAGE ARREARS RATE
CREDIT CARD ARREARS RATE
0.6%
5%
0.5%
4%
0.4%
3%
0.3%
2%
0.2%
1%
0.1% 2009
Dec
0 2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2008
2009
2010
2011
2012
2013
2014
2015
Source: www.cba.ca
600,000 550,000 500,000 450,000
Source: www.creastats.crea.ca/natl/index.html 5 • PRIVATE MATTERS TODAYFor • WWW.PMTODAY.CA information purposes only. Private Matters Today is not responsible for accuracy of the information above. Subject to change.
2019-Q2
2019-Q1
2018-Q4
2018-Q3
2018-Q2
2018-Q1
2017-Q4
2017-Q3
2017-Q2
2017-Q1
2016-Q4
2016-Q3
2016-Q2
2016-Q1
2015-Q4
2015-Q3
2015-Q2
2015-Q1
2014-Q4
2014-Q3
2014-Q2
400,000
2014-Q1
Number of Transactions
NATIONAL RESIDENTIAL REAL ESTATE SALES ACTIVITY
2016
2017
2018
C
ANADIAN MORTGAGE LANDSCAPE Article by Prakash Bector, VP Sales & Marketing, Indigoblue Group of Companies
Private Matters Today sits down with Prakash Bector, VP Sales & Marketing at Indigoblue Group of Companies to discuss the mortgage lending landscape in Canada and the impact of the stress test.
1. What are the different types of mortgage lenders in Canada? The Canadian mortgage market can be divided into three different buckets: prime, alternative and private. The prime market is dominated by the big 6 banks, credit unions and mortgage finance companies (nondeposit taking lenders). Prime mortgage lenders finance clients with strong credit quality and verifiable income. Generally, clients in this bucket need to provide a combination of notice of assessments, paystubs, job letters and T4 statements in order to qualify for a mortgage. As a result, these qualified clients benefit from the best rates in the market and also have access to high ratio mortgages with less than 20% down payment. Alternative lenders, on the other hand, are less stringent on credit quality and have more flexibility when it comes to providing proof of income, but still require clients to show ability to repay the mortgage. Many newcomers to Canada or self-employed individuals may fall into this bucket as alternative lenders use non-traditional sources of income such as bank statements to verify a client’s ability to repay his mortgage. Clients in the alternative lending space generally need at least 20% down payment and the rates provided are usually 2% to 3% higher than that of prime lenders. The private lending bucket consists of both mortgage investment entities that pool funds from investors and individual private investors. Private lenders generally put more weight on the property than the individual’s credit and specific documents to prove income. Clients that fall into this bucket generally need 20% to 25% down payment for 1st mortgages and rates can be 5% to 6% higher than prime lenders.
2. How has the stress test impacted the mortgage lending landscape? 6 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
As of January 2018, all federally regulated prime and alternative lenders providing conventional mortgages (those with 20% down payment or more) are required to qualify the mortgage based on the higher of the contract rate plus 2% or the Bank of Canada benchmark rate (currently 5.19%). Credit Unions are provincially regulated and so are exempt from the stress test, but many have instituted the stress test policy. As a result, fewer clients are qualifying for the mortgage amounts they need at regulated prime and alternative lenders. This has created more demand for private mortgages, as private lenders are not bound by the stress test rules. Private lenders are now seeing much better-quality clients which is great for their investors, but individuals obtaining private mortgages must be prudent in ensuring they are working with reputable firms and have a clear understanding of what they are getting into before signing any paperwork.
3. What type of clients are opting for private mortgages? With the introduction of the stress test, more prime and alternative clients are opting to obtain a private mortgage to increase the amount they can borrow, especially in markets where housing prices have continued to rise such as Toronto and Vancouver. Many borrowers may opt for a private mortgage to tap into extra equity in their current property to payoff expensive unsecured debt or complete a much-needed renovation, as they no longer qualify for any additional funds with their current lender. In addition, more self-employed clients are opting for private mortgages, as their net income tends to be insufficient to qualify for a mortgage with a prime lender. Net income for a business for self borrower is derived by subtracting many business-related expenses. As a result, line 150 of their notice of assessment won’t show enough income to qualify with a prime lender. Private mortgages can be a great resource for these clients if used prudently and with a clear understanding of how the mortgage will be repaid.
4. How can a borrower choose the best private lender? There are several private lenders available that focus on different types of lending from residential, commercial, construction, second mortgages and so on. It’s important to discuss borrower’s needs with a professional mortgage broker so he can adequately assess the marketplace and determine the most appropriate lender. Most private lenders will charge a fee in addition to the rate so overall price is an important consideration, but the whole solution should be assessed, not just the initial cost. It is crucial to have a long-term plan that considers the next steps after the private mortgage term has expired. Some questions to ask are: is the lender large enough to be able to offer a renewal or is the lender an individual with limited capital who may want his invested money back at maturity of the term? The borrower may find himself having to hold on to a private mortgage for slightly longer than anticipated. However, if the lender in question is not willing to offer a renewal, the borrower with help from their mortgage professional will have to find another lender. Additional questions to bear in mind are: what additional fees can the private lender charge should the borrower miss a payment or how quickly will the lender commence legal proceedings to remediate a loan that is in arrears? There is no sign that the stress test will be going away anytime soon, but we are fortunate to have several private lending options throughout Canada. It is important that borrowers take the time to work with their mortgage professional to find the best lender and mortgage solutions that is suitable for them.
Prakash Bector
VP, Sales & Marketing Indigoblue Group of Companies
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GISTERED E DISABILITY SAVINGS PLAN Article by Anni Zhu, CPA, CA, Senior Manager, Welch LLP
What is it? The Registered Disability Savings Plan (RDSP) is a registered long-term savings plan specific for people with disabilities. It is intended to help with them and their families to save for long-term financial needs by growing their savings on a tax-deferred basis. The RDSP is partly modeled after the Registered Education Savings Plan (RESP) and its grant incentive programs.
Who are eligible for the plan?
Canada Disability Savings Grant
Individuals can open an RDSP if they have long-term disability and are: • Eligible for the Disability Tax Credit (DTC) ; 1
• Under the age of 60; • A Canadian resident with a Social Insurance Number (SIN); and • Looking for a long-term savings plan.
How does it work? The RDSP allows the individual to contribute as much as they want each year, up to the lifetime contribution limit of $200,000. Government contributions and investment income can go over and above the $200,000 limit. Anyone may contribute to the plan with written permission from the plan holder. Contributions can be made to the plan until the beneficiary turns 59. Contributions are not tax deductible, however the income earned on the investments are tax deferred in the plan until they are withdrawn by the beneficiary, which works similar to an RESP. The generous contribution from the federal government maybe the main motivation for most of families to setup an RDSP in a 8 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
heartbeat. Depending on your family income, the federal government may contribute as much as $90,000 to the plan during your lifetime. The contribution comes in two forms: Canada Disability Savings Grant (CDSG) which is a matching grant and Canada Disability Savings Bond (CDSB) which doesn’t require matching. The government contribution closes after the calendar year when the beneficiary turns 49, however, the individual can still contribute to the plan until they turn 59.
The government gives matching grants up to 300 percent, depending on the beneficiary’s family income and contribution. The maximum grant amount is $3,500 per year, with a limit of $70,000 over lifetime. Family income depends on the age of the beneficiary. From beneficiary’s year of birth until December 31 of the year the beneficiary turns 18, it is the family income of the beneficiary’s parents or guardian that is relevant to the matching grant. Beginning the year the beneficiary turns 19, it is beneficiary’s own family income that is counted for the matching. If the beneficiary’s family income is $95,259 (2019 amount) or less, for the first $500 contributed into the RDSP, the beneficiary will receive $3 for every $1 contributed. For the next $1,000, the beneficiary will receive $2 for every $1 contributed. The maximum grant for any one year is $3,500. So, by contributing $1,500 in one year, the beneficiary can receive a maximum grant of $3,500 a year up to a limit of $70,000 lifetime. If the beneficiary’s family income is above $95,259, for the first $1,000 contributed into
the plan, the beneficiary will receive $1 for every $1 contributed. The maximum grant for any one year is $1,000 up to a maximum grant of $70,000 lifetime.
Canada Disability Savings Bond No contribution is required to get the bond. CDSB is meant for low-income families. If beneficiary’s family income is less than or equal to $31,120 (2019 amount) per year, the beneficiary will receive $1,000 per year. It is phased out, pro-rata, based on annual beneficiary’s family income between $31,120 and $47,630 (2019 amount). As mentioned earlier, once the beneficiary turns 18, the income of the parents or guardians are excluded from the beneficiary’s family income. It’s very common for the individual to get the full amount of bond once they turn 18. The maximum amount that the Federal government will invest in the plan is $20,000 over an individual’s lifetime.
Unused grant and bond entitlements If the individual has not been contributing regularly or if the individual hasn’t setup the RDSP account, there is a carry forward provision that allows individuals to access unused grant and bond entitlements from the preceding 10 years, starting 2008. The carry forward is applied to all RDSPs regardless of when the plan is initially opened or registered as long as the individual is eligible for the plan. The maximum annual amount of unused grant and bond entitlement that can be carried forward and paid out in a calendar year is $10,500 and $11,000 respectively. This amount includes any grant and bond entitlement for the current year. The
beneficiary cannot access the unused grant and bond entitlement after December 31 of the year they turn 49.
Effect on federal and provincial disability programs and benefits Money paid out of an RDSP does not affect the individual’s eligibility for federal benefits such as the Canada Child Benefit, the Goods and Services Tax credit, Old Age Security, or Employment Insurance benefit. All provinces and territories have announced fully or partially exempt RDSP assets and income. For instance, the Ontario government fully exempts RDSP assets and money withdrawn from the plan when determining eligibility for social assistance. i.e. RDSP assets or income will not impact the Ontario Disability Support Program (ODSP) income support.
Withdrawals from an RDSP Withdrawals can be made to the beneficiary at any time for any purpose. The beneficiary must start receiving regular payments, called Lifetime Disability Assistance Payments (LDAPs) by the end of the year they turn 60. The Grant and Bond are intended to encourage savings and should remain in an RDSP for at least 10 years. So, if money is taken out of the plan when the grants and bonds have been in less than 10 years, full or partial repayment rule will kick in. All grants and bonds that have been in the plan for less than 10 years must be paid back if: • The plan is closed; or
• The beneficiary no longer qualifies for the DTC.
Beneficiaries with shortened life expectancy When a beneficiary has a life expectancy of five years or less, they can withdraw up to $10,000 per year in taxable savings with certain conditions. This amount includes grants, bonds and earnings. In addition, beneficiaries can withdraw a prorated amount of their plan contributions. Repayment of the grants and bonds paid into the plan for less than 10 years is not required until the death of the beneficiary.
Summary RDSP is a great long-term savings plan for people with disabilities, especially with the generous contribution from the government. The key take-away is if you qualify for the DTC, start opening up the RDSP account as early as possible and contributing on a regular basis. For anyone who have not registered for an RDSP account, it is not too late to do so but make sure the plan is setup before the beneficiary turns 49. If you are interested in receiving further information on RDSP, please consult with a member of the Welch Tax Group.
Anni Zhu CPA, CA
Senior Manager Welch LLP
• The beneficiary dies; or
1- To qualify for the DTC, a medical doctor or other qualified medical practitioner must certify on Form T2201 “Disability Tax Credit Certificate”. The form must then be approved by the Canada Revenue Agency (CRA).
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A
CESS TO C AFFORDABLE JUSTICE Article by Derrick Leue, President & CEO, PROLINK Insurance Inc.
The cost and complexity of the Canadian legal system is often too much for individuals or small business owners to handle. According to the Canadian Lawyer Magazine 2018 Legal Fees Survey, the average hourly rate for an experienced lawyer in Canada is $414. If an individual or small business finds itself caught up in a legal dispute, oftentimes they will be unable to absorb the financial and operational impacts without help. This is where Legal Expense Insurance comes into play. For an annual premium often lower than the cost of having one-hour of face time with a Canadian lawyer, individuals and small businesses in Canada can purchase insurance that covers legal expenses, including various disbursements, court costs, witness fees, and adverse costs if they’re ordered to pay their opponent’s legal fees.
How is Legal Expense Insurance different from Commercial Insurance? The majority of Canadian businesses have multiple types of liability insurance policies in place to protect them from claims brought against them by customers, competitors or the general public. Products such as Commercial General Liability and Professional Liability are critical for legal defense matters; however, what about cases where an individual or business wants to pursue their legal rights? Legal Expense Insurance fills that coverage gap because commercial insurance policies do not cover you when you are pursuing your legal rights.
10 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
What can Legal Expense Insurance cover? 1. Unlimited telephone legal advice is always included in the legal expense insurance policy that you purchase. The ability to speak confidentially with a lawyer on any legal topic is valuable because business owners often make decisions without understanding the legal implications as they do not want to incur the costs associated with seeking legal advice.
2. Defense of matters not covered under
commercial insurance policies. Defending regulatory investigations, criminal actions, tax audits from Canada Revenue Agency, driving infractions and employment disputes are not covered by standard commercial liability policies. Legal Expense Insurance can provide the defense required.
3. Pursue legal action against another
individual or business. Contract disputes, recovering debt owed by customers, employees taking customers when they leave, fighting unreasonable landlords and receiving compensation for bodily injury can all be pursued through a Legal Expense policy.
Why have you not heard about Legal Expense Insurance? Life Insurance and commercial insurance have been available in Canada for more than 100 years. Legal Expense Insurance was first available in Canada in 2010. This unique protection has been available in Europe for more than 50 years. There are only a handful of insurers offering Legal Expense Insurance coverage. General consumer advertising is
expensive so most of the marketing of the product is provided by insurance brokerages and professional associations in Canada.
Examples of how Legal Expense Insurance has protected Canadian individuals and businesses Defense of highway traffic act and motor vehicle offences is the most frequent claim reported by policyholders. The policy will respond to almost all infractions except for impaired driving, photo radar or street racing infractions. Contract disputes where the policyholder is either a buyer or seller is a common claim for small businesses. The policy will cover having a lawyer issue a demand letter on your behalf to customers who have not paid. Canada Revenue Agency Tax Audits are highly prevalent and stressful for independent contractors and small businesses. Business owners are both surprised and thrilled to learn that their legal expense insurance policy can cover the cost of having tax lawyers and accountants respond to a CRA audit. Regulatory license and statutory defense is expensive and common in Canada. Business
owners often talk about the painful amount of “red tape” holding them back. Investigations by your professional regulatory body or a government agency focused on protecting the public are expensive. Professionals and business owners cannot ignore these investigations because it can have a detrimental impact on your ability to earn a living.
How much coverage do I receive with a Legal Expense Insurance Policy? Every legal expense policy has a maximum amount of legal expense coverage available for one claim with a total aggregate limit of coverage provided for all claims in the 12 month policy term. There are different coverage options available from different insurers. The most common policies available provide $50,000 of coverage for one claim with a maximum $100,000 available for all claims in the policy term.
policy. For example, all Mortgage Brokers and Mortgage Administrators who purchase their Errors & Omissions Liability through PROLINK Insurance automatically receive the DAS Legal Expense Insurance policy as part of their package.
2. Purchase the Legal Expense Insurance
policy on a standalone basis through a licensed insurance brokerage. The cost of a policy for a Canadian business with less than $2,000,000 in revenue and less than 10 employees ranges from $450 to $1,000 per year.
To Learn More Contact an insurance brokerage specializing in Legal Expense Insurance.
Derrick Leue
How can I purchase Legal Expense Insurance?
President & CEO PROLINK Insurance Inc
There are primarily two ways to purchase a Legal Expense Insurance policy.
1. Bundled with your commercial insurance
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RAISED OVER $30,000 FOR AUTISM AWARENESS
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S&P/TSX Index performance data is adjusted for splits & dividends. Indigoblue MIC actual performance is based on an annualized dividend rate of 7% until Nov 30, 2018 and at 7.75% from Dec 2018 onwards. Indigoblue MIC monthly dividends are reinvested as part of the DRIP program. * Target return of 7.75% is annualized for Indigoblue Mortgage Investment Corporation (“IB MIC”). Past returns are not indicative of future returns. IB MIC is a related entity to Indigoblue Capital Corporation (“IB Capital”) which is an exempt market dealer registered in ON, AB and BC.
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