Loans and liabilities against assets 108-04020040

Example

Description

1

Liabilities secured over both assessable assets and assets exempt from assessment

This is when an existing homeowner with an unencumbered principal home obtains a mortgage over both the new investment property and the existing principal home to purchase the investment property.

Apportionment calculation

Liability x investment property value / (investment property value + principal home value).

Principal home value: $200,000

Rental value: $300,000

Loan to purchase rental property: $280,000 (secured over both principal home and rental property)

Apportionment calculation

280,000 x 300,000 / (300,000 + 200,000)

=$168,000

Value of rental property

$300,000 - $168,000

= $132,000

This example is based on the assumption that an asset has only the mortgage being apportioned.

2

When a principal home property has an existing encumbrance, apportionment is based on the net value of the home property

This is when a homeowner with an existing mortgage purchases an investment property, against which both the existing principal home and the new investment property are secured. The net value of the principal home after the deduction of the existing home mortgage is to be used.

Principal home value: $500,000

Mortgage against principal home property: $100,000

Net value of principal home property: $400,000

Rental property: $300,000

Loan to purchase rental property: $280,000 (secured over both principal home and rental property)

Apportionment calculation

280,000 x 300,000 / (400,000 + 300,000)

= $120,000

Value of rental property

$300,000 - $120,000

=$180,000

3

Line of credit account on the principal home is used to purchase an asset

• A customer's principal home is worth $300,000 and was previously mortgaged with $50,000 owing
• The customer applies to the bank for a line of credit for up to 50% of the house's valuation, the application is approved. The original mortgage is paid out and the line of credit is drawn down $50,000 to pay off the original mortgage. Until the customer draws further on the line of credit, they still owe the bank $50,000
• On a given day the customer draws down $20,000 on the line of credit and purchases a car
• They now owe the bank $70,000 (+ interest) and have an assessable asset of a $20,000 car
• Later the customer draws down $10,000 and buys shares. They have increased their debt to the bank to $80,000 (+ interest)
• Their assessable assets are increased by $10,000 in shares, which are subject to deeming
• The account balance of the line of credit account is not an asset
• The asset value of any items purchased (for example, motor vehicle, shares) cannot be reduced as the funds used to purchase them are secured against another asset, in this case an exempt asset - the principal home

Note: had the line of credit been used to purchase an income producing asset (other than deemed financial asset) the interest is a valid expense.

4

Line of credit account on an investment property, is used to purchase an asset

• A customer's investment property is worth $300,000 and was previously mortgaged with $50,000 owing
• Assessable asset value of property under the Social Security Act = $250,000
• The customer applies to the bank for a line of credit for up to 50% of the property's valuation, the application is approved. The original mortgage is paid out and the line of credit is drawn down $50,000 to pay off the original mortgage. Until the customer draws further on the line of credit, they still owe the bank $50,000, and still have an assessable asset of real estate, $250,000
• On a given day the customer draws down $20,000 on the line of credit and purchases a car
• They now owe the bank $70,000 (+ interest) and have an assessable asset of a $20,000 car and a $230,000 investment property
• Later the customer draws down $10,000 and buys shares. They have increased their debt to the bank to $80,000 (+ interest)
• Their assessable assets are increased by $10,000 in shares which are subject to deeming
• The assessable asset value of their investment property has reduced to $220,000, resulting in nil overall increase in assets
• The account balance of the line of credit account is not an asset
• The asset value of any items purchased (for example motor vehicle, shares) cannot be reduced as the funds used to purchase them are secured against another asset

Note: only the interest on the first $50,000 can be claimed as an expense of the investment property. Had the line of credit been used to purchase other income producing assets (other than deemed financial assets) the additional interest could have been apportioned against them as a valid expense.

5

Multiple loans secured over multiple properties

Customer purchased their principal home property in 1972.

• The property is currently valued at $500,000

In 1996, they mortgaged the principal home property to purchase a holiday unit:

• The balance of the mortgage is now $50,000
• The current market value of the unit is now $300,000

In 2002, they borrowed $500,000 secured over both the principal home and the holiday unit to purchase a rental home.

• The current balance of this mortgage is $380,000
• The rental home is currently valued at $500,000

In 2010, they borrowed $400,000 to purchase a rental unit:

• The current balance of the mortgage is $250,000
• the rental unit is currently valued at $450,000
• The mortgage is secured over this property, the principal home, the holiday unit and the rental home.

Assessment of mortgages

First mortgage - $50,000:

• It cannot be used to reduce the value of the holiday unit, as it is secured over an exempt asset (that is the principal home).
• However the net value of the principal home will need to be considered for the apportionment calculations

Second mortgage - $380,000:

• The calculation for the value of the assets used as security will be:
• Net value of the principal home $450,000 ($500,000 - $50,000)
• plus holiday unit $300,000
• equals $750,000 value of all assets
• The mortgage will be apportioned as follows:
• $380,000 X $300,000/$750,000 = $152,000 mortgage can be offset against the value of the holiday unit. The Net value of the holiday unit then would be $148,000.
• The net value of the principal home property would also then be $222,000 ($500,000 - $50,000 - $228,000= $222,000)

Third mortgage - $250,000:

• It is secured over all four properties
• The value of assets used as security to be included in the calculation would be:
• Principal home property $222,000
• Holiday unit $148,000
• Rental home $500,000
• Rental unit $450,000
• The calculations for the mortgage apportionment and assessable asset value will be:
• Rental Unit portion of mortgage :- $250,000 x $450,000/$1,320,000 = $85,227.27
• Rental Unit value $450,000 - $85,227 = $364,773 assessable asset value
• Rental home portion of mortgage:- $250,000 x $500,000/$1,320,000 = $94,696.96
• Rental home value $500,000 - $94,697 = $405,303
• Holiday unit portion of mortgage:- $250,000 x $148,000/$1,320,000 = $28,030.30
• Holiday unit value $148,000 - $28,030 = $119,970
• Principal home property portion of mortgage:- $250,000 x $222,000/$1,320,000 = $42,045.45
• Principal home property has nil assessable value but it’s Net value (if there were any other mortgages to be apportioned would be $179,955

The assessable properties would be recorded on REBS with the following detail:

• Holiday Unit:
• $300,000 current market value
• mortgages/loans $180,030 ($152,000 of the $380,000 mortgage plus $28,030 of the $250,000 mortgage)
• Rental Home
• $500,000 current market value
• mortgages/loans of $94,697
• Rental Unit:
• $450,000 current market value
• mortgages/loans of $85,227

6

Unsecured loan used to purchase an asset

Customer purchases a car for $20,000 using $15,000 cash and $5,000 from their credit card.

The customer provides their credit card statement showing they have withdrawn $5,000 at the time they purchased the car. The assessable value of the car is $15,000.