I get many people asking me about buying a rental home on Salt Spring and usually spend a lot of time answering all their questions.  So in this post, I hope to cover some of the factual information.

Here are the typical questions and basic answers;

1. What is the rental market like on Salt Spring?  As most know, but some do not, the vacancy rate on Salt Spring has been zero for about the last two or three years.
2. What is the average rent? Kind of like how long is a ball of string, but let’s just say if one could find an average Salt Spring rental home the average rent would probably be $1500 per month.
3. What are the tenants like? Some are fantastic and some are not.
4. How much would an average rental house cost?  Averages are almost impossible to figure out on Salt Spring.  Home prices range from the low end at about 350k to sky is the limit.
5. What kind of returns can one expect to get?  It all depends on what one pays, maintenance cost,  rent charged, etc…  Let’s look at some hard numbers here and see if we can come up with some expected returns.

Let’s just say one could find a moderately nice Salt Spring home for approx 500k that you would like to buy and rent as an investment.

• One of the first things you’re going to have to do for tax purposes is figuring out how much of the price is the land and how much is the house costing you.  The nice thing is the tax report shows this and usually puts a high value on the land which is not great for the depreciation of the home which can be depreciated at 4% per year.
• The next thing you’re going to have to do is get the home ready for rental.  If it needs work you’re going to have to capitalize this cost you can not expense it. See CRA bulletin here IT-128R   and please do get independent accounting advice.  This post is just general information, not advice.

The home is ready for rent and you have found the perfect tenants and signed a lease all as per the BC tenancy law.

What about the numbers?

We know the rent will be $1500 per month or $18,000 per year.

What about the cost;

• taxes based on the cost of 500k one would expect to pay $2500 per year
• fire insurance again based on the cost of the home one would probably pay $2000 per year
• maintenance, assuming we have fixed all the main problems one could expect to pay about $300 per month or so or $3600 per year

Net profit? from the above number, we could assume to make $9,900 per year based on a 500k investment. Almost a 2% return on funds. But did you have the 500k?  Probably not and the idea of buying a rental property is you can buy a leveraged investment.  So assuming the bank is going to want 35% down you would have to have the 175k and borrow the 325k.

What is the approx cost of borrowing the 325k? at 3% over 25 years your payments would be $1850 per month or 22,200 per year.

So your total cost per year is approx 32,100 and your rental income is 18,000 per year so your profit or in this case the cost of ownership is $14,100 per year.

So how are you making money being a landlord on Salt Spring?  Over time you’re making some money because the renters will pay part of your mortgage per year and in 25 years you will own the home outright and if luck is on your side the market might go up and the home might be worth more.

In today’s dollars if you own the property for 25 years and it’s paid for your initial investment of 175k is now worth 500k buy you had to subsidize this investment per year at a cost of $14,100 or $352,500.    So you now have an asset worth in today’s dollars 500k that has cost you down payment of $175,000 plus the subsidy of $352,500 plus the property transfer tax of $8000 =  $535,500

What is the risk?

The risk is that property prices do not continue to go up, maintenance cost go up, financing cost goes up, and or tenant problems or the home sits vacant and there is a shortage of tenants like there was from 2009 to until about 2014.

What is the upside?

Property prices go up and you can sell at a higher price you make what is known as capital appreciation.  Please note this home will not be deemed your principal residence and any profit from the sale will be subject to capital gains tax.  Please note any depreciation claimed against the home will be recaptured by CRA.

I hope this helps you make your own decision about buying a Salt Spring investment home, again this is not legal advice only general information, please do talk to your accountant and or other professionals before buying a rental home.

Cheers Scott Simmons

This last month I had an accepted offer on a home and had a backup offer come in.  The backup offer was a very weak offer because the condition precedent (subject to clause) was so subjective.  It was subject to the buyer viewing and liking the lot.  Normally no one would take an offer like this seriously but it was a backup and had just a 3 day subject time so it was accepted.  The conditions precedent (subject to clauses) cannot be subjective they have to be distinct.

This just came out from the BCREA and covers the finer points of a subjective subject to clauses and options.

This would have worked for me a few years back when a buyer bought a place in 4 days and would not deposit and would not read the strata docs.  We had no consideration and no contract only an offer.  It went through but he could have backed out.  It was an odd deal one that I would have rather like to not be party to but odd things do happen.

Read on from the BCREA Cheers Scott.

OFFER VS. OPTION VS. CONTRACT OF PURCHASE AND SALE

Some conditions precedent are so imprecise or subjective that they prevent the formation of a contract. Pending the weak subject’s removal, we have only, in law, an offer. Removing the subject in question amounts to accepting the offer. Until the buyer delivers written notice removing the offending subject by the subject removal deadline, there is no contract. A famous example is,¹

. . . [s]ubject to the approval of the president of the corporate purchaser.

Since fulfillment of this condition precedent depends on how someone feels, it is subjective. In a dispute over a subjective subject clause, one side typically obtains legal advice to leverage the arrangement’s status as an offer to their advantage. A seller might cancel the deal before the buyer removes the problematic subject clause, thereby revoking the offer.² Or, a buyer might do nothing to fulfill the feeble subject, letting the offer, in law, lapse.

Suppose that, as the result of a subjective subject clause, all we have, in law, is an offer. What if the seller, for consideration or under seal, promises not to revoke that offer? Now, we have an option:³

Where consideration is provided for leaving the offer open, the transaction is known as an option. In essence, it consists of two contracts, one the agreement regarding the offer, the second the contract arising if that offer is accepted.

With this in mind, in 2003 BCREA added to the Contract of Purchase and Sale what is now section 22.⁴ Section 22 essentially provides that if, pending removal of a subjective subject clause, there is only an offer, the seller promises under seal not to revoke that offer before the subject removal deadline.

In Gordon Nelson Inc. v. Cameron, a standard form contract was subject to the buyer, in its sole discretion, finding suitable financing.⁵ The buyer paid a $1 million deposit. In addition to the pre-printed section 22, the parties added this comparable term:

Upon acceptance of this offer, the Buyer hereby agrees that the sum of Ten Dollars ($10.00) of the initial deposit shall be non-refundable to the Buyer and the Seller acknowledges receipt of such sum as consideration for the Seller . . . allowing the Buyer the benefit of the Buyer’s subjects and conditions and agreeing that the Seller’s acceptance of this offer is irrevocable.

The buyer did not remove its financing subject because it couldn’t find suitable financing. The sellers refused to return the deposit, claiming that the buyer breached the contract by failing to use sufficient effort to remove their financing subject.⁶ The buyer sued to recover its deposit.

The court found that the subjective subject clause, coupled with the term comparable to our section 22, created an option, not a contract. There was not yet any contractual obligation to use specific efforts to obtain financing. As long as the buyer acted honestly, it could choose not to exercise its option. The court ordered the $1 million deposit and accrued interest, returned to the buyer, minus the $10 payment to the sellers.

Unless the parties want an option, a REALTOR® should avoid a subjective subject clause. Instead, when apt, use one of the more objective subject clauses recommended by the Real Estate Council of British Columbia in the Professional Standards Manual.⁷ Council’s wording is far more likely to produce an enforceable contract.

Mike Mangan
B.A., LL.B.

1.	Wiebe v. Bobsein, (1985) 20 D.L.R. (4th) 475 at para. 15 (BCCA).
	2.	For more information, see Real Estate Council of British Columbia, “Subject to” Clauses — General Information” Professional Standards Manual, 7th edition, online athttps://www.recbc.ca/psm/how-the-law-works.
	3.	CCH Canadian Limited, British Columbia Real Estate Law Guide, looseleaf, Vol. 1, (North York, CCH Canadian Limited, 2000) at paragraph 3055.
	4.	In the Contract of Purchase and Sale — Commercial Real Estate, see section 40.
	5.	Gordon Nelson Inc. v. Cameron, 2017 BCSC 1269.
	6.	For information when a party is justified in refusing to remove a subject clause, see Legally Speaking No. 497 in October 2017.
	7.	Professional Standards Manual.

“Copyright British Columbia Real Estate Association. Reprinted with permission.” BCREA makes no guarantees as to the accuracy or completeness of this information or the currency of legal information.

The headlines were in the media about a month ago and this is something that keeps me up at night.  Especially this CRA to recover from the buyers the capital gains tax.  The other thing to note is this is just part of the trend of the federal government to bring in more taxes.  They are also going to be going after those that seem to claim various principal residences.  Here is the article from the Vancouver Sun Buyer beware_ Landmark court ruling will shake real-estate industry _ Vancouver Sun .   Here is the legal update from the BCREA

LICENSEES LIABLE FOR NOT DETERMINING SELLER’S NON-RESIDENT STATUS?

On March 25, 2017, several local newspapers ran a story with the alarming headline, “House buyer beware: Landmark court ruling will shake real-estate industry.”¹ The story referred to a February 10, 2017 BC Supreme Court judgment² and left licensees wondering about this decision’s impact on their duties to ascertain the Canada residency status of sellers for the purposes of the Income Tax Act. Despite the heightened tone of the story, the court’s decision does not establish any new duties for licensees in this respect.

There is significant risk to buyers dealing with non-resident sellers due to the Income Tax Act.³ In some circumstances, the Act allows the Canada Revenue Agency (CRA) to recover from the buyers the capital gains tax, which the non-resident sellers in this case should have paid, in the amount of $695,000. Where a buyer makes “reasonable inquiry” and has no reason to believe the seller is non-resident in Canada, the buyer might escape liability under the Act.

The issues in this case were: 1) whether the notary acting for the buyers had made “reasonable inquiry” as to the residence status of the seller, and 2) whether the notary had advised the buyers of their potential tax liability if the seller was not resident in Canada. Note that the case did not address the role or duties of the buyers’ agent in this situation. The evidence was that the buyers’ notary had inquired with the sellers’ law firm as to whether the sellers were Canadian residents at the time of purchase. The law firm had responded that they had no information on this topic, as they were only acting for a creditor of the sellers, who had obtained conduct of the sale of the property pursuant to a court order. The notary then took no further steps to ascertain the residence status of the sellers.

The court found that the notary had failed to make “reasonable inquiry” as to the residence status of the sellers, and had failed to advise the buyers about the potential tax liability. While the buyers are liable to the CRA for some $695,000, plus any applicable penalties and interest, there has been no determination at this stage of the case as to whether the buyers are entitled to recover the entire amount from the notary. It is possible that, at the next stage of the case, the notary might be able to reduce their liability by raising some defenses, or pointing fingers at other persons involved in the transaction. The notary did attempt to add the buyers’ agent as a third party to the action for this purpose, but that application was refused by the court as it was brought forward too late in the litigation. The notary can still commence a separate action against the buyers’ agent, although it’s difficult to see how the buyers’ agent could be at fault in that case. The decision has been appealed by the notary.

As of March 30, 2017, the standard form Contract of Purchase and Sale (CPS) was amended to include the buyers’ declaration as to citizenship (as required, in respect of the BC 15 percent foreign buyer tax), and the sellers’ declaration as to residency status (in respect of the Income Tax Act). Licensees should not give advice to their clients on how to complete this declaration, nor on how to interpret any declaration made by the other party to the transaction. However, as a best practice, licensees should recommend that their clients seek legal or accounting advice with respect to tax issues. A reminder to this effect now also appears on the “Information About This Contract” sheet appended to the CPS.

The Real Estate Council of British Columbia advises that brokerages should also be aware of this matter—particularly where a CPS is assigned to a non-resident buyer and the profit is to be paid to the assignor before completion of the original deal.

Oana Hyatt
B.A., LL.B.

	1.	Todd, Douglas, “House buyer beware: Landmark B.C. court ruling will shake real-estate industry,” Vancouver Sun (March 25, 2017), online: http://vancouversun.com/news/local-news/house-buyer-beware-landmark-b-c-court-ruling-will-shake-real-estate-industry.
	2.	Mao v. Liu, 2017 BCSC 226.
	3.	Income Tax Act, R.S.C., 1985, c. 1, s. 116.

“Copyright British Columbia Real Estate Association. Reprinted with permission.” BCREA makes no guarantees as to the accuracy or completeness of this information or the currency of legal information.

Real Estate is becoming like the movie A million ways to die in the west but instead of dying it more like a million ways to get sued with more being added every day.  Buyer beware and buying and selling agent please ask the questions you need to.

Cheers Scott Simmons