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Change in Mortgage Insurance Rules

After changing the minimum down payment requirement for homes above $500,000 in 2015, the Government of Canada announced a change in mortgage insurance rules on October 3, 2016 (with revision on October 14, 2016).

As background information, federal laws require federally regulated lenders to obtain mortgage default insurance (“mortgage insurance”) for homebuyers who make a down payment of less than 20 per cent of the property purchase price, known as “high-ratio” insurance. The homebuyer pays the premium for this insurance, which then allows homebuyers to purchase homes with a down payment as low as 5 per cent of the property value.

Lenders also have the option to purchase mortgage insurance for homebuyers who make a down payment 20 per cent or more of the property purchase price, known as “low-ratio” insurance. There are two types of low-ratio mortgage insurance: transactional insurance on individual mortgages typically paid for by the borrower, and portfolio (bulk pooled) insurance typically paid for by the lender.

Mortgage insurance is provided by the Canada Mortgage and Housing Corporation (CMHC), a federal Crown corporation, and two private insurers, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company.

With the background information above, the Government of Canada announced the following two changes:

  1. Applying a Mortgage Rate Stress Test to All Insured Mortgages

    Effective October 17, 2016, all high-ratio insured homebuyers must qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate. This requirement will also be extended to low-ratio insured mortgages effective November 30, 2016 (see below). This requirement is already in place for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.

    The Bank of Canada’s conventional five-year fixed posted mortgage rate is updated weekly and is available on the Bank of Canada’s website. The Bank of Canada’s posted rate is typically higher than the contract mortgage rate most buyers actually pay. As of September 28, 2016, the Bank of Canada posted rate was 4.64 per cent.

    Amongst other things, lenders and mortgage insurers usually assess two key debt-servicing ratios to determine if a homebuyer qualifies for an insured mortgage:

    • Gross Debt Service (GDS) ratio—the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income; and
    • Total Debt Service (TDS) ratio—the carrying costs of the home and all other debt payments relative to the homebuyer’s income.

    To qualify for mortgage insurance, a homebuyer must have a GDS ratio no greater than 39 per cent and a TDS ratio no greater than 44 per cent.

    The announced measure will apply to new high-ratio mortgage insurance applications received on October 17, 2016 or later. This measure will not apply to high-ratio mortgage loans where, before October 17, 2016: a mortgage insurance application was received; or, the lender made a legally binding commitment to make the loan; or, the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured.

    Homeowners with an existing high-ratio insured mortgage, including those renewing or transferring an existing high-ratio insured mortgage to another lender, are not affected by this change as high-ratio mortgage insurance spans the life of the mortgage.

  2. Changes to Low-Ratio Mortgage Insurance Eligibility Requirements

    There are also changes to the eligibility rules for newly insured low-ratio government-backed insured mortgages.

    Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low-ratio mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages.

    New criteria for low-ratio mortgages to be insured will include the following requirements:

    1. A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
    2. A maximum amortization length of 25 years;
    3. A property value below $1,000,000;
    4. For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the established amortization schedule;
    5. A minimum credit score of 600;
    6. A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
    7. If the property is a single unit, it will be owner-occupied.

    These changes will not apply to low-ratio mortgage loans where, before October 17, 2016: a mortgage insurance application was received; or, the lender made the loan or made a legally binding commitment to make the loan; or, the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured. The new low-ratio mortgage insurance eligibility requirements also do not apply if, during the period beginning on October 17, 2016 and ending on November 29, 2016, at least one of these three criteria is met and the loan is funded before May 1, 2017.

Related Links:

Technical Backgrounder: Housing Insurance Rules and Income Tax Proposals (Revised October 14, 2016), http://www.fin.gc.ca/n16/data/16-117_2-eng.asp

Disclaimer:

All content provided in this article is for informational purposes only and is not meant to be legal advice. Please consult your legal counsel or make an appointment to speak with us for further information.

Significant Changes to the Canadian Principal Residence Exemption Rules

After the recent announcement from the government of British Columbia introducing a new tax on foreign purchasers for the Vancouver area, the Department of Finance released a proposal to amend the Income Tax Act (the Act) on October 3rd, 2016, in an effort to stabilize Canada’s housing market.

Before discussing the changes to the income tax regime, it is important to set out the following background information on the taxation upon the sale of one’s principal residence.

First, Canadian resident individual taxpayers who sell their principal residence and realize a gain may claim a tax exemption when calculating the taxes from their gain. This capital gains tax exemption relies on a formula in paragraph 40(2)(b) of the Act. The formula is only applicable if the individual disposes of a property that is the individual’s “principal residence”.

Second, the definition of “principal residence” is contained in section 54 of the Act. The definition requires the individual taxpayer (or the spouse or common-law partner or child of the taxpayer) to have “ordinarily inhabited” the property. Court cases determine the meaning of “ordinarily inhabited”. The property also has to be a “capital property” of the taxpayer – this means that individuals who purchase and sell properties as a business are not eligible for the principal residence exemption because the properties are likely considered as inventories. Any resulting profits would likely be considered as business income that would not be entitled to the principal residence exemption.

Third, the principal residence exemption for individuals requires the individual taxpayer to file with the Canada Revenue Agency (the “CRA”) a prescribed form, Form T2091. However, the CRA’s previous administrative position was that Form T2091 was not required to be filed for individuals if the principal residence exemption eliminated all of the taxable gain.

There are also specific principal residence exemption rules relating to personal trusts which are outside of the purview of this article.

A Notice of Ways and Means Motion published on October 3, 2016 has set out the following proposed changes:

  1. Changes to the Principal Exemption Calculation Formula in Paragraph 40(2)(b) of the Act

    An individual who is a non-resident of Canada in the year of the acquisition of the principal residence property will be using a slightly different formula to calculate their principal residence exemption of capital gains tax. An individual who is not resident in Canada in the year that the individual purchased a residence will not—on a disposition of the property after October 2, 2016—be able to claim the exemption for THAT year. This new rule applies for properties sold after October 2, 2016. To give an example of this rule, an individual non-resident purchaser who buys and sells a residence in the same year after October 2, 2016 will no longer be able to claim the principal residence exemption for that year. The change in the formula is to prevent a non-resident of Canada from being able to dilute their taxable capital gain on the disposition of a principal residence.

    The above new rule does not apply to residents of Canada disposing their principal residence.

  2. Changes to CRA’s Administrative Position for Reporting Principal Residence Dispositions

    Concurrent with the Department of Finance’s announcement, the CRA announced significant changes to its administrative position regarding the reporting of principal residence dispositions. The CRA states the following amongst other things:

    Starting with the 2016 tax year, individuals who sell their principal residence will have to report the sale on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. Reporting will be required for sales that occur on or after January 1, 2016.

    You will complete Schedule 3 and file it with your T1 Income Tax and Benefit Return for the year you sell the property. If the property was your principal residence for every year that you owned it, you will make the principal residence designation in your Schedule 3. In this case, the year of acquisition, proceeds of disposition and the description of the property are the information that will have to be reported. Schedule 3 will be modified accordingly. Form T2091 (or Form T1255) will still be required for the designation in the case the property was not your principal residence for all of the years that you owned it.

  3. Changes to CRA’s Assessment Period

    The CRA is also given authority to assess taxpayers, beyond the normal assessment limitation period for a tax year, in respect of a disposition of real estate property by the taxpayer, in cases where the disposition is not reported in the taxpayer’s tax return for the year in which the disposition occurs.

    There are other proposed changes related to principal residence exemptions of personal trusts which are not covered by this article. Affected taxpayers should consult their tax advisors and adjust course accordingly.

Related Links:

Disclaimer:

All content provided in this article is for informational purposes only and is not meant to be legal advice. Please consult your legal counsel or make an appointment to speak with us for further information.

CBE Paralegal, Tjammie Overgaard, presents on “Wills & Estates Basics for Paralegals”, with the Continuing Legal Education Society of BC

On June 14, 2016, CBE Paralegal, Tjammie Overgaard, presented for The Continuing Legal Education Society of British Columbia (CLEBC) at a Wills & Estates Basics for Paralegals course in Vancouver, BC.

Tjammie’s presentation included a discussion on the importance of proper planning, organization and consistency in an estate planning practice, from a paralegal’s perspective.  She also presented on the rules, procedures and forms required to obtain an Estate Grant in British Columbia.  Tjammie’s presentation incorporated practical tips and advice for paralegals in implementing best practices, taking into consideration the recent developments in this area of law since the Wills, Estates and Succession Act came into force on March 31, 2014.

Tjammie joined CBE in 2012 and works as part of our Estate Planning team, drafting Wills, Powers of Attorney, Representation Agreements and providing paralegal support in all aspects of estate planning.  Tjammie also prepares applications for Estate Grants, and assists with transmission of assets, preparation of executor’s accounts and distribution to beneficiaries.

For Your Eyes Only

I just got a great picture of my friend bungee-jumping, but I probably won’t post it online.

Increasingly, information posted on social media sites is being used in personal injury actions, usually by the defendant’s insurers, as a way of refuting a plaintiff’s injury claims.

The use of social media evidence raises various privacy concerns. A picture of you posted online is arguably within the “public domain”; information that is available to the general public. There is no expectation of privacy in such materials, even if you only intended to share it with friends and family.

This applies not only to your postings, but also to materials relating to you posted by friends.  By posting pictures of others, you could inadvertently make yourself a witness in someone else’s lawsuit.  Evidence is generally only admissible in Court if it can be authenticated. In the case of evidence posted on social media, the best way to authentic it may be to call the person who took  or posted the picture, as a witness, to prove the circumstances under which the material was obtained.

How can you protect yourself? Consider changing your privacy settings, so that your profile and pictures are not readily accessible in a simple Google search.  Diligently review and remove yourself from pictures in which you were “tagged” or similarly identified. Before adding new “friends” to your account, consider if you know them well and are you comfortable with them seeing your details. Seek your friends’ consent, before posting pictures of them online.

Finally, use common sense; there are times when information need not be shared, and a bit of discretion could go a long way in sparing yourself headaches down the line.

Derek Young of Cohen Buchan Edwards LLP acts for persons injured in motor vehicle accidents.  You can contact him at 604.273.6411.

ICBC treats “worker-worker” accidents differently

Many of us spend a large part of our work day on the road; driving between work sites, visiting clients, or simply commuting to and from home.

We rely on our auto insurance to protect us from mishaps, particularly in the event of an accident. In the majority of cases, we can rest assured that our auto insurance is there when we need it. However, there are specific instances where your insurance may not protect you.

One example is the “worker-worker” accident. In accidents where the victim and the at-fault party are both “workers” engaged in “work-related activities” at the time of the incident , the Workers Compensation Act prohibits an injured party from suing the other motorist..   Not being able to bring a civil lawsuit often means that you will not be compensated for pain-and-suffering, and will be limited to recovering your wage loss and treatment expenses through Worksafe BC.  This prohibition is often relied upon by ICBC to deny coverage.

Figuring out whether your accident falls into the “worker-worker” category can be difficult, and the outcomes may be surprising. For example, an office worker who left her office early to work from home was deemed to have been injured within the “course of employment”, simply because she stated that she intended to work from home. A bicycle courier on his way to work carrying an undelivered package from the previous day was deemed to be engaged in “work-related” activities at the time of the accident.

If you have any doubt as to whether you may be deemed a “worker” at the time of an accident, it is wise to seek legal advice before dealing with ICBC.  For more information, call us at 604.273.6411 to speak with Derek Young.

It seemed like a good idea at the time… but

It is prudent to avoid being placed in a situation where you must defend your actions. Although an impatient driver behind you may insistently sound his horn, it is always better to wait. Readers might disagree, but the following case illustrates how you may be found partially at fault for a collision, having made a decision you thought to be reasonable at the time.

A motor vehicle accident occurred when the defendant was making a left turn from a northbound lane, intending to travel westbound.  The plaintiff was travelling southbound. The two vehicles collided in a traffic light controlled intersection.

The court considered the interplay between two sections of the Motor Vehicle Act:

When a vehicle is in an intersection and its driver intends to turn left, the driver must yield the right of way to traffic approaching from the opposite direction that is in the intersection or so close as to constitute an immediate hazard, but having yielded and given a signal as required by sections 171 and 172, the driver may turn the vehicle to the left, and traffic approaching the intersection from the opposite direction must yield the right of way to the vehicle making the left turn.

An “immediate hazard” was defined by the court:

The statutory obligation on a motorist faced with a yellow traffic light is set out in s. 128(1) of the Act:

When a yellow light alone is exhibited at an intersection by a traffic control signal, following the exhibition of a green light:

The court found that:

The court concluded that the collision was caused by the failure of both the plaintiff and the defendant to meet the standard of care required of reasonable drivers in the circumstances.  Because of the plaintiff’s breach of s. 128(1), she bore the greater fault.  Liability was apportioned 75% to the plaintiff and 25% to the defendant.

If you’ve been involved in an accident and would like advice on your rights and responsibilities, please contact us at 604.273.6411.

Federation of Asian Canadian Lawyers (FACL) – 3rd Annual Gala

On November 18, 2014, some of the CBE lawyers attended the 3rd Annual Gala held by the Federation of Asian Canadian Lawyers at the Sutton Place Hotel in Downtown Vancouver. It was a fun night networking with others, as over 220 members of the Asian Canadian legal community and guests attended the event. The keynote speaker for the evening was Winston Sayson, Q.C., of the B.C. Ministry of Justice, who shared snapshots from his childhood and experiences as Crown prosecutor – his speech was inspirational and enjoyed by all.

Cohen Buchan Edwards LLP wins Richmond Chamber of Commerce Business Award

Cohen Buchan Edwards LLP has been recognized by the Richmond Chamber of Commerce as a business committed to quality legal services and community philanthropy for over 35 years.

Cohen Buchan Edwards LLP was inducted in the Business Hall of Fame at the 37th Business Awards of Excellence held this November. You will meet the successful men and women of Cohen Buchan Edwards LLP.

I told my mother that if I was ever recognized by the Academy of Motion Pictures she would be in the audience and I would say hi to her in my acceptance. Well here we are and this recognition will do nicely. To my mother Babs Cohen – all my love for the support you and dad have provided.

Gary Cohen addresses the Richmond Chamber of Commerce

On behalf of the lawyers and staff of Cohen Buchan Edwards LLP, we say thank-you:

Congratulations to all the nominees and finalists for The Business Awards of Excellence.
To you, the business owners we offer this advice:

We are honoured and grateful for your recognition of Cohen Buchan Edwards LLP.

Gifts by Joint Tenancy

The term “joint tenancy” is not uncommon in most households. It frequently comes up when people share ownership of assets, such as real property or bank accounts.

The common understanding of “joint tenancy” relates to survivorship; upon the death of a joint tenant owner, the surviving owner receives the deceased’s interest in the jointly owned property. As a method of estate planning, people sometimes add family members as joint tenants, so that property transfers by right of survivorship on death. Although this may work out smoothly in some situations, it is not a one-size-fit-all arrangement.

If certain conditions are met, the courts may find a presumption of resulting trust against the survivor. This means the law presumes that the survivor is a bare trustee only, holding the joint asset in trust for the deceased person’s estate. A presumption of resulting trust in a joint tenancy might arise if the following conditions exist:

  1. A and B are not spouses;
  2. A transfers a joint tenant interest in A’s property to B;
  3. B did not give valuable consideration to A (i.e. no payment or services rendered).

If all of the conditions are met and the survivor is deemed to hold the asset in trust for the benefit of the deceased’s estate, the survivor may still rebut the presumption by proving that the deceased intended to gift the property to the survivor. These situations, which can result in costly litigation, are avoidable if proper estate planning tools are utilized in conjunction with the joint tenancy arrangement.

To learn more, contact Cohen Buchan Edwards LLP at 604.273.6411 and speak with one of our lawyers.

Agreements under the Family Law Act

The Family Law Act, in effect since March, 2013, recognizes agreements made between spouses dealing with family law issues, including division of property and debts. While many oral contracts can be binding, agreements addressing family law issues should be written. A written agreement may serve as evidence of its terms, while helping to prove that the parties considered legal principles that might be raised if the agreement is later challenged.

In particular, the Family Law Act allows a court to set aside an agreement concerning division of property and debts if there is evidence of:

  1. failure to disclose significant property or debts;
  2. procedural unfairness;
  3. lack of understanding of the nature or consequences of the agreement; or
  4. grounds under the common law for voiding the agreement;

and, in addition to these factors, the court concludes that it would replace the agreement with a court order that is substantially different from the agreement.

Courts can still decide to set aside an agreement even if none of the above factors are present, if it finds that the agreement is “significantly unfair”, also taking into account:

  1. the length of time that has passed since the agreement was made;
  2. the intention of the spouses when making the agreement;
  3. the degree to which the spouses relied on the terms of the agreement.

The threshold of “significant unfairness” required for the court to set aside an agreement is a new concept under the Family Law Act, with few court cases yet decided.

Agreements dealing with family law issues should incorporate the new legal principles found in the Family Law Act. Spouses entering into such agreements should consider seeking legal advice and should “put it in writing”. If you have questions about family law agreements, contact Cohen Buchan Edwards LLP at 604.273.6411 and speak with one of our family lawyers.