Monday, February 20, 2012

No Indefinite Tax Deferral with Trusts

Ontario Real Estate Source

By Brian Madigan LL.B.

There seems to be rather common misconception when it comes to trusts, and that is, that taxes can be avoided altogether.

This is not true. A trust files annual tax returns like everyone else and pays a rate of tax which is oftentimes higher than an ordinary taxpayer. It is only a testamentary trust which pays rates at the graduated scale, but misses out on personal deductions.

Capital gains taxes can be deferred for some time, but not as long as an individual might. An individual may defer capital gains until such time as they sell the asset or die, in which case, they are deemed to have sold the asset.

However, a trust is stuck with the “21 year rule”. Every 21 years a trust is deemed to have disposed of its capital assets at fair market value, whether they have been sold in fact or not. That means that they must report and declare the capital gain in their income tax returns filed for the 21st year.

As you can appreciate, that is not always the best strategy.

Trusts are not always the most appropriate solution but they can be utilized very creatively for estate planning purposes. They, in fact, are a very useful vehicle to hold a family cottage for the benefit of a number of beneficiaries. And, it may avoid the necessity of having to sell it to strangers!

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300.

Friday, February 17, 2012

Commission Protection for Real Estate Agents

Explanation of Commission Protection for Real Estate Agents

Ontario Real Estate Source

By Brian Madigan LL.B.

The Real Estate Council of Ontario (RECO) has mandated the participation of all of its registrants in an insurance program that includes among other coverages, a "Commission Protection Insurance Policy".

This policy is designed to safeguard registrants in the event of the theft, confiscation or mismanagement of their commission in a real estate transaction. So, if a commission is to be paid to a registrant, then it is protected under the insurance policy.

The policy arises out of a desire to protect registrants from the bankruptcy of brokerages. This occurred in the late 1980's and early 1990's when a significant number of brokerages went bankrupt. The creditors stepped in and took the money owed to other brokerages, and their own agents as well as the brokerages' own money. These funds were shared pro rata among all the creditors, and the registrants simply ranked as unsecured creditors.

On the other hand, the deposit itself was held in trust for a particular party in a transaction. Because it was trust money, it was protected from other creditors. But, the moment the deal went through, the deposit became the funds of the brokerage and were to be distributed to the co-operating brokerage and its own sales representatives. The only problem, of course, was that this was the ideal time for the creditors to step in and share in the distribution.

The commission protection insurance policy is designed to respond to a claim only if the commission is protected under a commission protection trust arrangement. So, the insurer here will only pay if the commission was held in trust. What that means is the trust arrangement must be satisfied just like the deposit before payment. In most cases, the funds will rank as trust funds in a bankruptcy, and eventually when distribution is made, these funds will be forwarded to the insurer.

There are some additional limitations and requirements under the policy before a claim will be paid. The limits of liability are $100,000 for each claim and $1,000,000 for each occurrence. There is a $250 deductible.

Let's have a look at some of the insuring agreements under the policy. First, there must be a loss of commission. Here, the insurer agrees:
· "to make payment on behalf of the insured
· the amount of any claim for loss
· sustained by a claimant
· in a trade in real estate
· in the Province of Ontario
· arising out of an occurrence
· discovered during the policy period"

And, "payment shall only be made for the benefit of a claimant".

The actual "named insured" in the policy is RECO. There is an extended definition of insured which includes:

1) RECO,
2) An employee, director or officer of RECO,
3) A registrant.

Loss is defined in the policy means:
· "loss of commission
· which has been entrusted to or received by
· one registrant in his/her professional capacity
· but is owed to another registrant
· in his/her professional capacity"

Consequently, the commission must be held by one registrant for another. The commission must actually exist. It cannot be a simple entitlement by way of contract to obtain a commission in the future. This is real money paid to a registrant which is later to be paid to another registrant. The usual arrangement would be a deposit on a real estate transaction, which following successful closing is to be utilized to pay commissions to the co-operating brokerage and the participating sales representative.

Trade is defined in the Real Estate and Business Brokers Act, 2002. It basically means a disposition or acquisition of real estate, including both offers and attempts to acquire or dispose of real estate. Consequently, any kind of advance payment on account of an opinion, or any other collateral issue would not be covered. Such activities are not considered to be "trades", even though money may have been paid to the brokerage. This would apply to both partial payments on account, as well as the final payment.

The appropriate remedy here would be to have the brokerage agree to hold the money in trust, and although the insurance would not apply, the common law rules related to trust property would.

The entitlement to the claim is an occurrence which is defined in the policy as follows:

· "....the insolvency of a registrant
· or the theft, fraud, misappropriation or wrongful conversion
· directly or indirectly by a registrant
· or present or former employee, director, officer, or manager of a registrant
· of moneys or other property
· entrusted to or received by the registrant
· in the registrant's professional capacity"
There is also an expanded explanation in respect to “occurrence”:

“Regardless the number of such incidents of insolvency or the number of such acts of theft, fraud, misappropriation or wrongful conversion, they will be grouped together as and amount to only one Occurrence regardless the number of Claimants who suffer a Loss.”

That provision has been recently added to the policy. The wording may indeed be rather awkward but nevertheless the meaning is clear. The insurer will only payout a maximum of $1,000,000 no matter what.

So, the intent here is to cover all moneys advanced to a registrant in the course of trading in real estate at such time as there is an obligation to hold such funds for another registrant. It applies to trust money (entrusted) and also money that was supposed to be held in trust but was not (received).

Clearly, it is the second part which may cause delay in investigation and settlement of any claims. Moneys placed in trust and removed without authorization can be traced. These are known transactions. Moneys which were delivered to the brokerage but never placed in trust may be elsewhere and present a much more challenging task for investigators. They are covered too.

Delays in processing settlements can easily arise where:

1)     claims are not presented in a timely fashion, and
2)     funds intended to be placed in trust, were deposited elsewhere. 

There is another RECO insurance policy called the Consumer Deposit Insurance Policy which protects the consumer. This policy only responds to the commission aspect of those same funds.

There are some important exclusions in the policy. Let's say ABC Realty is in difficulty and has been reported to RECO. The commission protection policy will not cover claims against ABC Realty. If that took place before the policy began, then there is no coverage. If the report to RECO takes place after the policy commences, then it will protect other registrants against loss of the commission through ABC Realty. Only RECO would be aware of any problem registrants. This situation is not that likely to arise in practice. The program has been in operation for several years and this exclusion is designed to protect the insurer and limit its exposure to just the claims within its policy period.

But, here is something that every sales representative needs to watch out for. The policy does not apply to any claim:
· By a salesperson
· Employed or contracted to a brokerage
· Where the brokerage fails to set up a commission trust account
· Unless the salesperson has used his/her best efforts
· To determine that the brokerage has set up
· And maintained a commission trust account

This refers, of course, to the salesperson's own brokerage. There is a due diligence requirement. The salesperson must determine: is there a commission trust account? Is that account specified in writing under my contract of employment or my independent contractor's agreement? Am I being paid out of that account? So, take a copy of all commission cheques, and photocopy them. Don't just keep the stubs! This will show that the commission trust account has been "maintained". It's not enough simply to say that when I joined the company 5 years ago, it had a commission trust account. Did you appreciate that your last trade was paid out of the general account? At that point, you were at risk, and you didn't notice, so, the problem is that once that payment was made, that was the "red light" that should have alerted you to a problem. The failure to recognize that problem precludes entitlement to benefit from insurance on your next deal.

A claim is deemed to have been reported to the insurer on the date that RECO becomes aware of evidence of an occurrence. RECO will then give notice to the insurer as soon as practicable, but no later than 36 months after the discovery.

RECO has a period of 5 years to investigate the claim. It is RECO's obligation to submit a detailed proof of loss.

This policy of insurance is "second payor". That means that if there is any other insurance policy or other indemnity available to satisfy this loss, then, this policy will only come into pay the excess leftover (if any) after the first policy of insurance has paid out.

The insurance company is subrogated to the rights of the insured. Subrogation is an insurance term referring to an "automatic assignment". The insurer once it pays out under a policy has the right to sue in the name of the insured any party who might otherwise be responsible for the loss. So, the person who caused the loss doesn't necessarily get off the hook. The insurance company makes a business decision as to whether it is feasible to commence litigation and recover the loss from the offending party. This, of course, includes any registrant whose dishonesty may have lead to the loss.

Remember that the policy said that payment can only be made for the benefit of a claimant, who is defined as a brokerage, broker or salesperson or their estates who has sustained a loss provided that such brokerage, broker or salesperson was not responsible for the loss. 

There are several additional defined terms under the policy: commission, commission trust, and commission trust account:

a) commission - is the remuneration owing to, to be paid to, or earned by a registrant for a trade in real estate in Ontario. 

The obvious exclusions would be fees, appraisals, and opinions. Referrals from out of Province transactions would not be covered.

b) commission trust - means a constituted trust where all deposits and other monies received by or due to a brokerage directed to satisfy commission payable or damages or other compensation in lieu of commission and applicable HST on any trade and real estate are received and held by the brokerage in trust.

The provision goes on to confirm that the beneficiaries of the trust shall be the listing brokerage, co-operating brokerage, the listing salesperson and the co-operating salesperson. You will find this particular document contained in the standard form agreement of purchase and sale. If it is not signed, then there is no commission trust established. And, if there is no commission trust, then the policy of insurance will not respond to the loss.

c) commission trust account - means a trust account maintained at a Canadian chartered bank or trust company and designated as a "commission trust account". The commission trust account shall be used only for the receipt and disbursement of commission trust funds, and kept separate and apart from the statutory trust account that a brokerage is required to maintain for customer funds.

This provision is important because the salesperson is obligated to ensure that such account is both established and maintained. These two matters are both conditions precedent to recovery under the insurance policy

If the commission is over $100,000, only the first $100,000 is covered. Also, there is a $1,000,000 limitation upon the total amount of the insurance coverage per occurrence. 

If XYZ Realty holds 10 deposits in trust in the total amount of $2,000,000 and steals all the money, then pro ration applies. The maximum liability for the theft (occurrence) by XYZ Realty is $1,000,000 under the policy. No matter how many actual thefts, there is just one occurrence, so the $1,000,000 overall cap applies.
Upon the assumption that there is one occurrence, or one single theft, at one time, then the claimants will share equally in the $1,000,000. That means that they would each only receive one half of their actual claims.

This creates a potential problem. If XYZ Realty goes under, and was spending the trust money, a $1,000,000 limit is not very high. If the average deposit is $25,000 on a $400,000 house deal, then XYZ Realty only needs 40 deals to reach the limit. Many successful brokerages would have over 100 transactions where deposits are held for sellers in mid June each year.

In my view, the upside limit for coverage is quite insufficient. The limit should easily be 5 times the present policy limits, in order to reach an adequate limit for insurance purposes. The purpose of insurance is "risk management" and the risk of commission loss through theft is still there.

So, if you are anxious to protect your commission:

1) Consider having your brokerage hold the deposit (knowing that your brokerage is under the $1,000,000 limit

2) Having the seller's brokerage confirm that they do not and will not hold more than $1,000,000 in trust for all potential registrants entitled to share in commissions

3) Specify that the deposit in the real estate transaction is to be paid to the seller's solicitor, in trust

4) Specify that the deposit in the real estate transaction is to be paid to the buyer's solicitor, in trust

5) Specify that some other stakeholder, third party hold the deposit in the real estate transaction, in trust

From a risk management perspective, 3, 4, and 5 place the funds beyond the reach of the brokerages. They reduce the risk but do not afford protection under the commission protection insurance policy. Items 1 and 2, lower the risk but still permit recovery under the policy.

The best protection is to ensure that you are employed by an established, reliable, trustworthy brokerage with a proven track-record.

So, please beware that all commissions aren't necessarily insured.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300.

Sunday, February 12, 2012

False Claims in SPIS fall under Protection of Homeowners' Policy

insurance policy
Insurer Must Back Up False Statements Made by Seller

By Brian Madigan LL.B.

In Aiken v. Unifund Assurance Co. the Superior Court in Ontario had to consider whether there was a duty to defend under a homeowners’ policy, where the claim arose as a result of a false Seller Property Information Statement.

A purchaser sued a vendor claiming misrepresentation and fraudulent concealment. The purchaser later amended the claim presented to include negligence. That is an unintentional tort and might be covered under an insurance policy.

In the Amended Statement of Claim, it is alleged that the Applicants:

1.     falsely, knowingly, carelessly or negligently failed to disclose or misrepresented a number of facts about the property in the SPIS,
2.     that they consciously omitted to disclose material information relating to the subject property:
a)     with knowledge that the omissions would mislead the Plaintiff or
b)    were careless as to whether such omissions would mislead the Plaintiff;
3.     that they deliberately failed to disclose information about the subject property; and
4.     that they were negligent in relation to information and renovations relating to the subject property.

The Court commented on the duty to defend as follows:

“An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim.  Similarly, where a claim raises the possibility of indemnity by the insurer, the insurer must defend the action on behalf of their insured.  The recent Supreme Court of Canada decision in Progressive Homes Ltd. V. Lombard General Insurance Co. of Canada found:

                        It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy.”

So, the Court is saying that the duty to defend does not depend upon the merits of the plaintiff’s lawsuit. Whether it would ultimately be successful is not relevant. The insurer must come to the rescue and pay the defence costs. That’s the point of having insurance in the first place.

The Court also reviewed with approval another recent case:

“The case of Poplawski v. McGrimmon involved a similar fact situation to the one at issue.  In Poplawski, home owners were sued by the purchasers after the sale of their home for alleged misrepresentations and negligence as it related to a SPIS.  The homeowner’s insurer refused to provide coverage and claimed an exclusion under the policy applied which placed the claim outside the coverage of the policy and therefore resulted in no duty to defend or to indemnify.  Mr. Justice C. McKinnon disagreed and found the exclusion did not apply and held there was a duty to defend.  His reasons and findings were upheld by the Ontario Court of Appeal.”

Both cases involved an interpretation of the insurance contract, being a limitation to prevent a homeowner from claiming under the policy themselves. In this case, as well as Poplawski, the Court felt that that principle was still intact, since the homeowners had sold their properties.


If there is insurance, then there will be more claims. Also, why allege fraud, if fraud is not covered under the insurance policy. Just allege negligent behaviour and then the insurance company must come to the rescue.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300.

Thursday, February 9, 2012

Toronto Real Estate Returns in January 2012


ORES Real Estate Index for January 2012

 Ontario Real Estate Source

By Brian Madigan LL.B.

Here is the “ORES REAL ESTATE INDEX” which tracks the average resale prices of single family homes and condominiums in the Greater Toronto Area (GTA). It also tracks certain benchmark comparisons such as the price of oil and gold, as well as the Consumer Price Index.

In addition, the stock market indices for Toronto, and the three largest US markets are also compared.
For ease of comparison, everything we look at is worth 100 points on the Index as of 1 January 2005. That time period compares favourably with the five year average used as a standard benchmark comparison in the mutual fund industry.

As of 31 January 2012, here is the Index representing average prices with the December 31st, November 30th, October 31st, and September 30th, numbers appearing in brackets for comparison:

Real Estate

143.45…..(139.70)…..(148.67)…..(147.97)…..(144.01)…..GTA single family

Other market comparisons

407.76…..(357.92)…..(408.18)…..(402.57)…..(378.73)… (per ounce)
223.98…..(224.82)…..(228.30)…..(211.99)…..(186.24)…..oil (per barrel)
135.29…..(129.89)…..(132.60)…..(133.12)…..(126.29)…..TSX index
143.45…..(139.70)…..(148.67)…..(147.97)…..(144.01)…..ORES sgl family
114.15…..(114.81)…..(114.72)…..(114.53)…..(114.25)….CPI index
136.43…..(126.32)…..(127.05)…..(130.16)…..(117.12)…..NASDAQ index
120.43…..(116.49)…..(114.83)…..(113.97)…..(104.04)…..Dow Jones index
111.10…..(106.46)…..(105.56)…..(106.10)…..(95.78)……S&P Index

Using the Index

Just a quick note on reading the information. Have a look at the ORES Index for Real Estate (single family homes). As of the end of January, the index stood at 143.45. That’s a 43.45% increase in 85 months. That means the increase is 0.511% monthly, or it could also be expressed as 6.13% annually. The performance here is shown without annual compounding for the sake of simplicity. It is noteworthy that the annual percentage was 7.01% as at the end of October. Both numbers were calculated using 1 January 2005 as the starting point.

The other statistics are reported in a similar fashion for the ease of comparison.

Observations (on the Index)

As we use index, there are several notable comments:

· Commodity prices are just commodity prices
· There is no other “extra return” for commodities
· The same is true for the CPI
· The CPI is a benchmark to see whether you are keeping pace with inflation, that number is 114.15; increases have been modest and inflation appears to be under control; this is significant. There was even a slight decline since December.
· For a realistic performance goal, you should aim for CPI plus 3.5% annually
· Stocks provide dividends in cash or extra stock. This return is additional to that shown in the stock market indices
· The stock market Indexes only measure the survivors. So, in 2009, both GM and Chrysler would have been dropped due to the bankruptcies
· If you held GM and Chrysler, you lost everything, but two new companies moved in to replace them in the Indexes
· Real estate offers a return in terms of occupancy. You can rent out the property and receive income, or occupy the property and enjoy it yourself

Comparative Observations Using the New Index

· Gold overall is still the best performer, reaching 407.76, increasing this past month by almost 9%, but just making up the ground it lost in December; note the peak for gold was in August 2011 at 423.96
· Oil was the most volatile, (it dropped in half over our measurement period), also declining this past month
· Real estate was the most stable, with solid predictable returns at about 6.13% annually
· Our own stock market posted reasonable gains, but still falls behind single family homes over the measurement period, however, don’t forget that the TSX is still well off its highs and is substantially resource based
· All three US stock market indicators now show positive numbers, and may truly be a better overall indication of the true state of the North American economy. The S&P matches inflation, the Dow is now measurably under the Nasdaq which now exceeds our own TSX


For steady, predictable, measured gains pick real estate. It’s a solid performer with lower risk (less volatility) and generally moving in a positive direction.

And remember, when it comes to real estate, it’s never “wiped out” completely, like GM or Chrysler stock. So, unless you’re sitting on the edge of a tsunami, you’ll still own something when the storm is over.

For a benchmark of success, there’s 1,000 years of history to point to a rate of return in real estate being about the equivalent of 5% per annum, simple interest (non-compounded). That means that real estate doubles in value every 20 years. There are a lot of companies (now bankrupt, including CanWest Global, and many US Banks) that would have been happy with that return.

The present rate of return although high by historical standards appears to be sustainable in sought after locations like the GTA. At the moment, over our measurement period we are looking at a 1.13% annual premium over the benchmark 5%.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300

Tuesday, February 7, 2012

Brekland Realty Group Subject to Suspension Order

Brekland Realty Group Subject to Suspension Order

Ontario Real Estate Source

By Brian Madigan LL.B.

It is indeed unfortunate that the Real Estate Council of Ontario (RECO), the governing body of the real estate profession has found it necessary to issue a suspension order.

Such an order causes difficulties for the 211 employed sales force and the clients.

Hopefully, the real estate profession will join together to provide assistance to the sales staff and their respective staff until permanent arrangements can be made.

The public is encouraged is contact RECO in the event that they have a transaction already booked.

Sales staff, being registered either as brokers or sales representatives may not “trade in real estate” until they have registered with another brokerage.

In the interim, I would encourage other registrants to assist any such brokers and sales representatives, as may be required, until they have found a suitable new brokerage.

This is a time to “rally the troops” and “pay it forward”. Whatever assistance is required by the newly displaced brokers and sales representatives, now “in limbo”, should be provided, “no strings attached”.

I am sure the entire industry wishes these brokers and sales representatives, the best and an opportunity to enjoy success in 2012.

Here is the public announcement as it appears on the RECO website; the issues are very serious:

“RECO freezes accounts and suspends registration of Brekland Realty Group

Consumer deposit insurance protection available to public

Thursday, Feb. 2, 2012 (Toronto) - The Registrar of the Real Estate Council of Ontario (RECO) has issued an immediate suspension of registration to Monster Realty Corporation which operates as Brekland Realty Group. To further protect the public interest, the Director, under the Real Estate and Business Brokers Act 2002(REBBA 2002), has frozen the bank accounts of the brokerage.

RECO has also charged the Mississauga-based real estate brokerage with failing to disburse trust funds in accordance with the terms of the trust.

REBBA 2002 requires all employees of a suspended brokerage to also be served with suspension orders. As a result, the brokerage and its 213 employees can no longer trade in real estate. The employees can apply to RECO for transfers to another brokerage.

“The suspension order and the charges relate to a significant shortfall of funds from the brokerage’s trust account. After RECO booked a routine inspection, it was revealed that a large sum of money was missing from the brokerage’s trust account,” said Registrar Allan Johnston.

Brekland Realty Group’s head office is located in Mississauga and it operates three branches in Mississauga, Milton and Oakville. The company is owned by Jason Laramee of Oakville.
REBBA 2002 allows an immediate suspension order to be used in circumstances where the Registrar considers it to be in the public interest.

“The investigation is ongoing and further charges may be laid,” added Johnston.

Any home buyers or sellers who have representation agreements or deposits with Brekland Realty Group can visit for further information. All real estate brokers and salespersons in Ontario must participate in an Insurance Program that provides consumer deposit protection.”


For the public: please contact RECO directly for any reassurance required.

For brokers and sales representatives: contact another registrant for assistance with any transaction, or if you are unsure or uncertain about such, then please do not hesitate to contact me and I will provide whatever assistance to you that I can.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300.

Sunday, February 5, 2012

Toronto "HOT" real estate market

Toronto City Hall
January 2012 Sales Figures for Toronto and GTA (Up or Down?)

Ontario Real Estate Source

By Brian Madigan LL.B.

The 2012 market started out with a bang! The sales were 4,567 compared to 4,199 last year.

Pressure also was placed upon the price which moved up to $463,534. Last year it was $425,762.

Sales are up 8.76%

Prices are up 8.87%

Those are the year over year numbers. So, that certainly appears to have things going in the right direction.

That would seem to be good unless you looked carefully at the numbers and realized that the high number was achieved in May 2011. That was $485,520, which means that we are still about $22,000 shy of the peak.

Are the prices up this January?

Compared to what?

Yes, compared to last January.

No, if compared to the market peak.

You be the judge as to whether the market is up or down. But, it will be interesting to see how different people comment on the market.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300.