Mortgage Broker is the magazine of the Canadian Mortgage Brokers Association and showcases the multi-billion dollar mortgage-broking industry to all levels of government, associated organizations and other interested individuals.
Issue link: http://digital.canadawide.com/i/906457
12 | fall 2017 cmba-achc.ca CMB MAGAZINE letters to the editor proud to say I have completely paid off our mortgage. However, I never want to put my family in the aforementioned situation again (i.e. using our house as collateral for business). As such, I retain money in my business in order to protect my business from a potential downturn or for new opportunities – which is smart business, right? Not so, according to the government's new proposals for taxing investment gains in my company. As a business owner, my safety net (or capital for future ventures) is the money I keep in my business – which the government is now suggesting is unfair and should be taxed at the personal rate. Once again, I disagree. I believe responsible businesses should be prepared for downturns and ensure they have adequate capital to weather economic storms (which happened to me in 2008). Unlike Ford and Bombardier, independent businesses like mine cannot rely on the government to bail us out in times of need. If you were to talk to any of the thousands of small business owners across Canada, I know you would find a very similar story to mine. ese same businesses employ millions of people, provide uniqueness to our marketplace and contribute to their communities. So when the government put forth these tax proposals, many of us were hurt. We were hurt that our government had neglected to realize the contributions we make to the country and the challenges we face as independent businesses, and told the public that we are somehow taking advantage of the system. Nothing could be further from the truth. I urge you to look at the world through an independent businessperson's eyes and reconsider the proposed changes to small business taxation. From my laptop, on my vacation, Kurt Wipp Appealing the Criminal Rate of Interest I have some reactions to the article entitled "High Risk, High Rates" in your Summer 2017 issue. first, I want to express my thanks for this article. It has brought to my attention something very important of which I had not previously been aware. seCond, I want to point out an error in the article. All references to the overnight rate imply that it is 0.5 per cent – which is no longer correct since it was changed to 0.75 per cent on July 12, 2017. For example, the new proposed criminal rate would be 20.75 per cent and not 20.50 per cent as stated in the article. third, I want to point out that lowering the criminal rate to 20.75 per cent could seriously impact the availability of private money. I am, among other things, both a real estate investor and a private mortgage lender. e focus of my letter is primarily about this issue. For example, there is an actual second mortgage loan on which I am about to lend that might very well be illegal if the proposed revision were currently enforced. If that were the case, then this borrower would not be able to obtain a second mortgage through me and probably most, if not all, other private lenders. Also, I wanted to provide you with a short self-introduction so that you understand my perspective and qualifications to speak on this issue. I am a licensed mortgage agent in Ontario and have been for about one year. In other words, I am relatively new to this aspect of the mortgage business. Previously, I was employed as an actuary for over 30 years. I therefore am thoroughly familiar with interest calculations and am probably better equipped than most to understand the implications of the phrase in Section 347 of the Interest Act, which states: "Criminal rate means an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles." Finally, I want to provide you with a simple example that illustrates the potential problem. Please note that all of the interest rates mentioned below have been rounded to the nearest basis point. Also, the results have been calculated in accordance with the method required for calculating criminal interest rate. For simplicity, I will refer to this method as the CCM (Criminal Code Method) below. Consider a simple private loan for $100,000 for a one-year term with only interest payments and a lender fee. For simplicity, let's first assume that there are no other costs to the borrower (i.e. no broker fee, no legal fees, etc.). Let's look at just four possible scenarios: (A) Lender Fee of 0% and interest only payments of 15% made at the end of the year at maturity. (B) Lender Fee of 0% and monthly interest only payments of $1,250 (i.e. 15% per year) (C) Lender fee of 3% and monthly interest only payments of $1,000 (i.e. 12% per year) (d) Lender fee of 15% and no interest payments (i.e. 0% per year) In practice, each of these scenarios would be quoted as saying that there was a 15 per cent return to the lender. is is a very accurate measure of the return to the investor if none of the interest payments can be reinvested during the term and if the lender fee is zero per cent (i.e. cases A and B). However, it significantly understates the investor's return if the lender fee is greater than zero per cent. e larger the lender fee, the more significant the understatement. However, this is a topic for another time. If we assume that the lender fee is considered interest for the purposes of CCM (and I think that it should be), then each of these four scenarios will produce a different interest rate as calculated by CCM. ese rates are: (A) 15.00% (B) 16.08% (C) 16.37% (d) 17.65%