HELOC and Mortgage Interest as a deduction - - - CEN-TA Cross Border Services

Hi David,

Even though I have not get any reply to my last few emails (with a few questions) - not sure if I'm not doing something right or may be it just doesn't reach you, I'm still trying to ask you a question (only one this time).

We're living in a condo and we a HELOC against it. I've been using money from this HELOC to buy a few of my rental property (as a downpayment) and do a Smith Manuver. We're planning buy a new condo (a bigger one since we're expectin of expand of our family). The price for the condo will be almost twice as big as the current amount we own to the bank (mortgage & HELOC together)/

The downpayment for the new property will coming out of HELOC.

My wife is thinking to move to a new place right away but I'm proposing to keep it as a rental (and subsidise it from our pocket) and have all interest (on mortgage and downpayment money) as tax deductable; and then a few years later switch the property purpose for CRA (so current will be a rental and a new one will become our residential).

What do you think we should do (and if my approach is good) and what way would you suggest here???

Thanks in advance and looking forward to hear back from you.

Thanks,
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david ingram replies:

If your name is not in the Subject Line, it will not likely be replied to. Even then, it is getting unlikely because of the sheer number of questions. To date it has been very rare for me to charge for a question unless it is a phone consultation or an "in person". However, by October 1, 2007, I am going to start a pay in advance PAYPAL account for people who send questions. It is the only way to separate them out. As it is, my clients are being ignored half the time and people who will never be a client are getting a question answered.

For instance, I have been gone for three days and on my return have 561 emails to try and reply to. I will answer about 20 and erase the others - No one can answer the email I get so no one should consider email sent to me to be delivered to me. As I say, if they are not replied to in two or three days, they are gone. I do look for PAYING CLIENT and the Client's name as it suggests in the subject line and will always try and answer another one first for people who have been to see me and have a follow up dealing with the original consultation.

You are starting over here.

However, in general, if you are taking down payments for rental properties out of a HELOC on your own residence, the interest is clearly deductible. BUT, if you take a down payment out of the HELOC for a unit you move into, the interest is NOT deductible.

To be deductible the interest must have been paid on money borrowed for investment purposes.

I gave a free seminar on the subject three weeks ago and we had 91 people out.

James Golombek of Trimark Fund had an interesting article on page FW4 of the Financial Post Weekend. He suggests that one should say goodbye to the Singleton Shuffle and then proceeds to say that Cash Damming is fine. In fact, I think is article is positive and the headline writer misread it.

The following is what I handed out at the seminar. As I have always said, I believe that proper paperwork will still get the mortgage interest as a deduction if a business reason is incorporated into the process

I have no idea what you should do from your question and am not prepared to spend an hour doing what if's with another 400 questions.

The following is what I handed out at the free seminar which lasted from 12 noon to 5:30 at night on August 12th.

[email protected]: Please see bottom of message if you wish to unsubscribe.
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My question is: Canadian-specific

QUESTION: We have a rental property generating regular rental income and got enough equity to cover our outstanding principle residence's mortgage. Is there a way we can move this equity to pay off the principle residence's mortgage and still be able to legitimately claim interest payable as tax deductible?

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david ingram replies:

Had 91 people at a free seminar at the Holliday INN on Sunday August 12th.

The following is the handout at that seminar. It includes the recent court cases, the history and a couple of worksheets. Hope it helps

Hope it helps.

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We recently bought a 4plex in Kitimat as a rental investment. We used a Scotia home equity loan for the down payment and a TD mortgage for the other 75%. We have a mortgage on our principal residence in Langley of $244,000. Our monthly payments on the 4plex will total about $1,300 , and the rents will be about $2,000. What would be the smartest method for paying this mortgage? What do we do with the excess cash flow? Is it possible to deduct the interest on our primary residence mortgage? Thanks.

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david ingram replies:

I had some 90 people at a free seminar on this subject today and am just about all "free"ed up on the subject.

You should be taking the rent you receive and use it to reduce the non-deductible mortgage on you r Langley house.

You can find out more by reading my November 2001 Newsletter in teh top left hand box at www.centa.com.

Reading Fraser Smith's Book 'THE SMITH MANOUVRE' will also give you ideas on how to make the Langley Morgage deductible.

Your excess flow should be used to reduce the $244,000 mortgage as soon as possible. Of course, the interest on the down payment loan is also dedcutible on Form T776.

The following is part of the handout at today's seminar -

David Ingram's US/Canada Services

Mortgage Interest as a Deduction in 2007 – dealing with GAAR

I first conceived of this method in 1975/76 when a client of mine had a rental duplex and had a tenant who was injured in a car accident. It was at the time of the changeover from private insurance to ICBC and the injured single mother tenant was waiting for an insurance settlement.

My client allowed his tenant to stay in the half duplex for more than a year and to stay afloat him self, he borrowed money to pay the duplex bills. When doing his 1975 tax return, we deducted the interest paid on the loan because the purpose of the loan was clearly to fund the rental duplex.

When he finally got his cheque for more than $5,000 from the tenant, it would have been all over if he had just paid the loan off and we had not thought about it. But my client, bless his soul, phoned and asked if he had to pay off the loan (which was deductible) or could he use the money for another non-deductible purpose.

My answer, after thinking about it for a day or so, was that he could us e the $5,000+ for any purpose he could think of. At the same time, I said this, I was also writing something for the North Shore Credit Union and put my ‘new’ method of making the mortgage interest deductible in this report which they then published as part of an advertisement in the North shore News in (I think) November, 1976.

I expanded it and it was next published by Hancock House Publishers in my Investment Guide in 1979, 1980 and 1985 and 1991 and BC Business magazine in 1979. Sometime in there, the Ontario Dental Association also ran it in their magazine. It then became part of the internet and can be found in the March 1997 and November 2001 newsletters.

I was pretty heavily involved in the Federal Conservative Party (ran for the North Shore Nomination in 19780 and am proud to say that we got mortgage interest as a tax deduction on the 1979 federal Income tax return.

Unfortunately, Joe Clark, the Prime Minister at the time, did not count the number of yes votes and lost a non-confidence motion on Dec 12, 1979, and on Feb 18, 1980, Pierre Trudeau was re-elected as Prime Minister and even though there was a 4-page form and a line on the T-1 General that year, the deduction was killed retroactively by the liberal government and we no longer had this benefit for all without manipulating the paperwork.

In 1981, Fred Snyder was running a series of seminars and teaching my method to a lot of different groups. In one seminar, he taught it to Realtors, McCauley, Nicolls, Maitland and Company and the manager Fraser Smith wrote Fred a letter thanking him for explaining the methods. In 1985, Fraser Smith than published the SMITH MANOUVRE which explains the method in great detail and at the time, VANCITY Savings Credit Union was featured in the book and was very good at setting up the method.

Then on Oct 27, 1988 John Singleton had approximately $300,000 in his lawyer’s capital account. He got permission to take the $300,000 out (it was his but was being used as security in his law practice). He used it to buy a house and then used the house as security to borrow $300,000 which he then put into his capital account; this was all done in one day. Of course, since the money in the account was now borrowed for business purposes, he deducted the interest on his 1988 and 1989 returns and the Tax Department turned him down. He appealed and lost in the Tax Court of Canada but won in the Federal court of Appeals. The CRA appealed to the Supreme Court and in October 2001, the Supreme Court of Canada found in favour of John Singleton in a 5 to 2 decision.

This case has now been quoted and cited in many other cases. In OVERS 2006 TCC 26, Mr Overs paid back a shareholder-loan, which would have been included in his income. By doing what he did, co-incidentally, the interest expense was made deductible.

Mrs Overs borrowed funds to purchase shares of his holding company at their fair market value. However, Mr Overs did NOT use a 73(1) rollover as Lipson did. Therefore, no capital gain was realized but the attribution rules in section 74(1) worked to transfer the interest expense on the wife’s borrowed funds -- back to him.

Judge Little turned down the CRA’s claim that tax benefits arose from this series of transactions. The taxpayer followed the Income Tax Act in repaying his loan and transferring the shares to his wife. Justice Little ruled that the transactions were NOT avoidance transactions and therefore GAAR did not apply. Judge Little ruled that none of the transactions could be considered “abusive tax avoidance”.

And Judge Bowman ruled in favour of Evans (2005 TCC 684). JuJudge Bowman found there were no avoidance transactions in what could only be described as a super complicated and very sophisticated series of business restructurings that ended up with a former shareholder receiving cash by using specific rules in the Act, including sections 85

(rollovers), 110.6 (capital gains exemption), 112 (tax free inter-corporate dividends), 74.5 (attribution) and ss. 84(3) (deemed dividends).

Judge Bowman assumed that there ‘were’ avoidance transactions. He then dealt with them on an individual basis to decide whether the avoidance transactions were ‘abusive’. His final decision was that provisions of the Income Tax Act operated as intended and there could not be any abuse.

However, he was not of the same opinion with the LIPSON Family who lost in Lipson v. The Queen, 2006 TCC 148

Mr Lipson owned a profitable business and:

The Lipsons contracted to buy a home in Forest Hills in Toronto
Mrs Lipson took out a demand loan to buy share in the family business from her husband.
The shares were transferred to Mrs Lipson as a section 73(1) rollover
Mr Lipson used the funds to buy the house
They “both” took out a mortgage on the house to repay the demand loan

Judge Bowman used the Section 245 GAAR provisions to rule that the Lipson family was guilty of Gross Abuse of the Tax system. Perhaps, if they had a business reason for the loan or had not used the Section 73(1) tax free rollover, he would have found in their favour as he did with the EVANS 2005 DTC 1762 case. In the LIPSON case the wife’s borrowing did not put income in her hands and it was unclea

The following was an excel spreadsheet that was presented and you might be able to figure it out.

1	WHY BOTHER MAKING YOUR MORTGAGE INTEREST DEDUCTIBLE??								1
2	by david Ingram - www.centa.com -					(604) 980-0321			2
3	WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING							$ 100,000.00	3
4	Let's pretend that you are paying 6%					0.06	times	6000.00	4
5									5
6	How much do you have to earn to pay					6000		6000.00	6
7	At a	0.3	marginal tax rate			you would need		8571.43	7
8			you would pay tax of					2571.43	8
9			To Have enough to pay the interest of					6000.00	9
10	TWO								10
11	WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING							$ 300,000.00	11
12	Let's pretend that you are paying 6%					0.06	times	18000.00	12
13									13
14	How much do you have to earn to pay					18000		18000.00	14
15	At a	0.35	marginal tax rate			you would need		27692.31	15
16			you would pay tax of					9692.31	16
17			To Have enough to pay the interest of					18000.00	17
18	THREE								18
19	WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING							$ 600,000.00	19
20	Let's pretend that you are paying 6%					0.06	times	36000.00	20
21									21
22	How much do you have to earn to pay					36000		36000.00	22
23	At a	0.4	marginal tax rate			you would need		60000.00	23
24			you would pay tax of					24000.00	24
25			To Have enough to pay the interest of					36000.00	25
26									26
27	You can easily see that the larger the mortgage payment								27
28	the more money you have to make and the larger your								28
29	marginal tax rate would be - BC runs from 23% up to $35,000								29
30	and is 44% over $118,000 or so								30
31	DEDUCTIBLE								31
32	But if the last mortgage of			600000	could be deductible			36000.00	32
33	the interest paid of		36000	would get a tax deduction of				14400.00	33
34		and you would only need to earn the difference						21600.00	34
35		instead of the		60000		on line 23 above			35
36	Why only	21600							36
37	Well, you could earn		21600	, borrow		14400	(line 33)		37
38	for a few days from Fred, and then pay Fred back with the refund								38
39									39
40	The difference in earnings is			60000		line 23			40
41	minus new necessity of			21600		Line 34			41
42	for an earnings savings of			38400					42
43	or a monthly difference of			3200					43
44									44
45	And, if you are self employed as I am, I would have to do								45
46	$200,000 of business and pay $140,000 of expenses to have a profit of								46
47	$60,000 left over to pay the tax on the $60,000 on line 23						(Aug 11, 2007)		47

And this will also show the mathematics of paying down a mortgage with the earnings from a Mutual fund.

Using New Securities Account to make mortgage deductible							This is to show the method only

Most, if not all people buy a Mutual fund and have the dividends reinvested
in the fund. Do NOT DO THAT if you want a deductible mortgage									Non
									Deductible		Non	HELOC
Assume you have a borrowed				100,000	to buy funds and they pay			0.06	original	less	Deductible	interest
A	B	C	D	E	F New	G	H	I	J	K	L	M
You pay	0.06	pay your	35% Tax	borrow for	Invest't	Mutual	earnings	worth	mortgage	earnings	original	not de-
	borrowed	interest	Refund	new funds	loan	Fund	0.06					ductible
2007	100000	6000	2100	6000	106000	100000	6000	106000	100000	6000	94000	6000
2008	106000	6360	2226	6360	112360	106000	6360	112360	94000	6360	87640	5640
2009	112360	6742	2360	6742	119102	112360	6742	119102	87640	6742	80898	5258
2010	119102	7146	2501	7146	126248	119102	7146	126248	80898	7146	73752	4854
2011	126248	7575	2651	7575	133823	126248	7575	133823	73752	7575	66177	4425
2012	133823	8029	2810	8029	141852	133823	8029	141852	66177	8029	58148	3971
2013	141852	8511	2979	8511	150363	141852	8511	150363	58148	8511	49637	3489
2014	150363	9022	3158	9022	159385	150363	9022	159385	49637	9022	40615	2978
2015	159385	9563	3347	9563	168948	159385	9563	168948	40615	9563	31052	2437
2016	168948	10137	3548	10137	179085	168948	10137	179085	31052	10137	20915	1863
2017	179085	10745	3761	10745	189830	179085	10745	189830	20915	10745	10170	1255
2018	189830	11390	3986	11390	201220	189830	11390	201220	10170	11390	-1220

Because the earnings from the mutual fund are mostly dividends and capital gains which are very tax efficient
there will be litle tax on the earnings - certainly less than half of the tax savings in column D

In this example, I have assumed an interest only HELOC and assumed that you would have paid your regular non-dedcutible interest
which would decrease each year because of the principal being paid down in column K.									column M represents HELOC interest

Every one's situation is different. YOUR cash flow will be different. And to escape GARR, you must be making a business decision
If you wish to make your mortgage deductible. A perceived increase in earnings from a mutual fund loan would likely be sufficient
but there are NO, NONE, NOT ANY Guarantees.

If this situation interests you, you are advised to get a written financial plan from Fred Snyder FIRST - His Number is (604) 731-8900

david ingram, home office phone (604) 980-0321 - Please do NOT phone before 10 AM or after 9 PM but you can phone 7 days a week
there are NO message machines - If you do leave a message with a person, If I do not get back in 4 hours, I WILL NOT BE RETURNING
the call - I leave it to YOU to follow up. I get over 700 emails a day and my record for phone calls on April 30 2006 was over 140.

I hpe the formatting stays with the email.

Not sure if this will help or not. What you should do is get Fred Snyder to do a written financial plan for you. see the red a couple of lines up.

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David Ingram wrote:

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It is very unlikely that blind or unexpected email to me will be answered. I receive anywhere from 100 to 700 unsolicited emails a day and usually answer anywhere from 2 to 20 if they are not from existing clients. Existing clients are advised to put their 'name and PAYING CUSTOMER' in the subject and get answered first. I also refuse to be a slave to email and do not look at it every day and have never ever looked at it when i am out of town.

However, I regularly search for the words"PAYING CUSTOMER" and always answer them first if they did not get spammed out. As an example, as I write this on June 28th, since June 16th (12 days), my 'spammed out' box has 7,118 unread messages, my deleted box has 2630 I have actually looked at and deleted and I have answerd 63 email questions I have answered for clients and strangers. I have also put aside 446 messages that I am maybe going to try and answer because they look interesting.

Therefore, if an email is not answered in 24 to 36 hours, it is lost in space. You can try and resend it but if important, you will have to phone to make an appointment. Gillian Bryan generally accepts appointment requests for me between 10:30 AM and 4:00 PM Monday to Friday VANCOUVER (Seattle, Portland, Los Angeles) time at (604) 980-0321

David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:

4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week Vancouver (LA) time - (please do not fax or phone outside of those hours as this is a home office)

email to [email protected]
www.centa.com www.david-ingram.com

Disclaimer: This question has been answered without detailed information or consultation and is to be regarded only as general comment. Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."

David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Mexico family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.

Phone consultations are $400 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada.

This is not intended to be definitive but in general I am quoting $800 to $2,800 for a dual country tax return.

$800 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only - no self employment or rentals or capital gains - you did not move into or out of the country in this year.

$1,000 would be the same with one rental

$1,200 would be the same with one business no rental

$1,200 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.

$1,500 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits no move in or out

$1,600 would be for two people with income from two countries

$2,800 would be all of the above and you moved in and out of the country.

This is just a guideline for US / Canadian returns

We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $150.00 up.

With a Rental for $350

A Business for $350 - Rental and business likely $450

And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.

Moving in or out of the country or part year earnings in the US will ALWAYS be $800 and up.

TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.

8891 forms are generally $50.00 to $100.00 each.

18 RRSPs would be $900.00 - (maybe amalgamate a couple)

Capital gains *sales) are likely $50.00 for the first and $20.00 each after that.

Just a guideline not etched in stone.

This from "ask an income trusts tax and immigration expert" from www.centa.com or www.jurock.com or www.featureweb.com. David Ingram deals on a daily basis with expatriate tax returns with multi jurisdictional cross and trans border expatriate problems for the United States, Canada, Mexico, Great Britain, United Kingdom, Kuwait, Dubai, Saudi Arabia, Thailand, Indonesia, Japan, China, New Zealand, France, Germany, Spain, Italy, Russia, Georgia, Brazil, Peru, Ecuador, Bolivia, Scotland, Ireland, Hawaii, Florida, Montana, Morocco, Israel, Iraq, Iran, India, Pakistan, Afghanistan, Mali, Bangkok, Greenland, Iceland, Cuba, Bahamas, Bermuda, Barbados, St Vincent, Grenada,, Virgin Islands, US, UK, GB, and any of the 43 states with state tax returns, etc. Rockwall, Dallas, San Antonio Houston, Denmark, Finland, Sweden Norway Bulgaria Croatia Income Tax and Immigration Tips, Income Tax Immigration Wizard Antarctica Rwanda Guru Consultant Specialist Section 216(4) 216(1) NR6 NR-6 NR 6 Non-Resident Real Estate tax specialist expert preparer expatriate anti money laundering money seasoning FINTRAC E677 E667 105 106 TDF-90 Reporting $10,000 cross border transactions Grand Cayman Aruba Zimbabwe South Africa Namibia help USA US Income Tax Convention

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