Retiring to the US -

QUESTION: I am looking at buying property in the US.What tax implications should I be looking at beforehand?Also, can trips taken there to look at properties be claimed as an expense after I've bought?  Can trips just to look be claimed against anything (what if I look in Vegas, Arizona, and Portland, but only end up buying in one or none).

DavidIngram's US/Canada Services
US/Canada/MexicoTax Immigration & working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Calls accepted from 10 AM to 10 PM 7 days a week
Res (604) 980-3578 Cell (604) 657-8451
Bus (604) 980-0321 Fax (604) 980-0325
[email protected]
www.centa.com www.david-ingram.com

Jan 6, 2008.

Rentals in the USA.

QUESTION thatcame to me from ASK AN EXPERT at  www.jurock.com

We just purchased property in Spokane Washington( a 4 plex apartments)
We plan on renting out 3 of the units and keeping one.  I was told bythe border crossing inspector,
that I have to hire a rental agency in order to rent out the apartments.
and I also  have to have a property manger full time..
We will be at our apartment approx 2 times a month..
So we do not need a property manager.
Do you know if this true,, or please direct me to the correct personthat would be able to help me.
Thanks for your time.
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david ingramreplies:

You need a property manager if you do not want the strong possibilityof going to jail for a few days before being deported and then notallowed back in the USA. For a story about US Immigrations hell for aHoliday Inn Manager, try
http://apostille.us/news/local_holiday_inn_express_manager_in_jail_on_immigration_charges;_husband_fights_for_her_return.shtml
or howabout a married woman's ordeal in Georgia for a traffic violation  at
http://www.canada.com/ottawacitizen/news/story.html?id=f4f1d2fb-07ae-4560-8f6c-703acf8146fb&k=0

Crossing the border when youhave an ad running to show the premises and saying you are going downto spend the weekend in your holiday home (i.e lying to the HOMELANDSecurity official) could result in seizure of your vehicle and a banfor up to 10 years under their ER (Expedited Removal) process.  Inother words, it is more serious to lie to the guard at the border thanit is to do the work.

You 'could' actually show the property for rent,  but you can NOT writeout a contract for rent or collect a single rent cheque (check) or cashfor rent in the United States. There is nothing new about this.  Thefirst time I ran into it was in 1972 or 1973.

If you are physically there, you can NOT cut the grass, shovel thesidewalk, paint or decorate or repair or fix or remodel or improve ortake out the garbage for any part of the rental property.

You can paint and clean your own unit if it is NEVER rented or intendedto be rented. You can not paint and clean up getting the property readyfor rent so DO NOT make the mistake of thinking you can live in one,clean it up and remodel it and then rent it out and do the same foranother one and then another one and another one. If you do this andone of your tenants (who maybe doesn't like you because you evictedthem or told them to turn their strereo down when you happen to be intown or for any other reason) read my website, (or the uscis website)he or she would find out that you can NOT do this stuff and could phonethe Homeland Security office or write an anonymous letter and you couldbe arrested in November 2008 for something you did in December 2007. 

This may seem unreal, but in US terms, working without a visa is justas serious in law as the spontaneous robbing of a convenience store andthe penalties can be worse.  Think of those nightly news shows with 28illegal Mexican or Guatamelan citizens being stuffed into Paddy wagonson the Arizona border. This is not a racist comment but with theMexican illegal immigrants, bing rounded up and shipped back across theborder is a way of life with no social stigma.  For a nice clean livingCanadian, being thown into an immigration detention cell for takingmoney for rent is a devestating experience. In one case, a mother andher son were thrown into jail for 5 days in Phoenix when she went toPhoenix from White Rock BC.  Her husband owned 18 units and HAD aproperty manager.  Unfortunately, he also died in the arms of thatfemale property manager and his widow then fired the property managerand she and her 20 year old son went to Phoenix to collect the rent andhire another property manager.

The property manager (who knew the law as everyone in Arizona does)phoned Homeland Security who showed up and arrested mother and son andthrew them into the notorious Phoenix Immigration hell with some 300other illegals. To rub salt into the widow's wounds, the propertymanager ended up with the property because she was a second mortgageholder on the property and the property fell into default because ofthe widow's cash flow troubles, largely because she could not go toPhoenix to hire another property manager.

For instance, for 'you', this kind of arrest could result inimprisonment for a usual five days in a US immigration jail until youposted $5,000 bail each and then being banished from the US for five toten years. 

It does not stop there.  This type of conviction would stop you gettingon an airplane which stopped in the USA on the way to Mexico.  AND, under new US laws that have been proposed but not yet actually put inplace, the arrest and banning would stop your Nov 6 trip to Cancunbecause people in this position will not even be allowed on commercialairliners that are flying over any part of the US. To get to Cancun,you would have to fly from Calgary or Vancouver to London England andthen back to Mexico City and 'then' to Cancun and reverse it to gethome.

This may be overkill but 'You' are / were lucky that the inspector gaveyou the correct advice BEFORE you put your foot in it.

By the way, for income tax You ALSO HAVE TO FILE A 1040NR US TAX RETURNWITH A SCHEDULE E AND A SCHEDULE 4562  EACH.  Then the same income getsput on Schedule T776 of your Canadian return.  If you have paid tax tothe US, you will claim it as a credit on Canadian forms T2209 and T2036.

DavidIngram's US/Canada Services
US/Canada/MexicoTax Immigration & working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Calls accepted from 10 AM to 10 PM 7 days a week
Res (604) 980-3578 Cell (604) 657-8451
Bus (604) 980-0321 Fax (604) 980-0325
[email protected]
www.centa.com www.david-ingram.com

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The second dealt with making your personal mortgage interest in Canadadeductible and the Overs, Evans, Lipson and Singleton tax cases and GAAR

DavidIngram's US/Canada Services

Mortgage Interest as a Deduction in 2008 – dealingwith GAAR

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

My client allowed his tenant to stay in the halfduplex for more than a year and to stay afloat him self, he borrowedmoney to pay the duplex bills. When doing his 1975 tax return, wededucted the interest paid on the loan because the purpose of the loanwas 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 paidthe loan off and we had not thought about it. But my client, bless hissoul, phoned and asked if he had to pay off the loan (which wasdeductible) or could he use the money for another non-deductiblepurpose.

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

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

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

Unfortunately, Joe Clark, the Prime Ministerat the time, did not count the number of yes votes and lost anon-confidence motion on Dec 12, 1979, and on Feb 18, 1980, PierreTrudeau was re-elected as Prime Minister and even though there was a4-page form and a line on the T-1 General that year, the deduction waskilled retroactively by the liberal government and we no longer hadthis benefit for all without manipulating the paperwork.

In 1981, Fred Snyder was running aseries 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 wroteFred a letter thanking him for explaining the methods.  In1985, Fraser Smith than published the SMITH MANOUVRE which explains themethod in great detail and at the time, VANCITY Savings Credit Unionwas featured in the book and was very good at setting up the method.

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

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

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

Judge Littleturned down the CRA’s claim that tax benefits arose from this series oftransactions.  The taxpayer followed the Income TaxAct in repaying his loan and transferring the shares to his wife.Justice Little ruled that the transactions were NOT avoidancetransactions and therefore GAAR did not apply. Judge Little ruled thatnone of the transactions could be considered “abusive tax avoidance”.

And Judge Bowman ruled in favour of Evans (2005 TCC684).  Judge Bowman found there were no avoidancetransactions in what could only be described as a super complicated andvery sophisticated series of business restructurings that ended up witha former shareholder receiving cash by using  specificrules in the Act, including sections 85

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

Judge Bowmanassumed that there ‘were’ avoidance transactions.  Hethen dealt with them on an individual basis to decide whether theavoidance transactions were ‘abusive’.  His finaldecision was that provisions of the Income Tax Act operated as intendedand there could not be any abuse.

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

Mr Lipson owned aprofitable business and:

1. The Lipsonscontracted to buy a home in Forest Hills in Toronto
2. Mrs Lipson tookout a demand loan to buy share in the family business from her husband.
3. The shares weretransferred to Mrs Lipson as a section 73(1)  rollover
4. Mr Lipson usedthe funds to buy the house
5. They “both” tookout a mortgage on the house to repay the demand loan

 Judge Bowman used the Section 245GAAR provisions to rule that the Lipson family was guilty of GrossAbuse of the Tax system.  Perhaps, if they had a businessreason for the loan or had not used the Section 73(1) tax freerollover, he would have found in their favour as he did with the EVANS2005 DTC 1762 case.  In the LIPSON case the wife’sborrowing did not put income in her hands and it was unclear who hadpaid the interest.

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