AMENDED for original recipient
Sent: Wednesday, January 25, 2006 7:05 AM
To: taxman at centa.com
Subject: to depreciate or not to depreciate
QUESTION: Last year, my husband and I purchased a 30-unit
apartment complex just outside Toronto. Even after deducting all
expenses (including mortgage interest), we are left with rental
income to report to Revenue Canada. We are probably both going
to be in the 40+% tax bracket for this year's income taxes. My
question relates to what would be the better tax strategy:
1) Claim depreciation on the building this year and in all future
years (I believe this is the same as capital cost allowance,
CCA), so that the income tax we pay in the short term is reduced.
But when we sell the building (probably in about 10 years), we
will recapture the CCA and end up paying more tax on the capital
gains.
or
2) Forego depreciation as an expense, pay higher taxes in the
short term, but minimize the capital gains over the long term.
I have learned so much from your website and would greatly
appreciate any advice you can share.
Regards,
===================================================
david ingram replies:
Answers to this and other similar questions can be obtained free
on Air by david ingram on the last Sunday of each month (Jan
29, 2006 this month) .
On the last Sunday at 9:00 AM on 600AM in Vancouver, I, david
ingram will be a guest on Fred Snyder of Dundee Wealth Managers'
LIVE talk show called "ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the
internet at
www.600AM.com
Call (604) 280-0600 to have your question answered. BC listeners
can also call 1-866-778-0600.
Callers to the show and questioners on this board can also attend
the Thursday Night seminars on finance and making your Canadian
Mortgage Interest deductible.
I will be at the seminar following the last Sunday of the month.
------------------------------
Back to the Question -
Claiming depreciation if you are in the 40% tax bracket is the
smart thing to do. You will not likely be paying ba ck the tax at
a higher tax rate which is what happens to many people with their
tax shelters.
And, not claiming depreciation does not minimize capital gains in
the future. When you sell in the future, the capital gains will
be the same either way. The depreciation recaptured is taxed at
straight rates on the rental statement (T776).
Which brings up another point. When picking out categories of
expenses to keep track of, use the T776 as your guide. The
computer numbers on the T776 are the numbers that the CRA wants
you to fit your expenses into. Why make it hard on them. Plus,
if you bring me (or any other accountant) the figures asked for
by the CRA, your bill will be less.
It always amazes me how people will bring me an Excel spread
sheet with their rental expenses broken into 40 items. I then
spend an hour putting them together by hand when they could have
kept their columns and blended them into the CRA columns in a
couple of minutes. It may be important for your accounting to
keep roof repairs separate from painting which is also separate
from key changing but the CRA wants them all in one heading under
Repairs and Maintenance on line 8946.
You can find a fillable T776 to practice with at
http://www.cra-arc.gc.ca/E/pbg/tf/t776/t776-fill-04e.pdf
But with regard to claiming the depreciation think about the
following:
If you save $1,000 in tax this year and have to pay it back 10
years from now, it will be in depreciated dollars. 1.e. $1,000
today will be like $500 or less 10 year from now in spending
power. In addition, you get to invest the $1,000 for ten or
twelve or twenty years, Talk about a win - win situation. AND,
AND, AND, our Prime Minister ELECT's platform included the
ability to roll the apartment investment over into another
investment in the future (as the US does with a 1031 Rollover)
and if that happens, you might not have to pay the $1,000 back
until you depart this mortal earth. Let the kids worry about it
when they inherit your well earned loot. And, if you do not want
them to pay it, you can cover the tax with a life insurance
policy.
It is too bad you are not in the Greater Vancouver area to attend
one of Fred Snyder's excellent Thursday Evening seminars which I
will explain for others at the very bottom of this missive. For
instance, if the interest on your own home mortgage is not
deductible now, you can make it deductible by using the apartment
rents to pay down your personal mortgage and using your house as
security to pay deductible apartment expenses. Goto
www.centa.com and read the November 2001 newsletter in the top
left hand box. You should also read the rental section which you
can find in the TAX GUIDE in the same top left hand box.
Last, but not least, if buying an RRSP for tax savings today and
paying them back later makes any sense, then claiming the
depreciation today makes more sense.
-----------------------------
In the US, there is no choice. You must claim depreciation.
----------------
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa
Specialists
US / Canada Real Estate Specialists
Home office 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 10 PM 7 days a week (please do not
fax or phone outside of those hours as this is a home office)
email to taxman at centa.com
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."
Be ALERT, the world needs more "lerts"
David Ingram specializes in giving expert income tax and
immigration help to American and Canadian citizens living out of
their home countries from Zimbabwe to Saudi Arabia to Mexico to
China or Chile - Cross border, Non-resident - dual citizen - out
of country investments are all handled with competence and
authority.
This from "ask an income 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,
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Immigration Tips, Income Tax Immigration Wizard Antarctica
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NR 6 Non-Resident Real Estate tax specialist expert preparer
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Fort Myers,
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David Ingram expert income tax help and preparation of US Canada
Mexico non-resident and cross border returns with rental dividend
wages self-employed and royalty foreign tax credits
Every Thursday Evening, Fred Snyder of Dundee Wealth Management
conducts one of 17 different financial seminars in the boardroom
of his office
Time: 7:00 to 9:30 PM
Date: Every Thursday evening
Place 1764 West Seventh
Vancouver (corner of Burrard)
Phone (604) 731-8900 to register
No cost - no obligation
Topics always cover mortgage interest as a deduction
other topics - getting the mortgage, estate planning, critical
care insurance, income taxation, differences between stocks and
bonds, and usually the most innovative HELOC mortgage offered in
Canada from Manulife Bank
If you are starting in downtown Vancouver and do not want to go
home first, one of the excellent THAI HOUSE restaurants is in the
same building and makes a nice start to the evening. If it is
your first seminar, Fred will buy you dinner if you are
pre-registered.
I, david ingram, will be at the Thursday evening following the
last Sunday of each month (Feb 2, 2006 this time) to cover
mortgage interest as a deduction and give the class an adding
test.
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