QUESTION: Mortgage interest on a rental ppty is deductible form rental income, and if it creates a loss that can be used to reduce tax on other income. The Tax guide says that if you have consecutive years of loss they may not be deductible. A business loss becomes an abil and has a 3 bck and 10 forward aplication. I cannot get a clear picture for buying a rental ppty and being confident of my tax position. Please advise. --------------------------------------------------------------------------- david ingram replies: To be deductible a rental loss must be incurred on a property that you bought to earn rental income and have prepared a business plan that shows that a rental profit will eventually be earned with rental increases and maybe a deduction in interest as a mortgage is paid down. An ABIL does NOT apply to rental property. In my 43 years in the business and thousands of tax returns prepared with rental losses, I have never - not once - had the CRA turn down a rental loss for a return where there has been a rental profit projected. On the other hand, in the last two weeks. I stopped an investor from buying in Powell River, because I could not project a rental profit or close to a rental profit in ten years. On the same basis, I stopped investments in Brazil, Peru, Chile and Guatemala in the last two weeks as well. The same concept can be used in the US as well. Reading the Canadian CRA's Bulletin IT-533 might help you and attending some of Fred Snyder's free seminars is likely a good idea as well. And the following Q & A might serve you well taxman at centa.com: Please see bottom of message if you wish to unsubscribe. ------------------------------------------ My question is: Canadian-specific QUESTION: In a Jurock Newsletter 07/2002 you stated that there is a process by which mortgage interest can be "shifted" from personal to business over a 4-5 year period to allow it to become deductible interest on an investment property. I have also heard that CRA has taken this to court and at first won 2 and then lost 1 on appeal. So what is the status on this today '2006'. Can this approach still be taken or am I relying on old news? --------------------------------------------------------------------------- david ingram replies: The process is very legitimate and was really brought home with the Singleton case in the Supreme Court of Canada. I am too busy for a new reply but this old one should suffice. You could also ask again tomorrow morning (Sunday) at 9:00 AM on 600 AM CKBD Radio. ---------------------------------------------------------------------------- ---- Date: Tuesday February 01, 2005 Time: 10:02 PM -0800 QUESTION: Your Nov/01 Cen-Tapede gives several examples of how to create interest deductions by associating the borrowing with your business. In further web searches on this subject I have just found Mohammad v. Canada (1998) and now I am confused. My wife and I live in a small city in B.C. We are considering the purchase of a rental property. The purchase price would be about $150,000, annual taxes $1500, monthly rental income $700. We have approximately $500,000 equity and a mortgage principal remaining of $40,000 in our principal residence. Naturally, the method that was described in your newsletter looked attractive to us. If I understand it correctly we should take a loan for the down payment, then take an additional pre-arranged floating business loan to pay the mortgage and maintenance costs of the rental home. Rental income would be used to pay down the remaining principal on our principal residence. In Mohammad v. Canada the court found that interest could be deducted from the rental income even if the purchase was 100% financed. Okay, that I understand. However, the judge referred to "reasonable expectation of profit" and in doing so wrote that an acceptable standard for CRA to apply would be that there can be "no reasonable expectation of profit so long as no significant payments are made against the principal amount of the indebtedness". He goes on in more detail, but no doubt you are familiar with the judgement so I won't quote it here. My question is this: How do I square that judgement with your method of financing the rental property, a method that would involve not only 100% financing of the initial purchase price, but additional financing via the floating business loan. If I go that route am I likely to have CRA disallow the whole thing on the basis that I never had any reasonable expectation of profit? Looking forward to whatever comments you care to make. G XXXXXXXXXXXX ---------------------- david ingram replies: You either misread the case or you read the tax court case and missed the Federal Court of Appeal ruling The Tax Court disallowed the deduction and the Federal Court of Appeal allowed the deduction. However, the question is moot. Further cases have stated clearly that the concept of "expectation of Profit" no longer applies if there is no personal use of the item. Therefore Expectation Of Profit rules really only apply to the likes of Whistler Condos, Saltspring cabins and rental sailboats or Motorhomes where the item is used by the owner for personal use as well. In addition John Singleton LLB won his case for interest deduction in the Supreme Court of Canada and The CRA issued Bulletin IT 533 which deals with the issue of deductibility. The bulletin is quite clear that you must have a cash flow sheet showing that you "will" make a "cash flow" profit in the future. Therefore, having a sheet showing you will lose money for three years to six years and then start making a profit with a combination of rental increases and the paying down of the mortgage makes good sense. Note that capital gains do NOT count as profit for this set of rules. Following is the link to the Court of Appeal Mohammad case: http://reports.fja.gc.ca/fc/1998/pub/v1/1998fc21037.html A-652-96 Zahid Mohammad (Applicant) v. Her Majesty the Queen (Respondent) Indexed as: Mohammad v. Canada (C.A.) Court of Appeal, MacGuigan, Robertson and McDonald JJ.A."Toronto, June 11; Ottawa, July 28, 1997. <snip> The issue was whether the Tax Court erred in refusing to permit the deduction of interest paid on the $25,000 personal loan. Held, the application should be allowed. Taxpayers frequently acquire a residential property for rental purposes by financing the entire purchase price. The amount of yearly interest payable on the loan often greatly exceeds the rental income that might reasonably have been earned. There can be no reasonable expectation of profit so long as no significant payments are made against the principal amount of the indebtedness. A rental loss can be claimed even though no such payment(s) were made in the taxation years under review, if the taxpayer establishes to the Court's satisfaction that he had a realistic plan to reduce the principal amount of the borrowed monies. The taxpayer will discharge that burden by showing that significant payments were made against the principal indebtedness in the taxation years closely following the year of purchase. The application record referred to such payments having been made, but evidence thereof was not before the Tax Court Judge and was not raised during this hearing. <snip> Make out a cash flow sheet showing eventual rental cash flow profits and sleep well. ======================== Answers to this and other similar questions can be obtained free on Air every Sunday morning. Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Dundee Wealth Management and I, David Ingram host a 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 Local calls are taken at (604) 280-0600 and Long Distance calls are taken at 1( 866) 778-0600 Callers to the show are invited to attend free seminars on financial planning with such specialities as deductible mortgage interest. They are held at Fred Snyder's Office at 1764 West 7th in Vancouver - (604) 731-8900 for more information. ========================================= 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 to cover mortgage interest as a deduction and give the class an adding test. -------------- David Ingram's US/Canada Services US / Canada / Mexico tax, Immigration and working Visa Specialists US / Canada Real Estate Specialists 4466 Prospect Road North Vancouver, BC, CANADA, V7N 3L7 Res (604) 980-3578 Cell (604) 657-8451 (604) 980-0321 Fax (604) 980-0325 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 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" ============================== 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, the 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 and Houston Texas Denmark, Finland, Sweden Norway Bulgaria Croatia Income Tax and Immigration Tips, Income Tax and Immigration Wizard Income Tax and Immigration Guru Income Tax and Immigration Consultant Income Tax and Immigration Specialist Section 216(4) 216(1) NR6 NR-6 NR 6 Non-Resident Real Estate tax specialist expert preparer consultant expatriate anti money laundering money seasoning FINTRAC E677 E667 4789 4790 TDF-90 Reporting $10,000 cross border transactions ========================= Alaska, Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Garland, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon. 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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 <http://www.centa.com> . If you forward this message, this disclaimer must be included." Be ALERT, the world needs more "lerts" David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Saudi Arabia to Mexico to China or Chile - Cross border, dual citizen - out of country investments are all handled with competence & authority. ----- Alaska, Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Garland, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon. Pennsylvania, Rhode Island, Rockwall, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia, Wisconsin, Wyoming, British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec City, New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland, Yukon and Northwest and Nunavit Territories, Mount Vernon, Eumenclaw, Coos Bay and Dallas Houston Rockwall Garland Texas Taxman and Tax Guru and wizzard wizard - consultant - expert - advisor -advisors consultants - gurus - Paris Prague Moscow Berlin Lima Rio de Janeiro, Santaigo Zimbabwe 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 New York, Boston, Sacramento, Minneapolis, Salem, Wheeling, Philadelphia, Pittsburgh, Atlanta, Pensacola, Miami, St Petersburg, Naples, Fort Myers, Cape Coral, Orlando, Atlanta, Arlington, Washington, Hudson, Green Bay, Minot, Portland, Seattle, St John, St John's, Fredericton, Quebec, Moncton, Truro, Atlanta, Charleston, San Francisco, Los Angeles, San Diego, Sacramento, Taos, Grand Canyon, Reno, Las Vegas, Phoenix, Sun City, Tulsa, Monteray, Carmel, Morgantown, Bemidji, Sandpointe, Pocatello, Bellingham, Custer, Grand Forks, Lead, Rapid City, Mitchell, Kansas City, Lawrence, Houston, Albany, Framingham, Cambridge, London, Paris, Prince George, Prince Rupert, Whitehorse, Anchorage, Fairbanks, Frankfurt, The Hague, Lisbon, Madrid, Atlanta, Myrtle Beach, Key West, Cape Coral, Fort Meyers, Berlin, Hamburg Warsaw, Auckland, Wellington, Honolulu, Maui, Kuwait, Molokai, Beijing, Shanghai, Tokyo, Manilla, Kent, Winnipeg, Saskatoon, Regina, Red Deer, Olds, Medicine Hat, Lethbridge, Moose Jaw, Brandon, Portage La Prairie, Davidson, Craik, Edmonton, Calgary, Victoria, Vancouver, Burnaby, Surrey, Edinburgh, Dublin, Belfast, Glasgow, Copenhagen, Oslo, Munich, Sydney, Nanaimo, Brisbane, Melbourne, Darwin, Perth, Athens, Rome, Berne, Zurich, Kyoto, Nanking, Rio De Janeiro, Brasilia, Colombo, Buenos Aries, Squamish, Churchill, Lima, Santiago, Abbotsford, Cologne, Yorkshire, Hope, Penticton, Kelowna, Vernon, Fort MacLeod, Deer Lodge, Springfield, St Louis, Centralia, Bradford, Stratford on Avon, Niagara Falls, Atlin, Fort Nelson, Fort St James, Red Deer, Drumheller, Fortune, Red Bank, Marystown, Cape Spears, Truro, Charlottetown, Summerside, Niagara Falls, Albany Zimbabwe international non-resident cross border income tax help assistance expert preparation & immigration consultant david ingram, experts on rentals mutual funds RRSP RESP IRA 401(K) & divorce preparer preparers consultants This from "ask an income tax and immigration expert" from www.centa.com <http://www.centa.com/> or www.jurock.com <http://www.jurock.com/> or www.featureweb.com <http://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
