October 2001 CEN-TAPEDE - Investment in apartment building, Pension as citizen of both US and Canada, Real Estate taxes deduckab
October 2001
The CEN-TAPEDE
david ingram's US/Canadian Newsletter
108-100 Park Royal South, West Vancouver, BC, V7T 1A2
(604) 913-9133 (9 AM - 5 PM) - Fax 913-9123
Friday, Oct 26, 2001 - This is a question to "ask a tax expert" which can be found at www.jurock.com if you look close (take a look for great real estate information) or more directly at www2.jurock.com
Hi
Strictly from a tax point of view, is it better to invest in an apartment building directly or buy units in a REIT?
Regards
Erik
Answer:
From a tax point of view, if you bought the "SAME BUILDING" as an individual, there should be no difference with regard to building expenses. The building expenses should be the same. Any difference would be caused by the fact that you do not get a deduction (nor do you have to pay) for the massive legal and accounting and administrative costs of the REIT (Real Estate Investment Trust). I will repeat here for the 1,000th time in my life. Never spend a single dollar that you do not have to spend "just because" it is a tax deduction.
In actuality, your tax situation with the whole building should be better. By buying the building yourself, you have the option of capitalizing or expensing and "timing" repairs according to your own individual annual income tax situation and not getting caught up in the overall accounting of the partnership year after year after year.
david ingram's CEN-TA
-US / CANADA Tax & Immigration Matters
108 - 100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
(604) 913-9133 FAX (604) 913-9123
www.centa.com - taxman@centa.com
Your Questions answered on Saturday from
1 PM to 3 PM Vancouver time (4 PM to 6 PM
New York time - click on www.CFUN.com
and listen to the live show with Fred Snyder
Joan Marsh and David Ingram
Sent: Wednesday, October 24, 2001 9:59 AM
Subject: Jurock.com 'Ask an Expert': A Question for You
QUESTION: I am a citizen of both the U.S. and Canada, currently live in the U.S. and have just received my first company pension payment in Canadian dollars...monthly, it will amount to less than $500 CAN. But 15% Canadian income tax was deducted. Can I get that deduction back somehow? How does this affect my U.S. taxes?
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If you are taxable in the USA, you will get credit for some or all of the tax paid to Canada.
Convert the $6000 Canadian to US dollars and report the amounts on both lines 16a and 16b of your US 1040.
Then get hold of Form 1116 and fill it in (the book says that this form alone takes 1 hour and 53 minutes to fill in).
Report the 15% tax paid to Canada on Form 1116 and that is the end of that.
Unfortunately, if your income is low enough in the US that you are not taxable, you pay the tax to Canada with no refund unless you file a Section 217 return which does not usually work for someone in your situation when you receive your US Social Security.
Incidentally, when and if you start receiving your Canadian OAS and CPP, those two pensions do NOT go on lines 16a or 16b.
These two Canadian (Social Security Type) pensions are treated the same as US social Security and show up on lines 20a and 20b. I have NEVER seen a US accountant handle this correctly and usually a person in your position ends up paying much more tax to the US than you have to.
To put in a small commercial here, we do handle this kind or return by mail and fax.
david ingram's CEN-TA
-US / CANADA Tax & Immigration Matters
108 - 100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
(604) 913-9133 FAX (604) 913-9123
www.centa.com - taxman@centa.com
Your Questions answered on Saturday from
1 PM to 3 PM Vancouver time (4 PM to 6 PM
New York time - click on www.CFUN.com
(or 1410 on your AM dial locally)
and listen to the live show with Fred Snyder
Joan Marsh and David Ingram
This is another Question submitted to "ask a tax expert" - find it in the middle of the page at www.jurock.com
QUESTION: ARE REAL ESTATE TAXES DEDUCTIBLE ON YOUR TAX RETURNS?
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REPLY: In the United States, real estate property taxes are deductible on a schedule A under itemized deductions. You can claim taxes on your home and seasonal residence. To claim, you have to give up your standard deduction.
In Canada, real estate taxes are never deductible unless there is a business use for the property.
Rental - If you are renting 100% of the property out, you can deduct 100% of the taxes. If you are renting half of the house out, you get top deduct half of the taxes on a T776 rental schedule.
Office in Home - (self employed) If you use 10% of the home for business, you can deduct 10% of the taxes, interest, repairs and maintenance, heating, etc.
Office in Home - (employee) The tax department says that you cannot deduct taxes or interest. On the other hand, in an unappealed case, Judge Taylor of the Tax Court of Canada allowed Dale Andrew Drobot to deduct a percentage of interest and taxes. However, this is too low a court to use as a binding precedent.
If you are an employee and your employer requires you to have an office at home, RENT IT TO THEM. Reduce your salary by $300 a month and charge your employer $300 a month for the office. Then the rental situation above applies and you get to deduct a percentage of everything.
This is the first question answered in using WINDOWS XP, XP was installed on office and home computer is a very short time by my 14 year old son Mitchell.
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David ingram
And in Vancouver, Your questions answered on air on CFUN
from 1 to 3 PM on Saturday afternoons - 1410 on AM dial
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QUESTION: Could you elaborate on how to buy rental property by transferring money from an RRSP, putting a mortgage on your own home, etc? What is the procedure?
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Reply from David Ingram
I could write a 200 page book and still not have all the parameters covered.
There is no direct method I know of that allows you to take money out of an RRSP and put it directly into the ownership of a rental property.
Some organizations, ours been one of the first, would encourage you to buy a second mortgage on some one else's property within your RRSP. The person who had borrowed from you would buy another second mortgage on someone else's property and by the end of the process, a whole bunch of people had monies out of their RRSP without paying tax on the withdrawal and the effect was the same, but the monies did not move directly.
A mortgage on your own property is a simple matter but does not make sense to me.
The rules are that the mortgage on your own home has to be insured by the CMHC. You therefore have to pay a CMHC fee and an annual bill of about $300 for administration.
I have never found a person whom I thought should take "advantage?" of this option.
If you have an RRSP, the last thing you want to do is pay yourself taxable dollars which you do not get to deduct when you pay them.
You can also here Fred Snyder (Mutual Funds), Joan Marsh (CIBC Mortgage) and myself, every Saturday at 1410 AM, CFUN radio from 1 PM to 3 PM.
I will have a couple of examples of how you can make your
Canadian Mortgage Interest Tax deductible.
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QUESTION: Hi David!
I am a United States citizen with two years of Landed Immigrant status
here in Canada. I hope to apply for dual citizenship as soon as I am able.
I am almost 59 yrs old and will be eligable for my U.S. social security before
too many more years. I wonder if that is taxable? If so, at what rate
would it be taxable if it is my sole income? My partner and I are planning
to purchase a home here in BC before long and I need to be able to pinpoint
my future income before I join the venture!
Thanks for any help you can give me,
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Citizenship - Nothing in my answer is determined by your citizenship, The answers are based upon your being in Canada more than 183 days a year (with or without Canadian Landed Immigrant status). However, You should phone my office at (604) 913-9133 and ask Gail to send you copies of my Oct 93 (Dual Citizens) and Oct 95 (duties of US citizens living out of the US) CEN-TAPEDE newsletters which consist of another 20 pages on the subject.
Two New Pensions - After ten years in Canada, which sounds to me that you will have to be 67, you will be entitled to 25% of whatever amount is being paid for Canadian Old Age Security. Today, in the same situation, you would get about $105.00 CDN a month. If you are working, you will also be entitled to a small Canada Pension Plan amount.
Line 115 - Pension Income - 85% of your US Social Security "IS" taxable in Canada at whatever your marginal tax rates are at the time. This will be after you have claimed your personal exemption amounts which today are over $11,000 Canadian.
As an example, I am going to assume that your US FICA (Social Security) amounts to $1,000 US a month or $12,000 a year. You have to convert this to Canadian Dollars and depending upon the exchange rate, I will assume that it converts to $18,000 Canadian and that is the figure you would put on line 115 of your Canadian return.
Line 236 - Net Income - Assuming no other income as your question implies. (You would not get the Canadian Old Age Pension for two years anyway and if you do not work, there would be no CPP), your Net Income on line 236 would also be $18,000.
Line 256- Treaty Exempt Income - The US / Canadian Income Tax Treaty allows you to deduct 15% of the US pension on this line. Enter $2,700 (15% of $18,000).
Line 260 - Taxable Income - Your taxable income would then be $15,300.
Calculated Gross Tax - Your tax on this (22 rate just a guess / estimate six years from now) would be about $3,366.
Tax Credits - $3,000 - (based upon an estimated 25% of a personal exemption amount of $12,000 six years from now) .
Actual Tax Owing - You would owe about $366.00 to Canada and nothing to the USA in this situation.
No Tax to Pay - If your US Social Security was less than $8,000, there would be no tax in Canada.
HAVE TO FILE US INCOME TAX RETURNS - IN ANY CASE, YOU HAVE TO FILE YOUR US RETURNS EVEN IF YOU
HAVE NO US SOURCE INCOME.
Have to File US tax returns anyway -
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QUESTION: I would like to buy a property in the lower mainland of British Columbia. However, if I live in the U.S. and work in the U.S. can I invest in a condo and not pay income tax.
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BUYING IN THE LOWER MAINLAND WHILE LIVING AND WORKING IN ANOTHER COUNTRY SUCH AS THE USA
You are certainly not alone here. There are hundreds of Americans and other nationalities buying lower mainland condos. There are no legal bars to a foreign national buying Real Estate in BC. However, there are restrictions in other places like Prince Edward Island.
NOT PAYING INCOME TAX - I AM NOT SURE WHAT YOU MEAN BY THIS SO WILL ANSWER IT GENERICALLY.
LEAVING IT EMPTY - IF YOU LEAVE IT EMPTY AND UNFURNISHED AND KEEP IT AS A SPECULATIVE PROPERTY, you would have capital gains tax to pay to Canada and the US on Sale. You would pay Canadian tax first and then US tax and would claim credit for the tax paid to Canada on a US 1116.
USING IT FOR YOUR OWN USE - NO RENTAL - Assuming that you are US citizens only and not Canadians as well, there would be no Canadian Income tax liability unless you or your family was in Canada more than 183 days. If you were in Canada more than 183 days, you would be liable for income tax to Canada on your world income.
If you are a truly international person, who is not in any country more than 183 days, Canada might attempt to tax you on your world income because of your interests in Canada and a lack of interests in the other countries.
RENTAL PROPERTY - Taxable in both Countries - If you buy the unit as a rental investment property, it is subject to capital gains tax in both countries as above and you must file a Canadian Rental return under Section 216(4) each year for each owner. In addition, you need a rental "tax" agent in Canada who has signed a form NR6 and agreed to pay your tax if you do not file a Canadian Income Tax return by June 30th of the next year.
Parts of the CEN-TA organization look after over 1,500 rental properties for absentee owners and some 300 of them do not live in Canada. We can also assist you ion the purchase of your Lower Mainland Condominium and give you all the non-resident information at the same time. e can act as your agent in the above scenario.
Your questions answered in the Vancouver area from 1 PM to 3 PM every Saturday on C F U N - 1410 on your AM dial.
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This a a question from
I have a 4 acre Island lot for sale and am considering opening
it up to trade for a revenue property in town. I understand that if I sell
the lot for cash I will need to pay capital gains. My question is; if I
trade it straight across for another property will I have to pay for the
capital gains as if I sold it for cash, or can I wait and pay the capital
gains when I eventually sell the property in town that I traded for?
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CANADIAN PROPERTY - I am assuming that this is a Canadian property. If so, there is no provision for rolling over capital gains for any item other than an active business property and then it cannot be a rental business property.
So - no exchange can be done for an island lot, even if you traded it for another vacant lot.
If you were expropriated by a government body, there is a rollover provision available.
Canada does recognize the rollover of active business property. Therefore, if a farmer sells his farm and buys a bigger farm of the same type, he or she can roll over the profit. If a Canadian Tire store sold its old premises and built or bought a larger location (as is just happening in North Vancouver), the profit from the old building can be rolled into the new building (grand opening on October 31, 2001)
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UNITED STATES - A 1031 ROLLOVER APPLIES TO ANY BUSINESS PROPERTY INCLUDING RENTALS AND CAN EVEN APPLY TO FARMERS WHO TRADE BULLS.
It does not apply when you sell a property out of the country and buy one within the United States or vice versa although it did apply until about 1990.
CEN-TA Cross Border Services - Tax, Visas, Immigration
http://www.centa.com/staticpages/index.php/Oct2001CEN-TAPEDE
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