Margin Interest as a deduction for US rental property - Expert Income Tax Help with cross Border tax and immigration and divorce

xxxxx wrote:
Dear Sir , I have a question.

I am a Canadian who has a margin account with a discount brokerage in Canada.

Can i use this margin account to borrow, to invest in a rental property in the US ?

Is the interest deductible in the US , and in Canada ?

I appreciate an answer.

xxxxx

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david ingram replies

It does not matter if you borrow from a Canadian or an Ethiopian Bank or other financial institution. 

What does matter is what the money was ultimately used for.

If you use a Canadian Brokerage account to borrow any part of the money to purchase a US rental property, the loan interest is deductible on your US federal US state (if in a state with tax) and your Canadian tax return.

The following answers to other questions might help as well.  Remember - you can NOT work on the property.

-----------------------------

XXXXXX XXXXXX wrote:
Very informative information here!
 
Question: Is it legal for me (a Canadian citizen and resident) to collect rent from an investment property in the US as long as I hire an American property manager to collect rent? He takes 15% of the rent and I receive the remaining.  
 
Thanks,
 
XXXXXX
--------------------------------
david ingram replies:

Without a doubt - You can own any investment in the US as long as you hire an American resident to look after it and collect rent etc.  This also applies to other countries and I am sending the entire older question out again because I have had two other calls about Thailand this week and can not issue enough warnings about investing or doing anything in Thailand.   I have had two  men i know arrested and imprisoned and had their lives ruined in Thailand for  'nothing'.

The reference in the following text and the link to the Thailand Story and Canadian Nixon who was imprisoned for serving on a condominium board where he owned five condos is a must read for anyone thinking of investing and or living in Thailand and a warning to those thinking of investing anywhere other than their home country.


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On Sat, Sep 5, 2009 at 6:41 PM, US / Canada Income Tax Help - CEN-TAPEDE <centapede@lists.centa.com> wrote:



My question is: US-specific

QUESTION: I noticed that your website uses a lot of fear mongering when it comes to doing improvements on a USA Property. fact is that every Canadian that i know builds their own decks,paints,or any other work that needs to be done on their property. there is simply no agency that can investigate it , there are over 11 million illegal immigrants they cant even catch......please don't fear monger!


------------------------------------------------
Ozzie Jurock replies:

oz wrote:
Fear-mongering?

As a Canadian:
1. If you own a holiday home in the US, you can renovate to your heart's content.
2. If you own an investment property, you have to hire someone to do it for you.
    You can't renovate, can't collect rent etc.

That's not fear-mongering, that is the law.

Ozzie
---------------------------------------
david ingram replies:

Since I am the author of the warnings, I suppose that I should make the point further,.

If you, as  a Canadian wish a summer or winter home in he US, you may buy a lot and dig a hole and lay a foundation and frame, roof, plumb, wire and finish the interior of your home.  You can buy a bulldozer or rent one or hire an operator with one to dig that hole and finish off the driveway, and then you can spread the gravel or mix and pour your own concrete for the driveway and sidewalk and patio pad.

However, if you intend to rent it out of for even a day a year or provide it for your employees to use for their holidays, you can not do any of the above except buy the lot or the property and hire US citizens or US resident aliens to do any work on it or collect rent for you.

And, if it is for your own use, your brother, sister, next door neighbour or even adult children may not work on the project either.  If they do, they are liable to arrest, fine, imprisonment, deportation and banishment from the USA as you are if you work on the unit which is intended for rent or business use or is already being used for business use.

You are also (I hate to say it) rather naive to think that Homeland Security does not have the facilities to catch you when they can not catch 11,000,000 illegal aliens.

Homeland Security has a multitude of informers who will  and do report Canadians doing work on their own properties.  I have seen or talked to dozens of people who have been arrested because a painter, dry waller, house cleaner, irate tenant or rental manager has reported them.  What happens is that the owner asks for a quote to paint the rental suite and then does it himself.  the painter sees the fellow painting his own suite and turns him or her into Homeland Security and Homeland security comes along and arrests you and puts you into an immigration holding cell with 84 other illegals who have been rounded up that week and you have to come up with $5,000 US bail to get out of jail and then suffer deportation and being banned from the US for 3, 5 or 10 years.

This can happen anywhere.  You may want to read the following about a Canadian working on the council of his five rental condos in Thailand. 

One strata council in Point Roberts had a problem with the president of the council being a Canadian and firing a maintenance worker in the complex.  The maintenance worker complained to Homeland Security.  I regularly advise Canadians to stay off the strata council when they own units in the USA. 

For the Thailand story, see  http://thaicrisis.wordpress.com/2009/03/31/condo-owner-arrested-for-working-illegally/

I wish I could go along with your wish to stop fear mongering.  However, it is really tough when you are a nice Canadian and they arrest you for painting your condo five months AFTER the fact because the tenant you evicted phoned Homeland Security.

Remember. under US law, the penalty for painting a unit can be more serious and damaging to the perpetrator then  the spontaneous holdup of a corner store.

So, if you are painting, cleaning and collecting rent for a piece of business real estate, stop now.

If you are merely fixing up a place that you use exclusively for pleasure and your own family, paint away, but do not help a neighbor, even if the American neighbor helped you first.

A lady at my house today, a US Canadian dual citizen who paints and decorates and cleans the eves on her rental units had to use the police to evict a 16 year tenant who threatened her with a knife.

You never know when the tenant or a neighbour will become an enemy.  Think of a divorce.  The combatants used to sleep together and may have produced half a dozen children.  My understanding is that the IRS and CRA gets half their tips from ex spouses.

The nice thing is that the Canadian can be bailed out quickly in the USA.  In Thailand, you can rot in the jail for months.  When you do read the Thailand one (and be sure you do) read the whole thing.  Do not just dismiss it because the rules are very similar to the US rules.  BEWARE!
david ingram

copied to Ozzie
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taxman@centa.com: Please see bottom of message if you wish to unsubscribe.
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I have a Canadian investor investing in the United States. What are his tax responsible on profits made both in Canadian and US? I buy and sale real estate although he is serving as a silent partner and will not be listed as owner of the properties.

"To do good work one must eat well, be well housed, and drink one's wine in peace."

-------------------------------
david ingram replies:

I have to admit that when someone sends me an email with three contact numbers and they are all unlisted numbers and that person is taking people's money, I get a little worried.

I am not answering your question as such but am including older emails that all together do answer your questions.  Feel free to pass this on to your Canadian Client.

-------------------------------------------

This email is because of a phone call asking for copies of the handouts I have used at various seminars.

It will also be the last email I send to the 'lists" in 2009 with the mantra of giving people income tax help

The first part in green  starts off with a New Year's observation because of an email from Dan Walkow.

I hope we all have a great 2010 and look back on 2009 as one of interest.

ingram

-------------------------------------------
This came to me from Dan Walkow (www.seabankcapital.com) who has been on the INGRAM Show (www.david-ingram.com) many rimes and who specializes in investments for people with US and Canadian situations which requires not only special knowledge but special licensing to deal with.    Dan thinks 'out of the box' Which makes his email particularly poignant.

The last person I talked to was upset because they had a spat with their spouse this morning,.    I said, "At least you have a spouse to have a spat with".

So this is going out to my list as 'maybe' the last missive from me for 2009.  It is advice to think out of the box.  Be thankful for what you have, and look up, look down, look sideways and remember that even a crow will bend a piece of wire to get food out of a container

http://www.youtube.com/watch?v=fijuwTeoBt8

We all have to figure out what wire to bend this year and who might be the best person to help you with the bend.

May this new year of 2010 be a magnificent and rewarding one for us all.

ingram


BUZZARD:

If you put a buzzard in a pen that is 6' x 8' and is entirely open at the
top, the bird, in spite of its ability to fly, will be an absolute prisoner.
The reason is that a buzzard always begins a flight from the ground with a
run of 10-12'. Without space to run, as is its habit, it will not
even attempt to fly, but will remain a prisoner for life in a small jail
with no top.


BAT:

The ordinary bat that flies around at night, a remarkably nimble creature in
the air, cannot take off from a level place. If it is placed on the
floor or flat ground, all it can do is shuffle about helplessly and
painfully until it reaches some slight elevation from which it can throw
itself into the air. Then, at once, it takes off like a flash.


BUMBLEBEE:

A bumblebee, if dropped into an open tumbler, will be there until it dies,
unless it is taken out. It never sees the means of escape at the top,
but persists in trying to find some way out through the sides near the
bottom.  It will seek a way where none exists, until it
completely destroys itself.


PEOPLE:

In many ways, we are like the Buzzard, the Bat, and the Bumblebee.
We struggle about with all our problems and frustrations, never realizing
that all we have to do is look up.  Sorrow looks back, worry looks
around, but faith looks up. Live simply, love generously, care deeply, speak
kindly and trust in the Creator.

May your troubles be less, your blessings more, and may nothing but
happiness come through your door!

----------------------------------------------

Hello

 

Further to our brief conversation I understand you had given a handout at one of your USA Real Estate seminars.  I would appreciate if you would send me a copy of that handout.  Thanks for your anticipated information.  If there is any charge please let me know.

 

Regards,

 

 

--------------------------------------
david ingram replies:

I have done the us canada  real estate seminar in Toronto, Ottawa, Calgary, Vancouver,  Victoria; Langley, Nanaimo and a few other places to over 6,000 people in the last 18 months.

There have been 4 or 5 different handouts.

The ones I am referencing are fairly typical

I see that you  are a lawyer

Happy reading

The following are several questions answered at different times and include the handouts


XXXXXX XXXXXX wrote:
Very informative information here!
 
Question: Is it legal for me (a Canadian citizen and resident) to collect rent from an investment property in the US as long as I hire an American property manager to collect rent? He takes 15% of the rent and I receive the remaining.  
 
Thanks,
 
XXXXXX
--------------------------------
david ingram replies:

Without a doubt - You can own any investment in the US as long as you hire an American resident to look after it and collect rent etc.  This also applies to other countries and I am sending the entire older question out again because I have had two other calls about Thailand this week and can not issue enough warnings about investing or doing anything in Thailand.   I have had two  men i know arrested and imprisoned and had their lives ruined in Thailand for  'nothing'.

The reference in the following text and the link to the Thailand Story and Canadian Nixon who was imprisoned for serving on a condominium board where he owned five condos is a must read for anyone thinking of investing and or living in Thailand and a warning to those thinking of investing anywhere other than their home country.
-------------------------------------------

On Sat, Sep 5, 2009 at 6:41 PM, US / Canada Income Tax Help - CEN-TAPEDE <centapede@lists.centa.com> wrote:

My question is: US-specific

QUESTION: I noticed that your website uses a lot of fear mongering when it comes to doing improvements on a USA Property. fact is that every Canadian that i know builds their own decks,paints,or any other work that needs to be done on their property. there is simply no agency that can investigate it , there are over 11 million illegal immigrants they cant even catch......please don't fear monger!

------------------------------------------------
Ozzie Jurock replies:

oz wrote:
Fear-mongering?

As a Canadian:
1. If you own a holiday home in the US, you can renovate to your heart's content.
2. If you own an investment property, you have to hire someone to do it for you.
    You can't renovate, can't collect rent etc.

That's not fear-mongering, that is the law.

Ozzie
---------------------------------------
david ingram replies:

Since I am the author of the warnings, I suppose that I should make the point further,.

If you, as  a Canadian wish a summer or winter home in he US, you may buy a lot and dig a hole and lay a foundation and frame, roof, plumb, wire and finish the interior of your home.  You can buy a bulldozer or rent one or hire an operator with one to dig that hole and finish off the driveway, and then you can spread the gravel or mix and pour your own concrete for the driveway and sidewalk and patio pad.

However, if you intend to rent it out of for even a day a year or provide it for your employees to use for their holidays, you can not do any of the above except buy the lot or the property and hire US citizens or US resident aliens to do any work on it or collect rent for you.

And, if it is for your own use, your brother, sister, next door neighbour or even adult children may not work on the project either.  If they do, they are liable to arrest, fine, imprisonment, deportation and banishment from the USA as you are if you work on the unit which is intended for rent or business use or is already being used for business use.

You are also (I hate to say it) rather naive to think that Homeland Security does not have the facilities to catch you when they can not catch 11,000,000 illegal aliens.

Homeland Security has a multitude of informers who will  and do report Canadians doing work on their own properties.  I have seen or talked to dozens of people who have been arrested because a painter, dry waller, house cleaner, irate tenant or rental manager has reported them.  What happens is that the owner asks for a quote to paint the rental suite and then does it himself.  the painter sees the fellow painting his own suite and turns him or her into Homeland Security and Homeland security comes along and arrests you and puts you into an immigration holding cell with 84 other illegals who have been rounded up that week and you have to come up with $5,000 US bail to get out of jail and then suffer deportation and being banned from the US for 3, 5 or 10 years.

This can happen anywhere.  You may want to read the following about a Canadian working on the council of his five rental condos in Thailand. 

One strata council in Point Roberts had a problem with the president of the council being a Canadian and firing a maintenance worker in the complex.  The maintenance worker complained to Homeland Security.  I regularly advise Canadians to stay off the strata council when they own units in the USA. 

For the Thailand story, see  http://thaicrisis.wordpress.com/2009/03/31/condo-owner-arrested-for-working-illegally/

I wish I could go along with your wish to stop fear mongering.  However, it is really tough when you are a nice Canadian and they arrest you for painting your condo five months AFTER the fact because the tenant you evicted phoned Homeland Security.

Remember. under US law, the penalty for painting a unit can be more serious and damaging to the perpetrator then  the spontaneous holdup of a corner store.

So, if you are painting, cleaning and collecting rent for a piece of business real estate, stop now.

If you are merely fixing up a place that you use exclusively for pleasure and your own family, paint away, but do not help a neighbor, even if the American neighbor helped you first.

A lady at my house today, a US Canadian dual citizen who paints and decorates and cleans the eves on her rental units had to use the police to evict a 16 year tenant who threatened her with a knife.

You never know when the tenant or a neighbour will become an enemy.  Think of a divorce.  The combatants used to sleep together and may have produced half a dozen children.  My understanding is that the IRS and CRA gets half their tips from ex spouses.

The nice thing is that the Canadian can be bailed out quickly in the USA.  In Thailand, you can rot in the jail for months.  When you do read the Thailand one (and be sure you do) read the whole thing.  Do not just dismiss it because the rules are very similar to the US rules.  BEWARE!
david ingram

-------------------------------------------------------------------------------------


I plan on buying a house and paying cash.
Can I rent this out?
If I get a property manager is that ok?
 
When I go across the border can I say I have an investment property or is this called a vacation property?
 
I understand I can clean the kitchen, bathroom and vacuum but I cannot do repairs or any improvements.
 
Also it is in Arizona do I declare the income?
 
With thanks,
 
XXX XXXXX
-------------------------------------------------
david ingram replies:
 
If you are going down to buy the property, say you are going down to buy a property.
 
If you are intending to rent it out, get a property manager.
 
If this is a rental property, you can NOT clean the kitchen, bathroom, or anything else if the purpose is to get it ready for rent.
 
If you happen to be staying in the unit yourself for a month, you are welcome to vacuum, clean the kitchen and bathroom and make the beds for yourself while you are there and clean it well when you finish your month's stay. However, do NOT stay one night and give it that super dooper cleaning or decide to paint the unit while you are there.  A resident property manager or someone else in the complex (if a condo) could report that you are making improvements and doing repairs and maintenance without a visa.  You could be arrested a year later just as if you robbed a bank.
 
You need to file a US 1040NR with Schedule E and 4562  and an Arizona 140PY and then report the income and expenses again in Canada on Form T776 and the accompanying CCA schedule (capital cost allowance).
 
These older questions will help and if you want to get a 5 minute conversation in, call 1-866-980-0499 (or 604) 980-0321 locally between 6 PM and 9 PM on Wednesday night when I do an open line show on money, finance, and other interesting topics.  The guest from 6 to 7 PM (PDT) this next Wednesday, July 22, 2009 will be Carey Linde a Vancouver divorce lawyer whose specialty is child access and custody for fathers.  If you know any man who is having a problem with visitation rights, etc., tell him or her to log on this next Wednesday  to www.david-ingram.com
 
Note that there is no charge for calls to the program.  I charge $450 for this type of consultation by phone or in person.  See price list at end
 
These older questions will help as well. Please note that this address is NOT a Q & A address.  Questions should be sent to taxman@centa.com.
 
--------------------------------------------------- 
 
Sent: Thursday, November 13, 2008 10:45 PM
Subject: Request Information - Buying Rental Investment Property In WA

Dear David,
 
I am a Canadian Citizen planning to buy a 4 plex rental investment property in Bellingham, WA.
Request if you could provide more information and have you seen cases of Canadians owning rental properties  south of the border.
 
Secondly, will it be better if I form a LLC in Washington state - I understand I have to get a business visa under NAFTA or in your opinion should I just keep in under my personal name.
 
Say, If I do buy it under my personal name - and later want to transfer it under LLC - how hard it is and is there a financial burden ....reason in canada is the property transfer tax etc.
 
My contact cell number is 778 2xx-xxxx and I am in Surrey,BC.
 
Many Thanks
 
-------------------------------------------
david ingram replies:
 
This was a Nov 13th question that only surfaced because i lost all of my email from Nov 17th on.  This was sitting there unanswered.
 
Since Nov 13th, I have spoken to over 2,000 people at seminars in Calgary, Vancouver, Victoria and Nanaimo about buying US property.  I am going to send you the main handout which was given out at those seminars.
 
In particular, I want to point out the danger of the 4-plex in Bellingham when you live in the lower mainland.
 
It is so close that if something needs fixing, you are going to be tempted to go down and fix it yourself.
 
As a Canadian, you can NOT work on that property in any way as the following will show you.
 
If you have a question, feel free to phone the show tonight.  Because you are local, you can use 604-980-0321 as a phone line. 
 
The older questions following will / should help you in your quest.
 
Good luck.
 
david ingram
 
 
----------------------------------------------------------\
My question is: US-specific

QUESTION: I am thinking of buying a property in Phoenix for personal use. I also want to rent it out as a vacation rental for most of the year. I see most people
just list their properties on Craigslist or Vacationrentals.com and then collect by Paypal or certified cheque. My question is this: If you are doing this from home in
Canada, while all the cleaning and maintenance is being contracted out to Americans, are you still in violation of their laws? Thanks for your reply.
 

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david ingram replies:

If you only do what you suggest and do no repairs or maintenance on the unit when you are using it yourself, you will be okay.  However, if you decide to paint the bathroom while you are using it yourself, you ARE  subject to arrest, imprisonment, fines and banishment from the USA for 3, 5 or 10 years.


Cleaning the kitchen, washing the bathroom or vacuuming while you are there yourself is okay BUT NO REPAIRS, NO IMPROVEMENTS.

So that you understand what i mean.

Let's say you have locals cleaning and maintaining while you are renting it to vacationers.  Then you go down and paint the place while you are there.  Then for whatever reason, you replace the cleaners you had.  THEY KNOW YOU PAINTED IT,  They can report you six months or a year or three years later.

You would expect to be reported if you robbed a bank.  Painting the unit can be more serious under US Immigration Law then a spontaneous drunken robbery of the corner grocery store.

The following older Q & A contains a lot more info and remember, when you do rent it, you have to file a US 1040NR and a Arizona Tax return each.  Big fines for failure to file as a non-resident.  You now know whee to send the returns.

david ingram
-------------------------------------------


QUESTION:

What is the best way to either structure a company (Canadian or USA)or set myself up personnel to shelter / minimize taxes paid as a Canadian resident, working in BC, investing in real estate in San Diego,California, USA?


-----------------------------------
david ingram replies:

There is no one best way because everyone is different in terms of estate, family, immigration and other issues.

In general I do NOT recommend buying in the name of a company.  If the desire is to escape public liability, you do that with a good insurance policy.
 
Directors can be held liable for many, if not 'most' responsibilities of a limited company if the creditor or wronged person wants to pursue it. Think of the driver of a car belonging to a limited company.  They sue the company AND the driver.
 
If you incorporate cross border, be prepared for an extra $2,000 a year in accounting plus legal fees plus extra state filing fees.  California where you are thinking of investing,  has a minimum $800 a year government filing fee for an LLC as an example even if you lost or lose money on the rental..

The following older Q & A may help.

QUESTION:

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 by the 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 person that would be able to help me.
Thanks for your time.
----------------------------------------------------------
david ingram replies:

You need a property manager if you do not want the strong possibility of going to jail for a few days before being deported and then not allowed back in the USA. For a story about US Immigrations hell for a Holiday Inn Manager, try
http://apostille.us/news/local_holiday_inn_express_manager_in_jail_on_immigration_charges;_husband_fights_for_her_return.shtml
or how about 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 you have an ad running to show the premises and saying you are going down to spend the weekend in your holiday home (i.e lying to the HOMELAND Security official) could result in seizure of your vehicle and a ban for up to 10 years under their ER (Expedited Removal) process.  In other words, it is more serious to lie to the guard at the border than it is to do the work.

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

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

You can paint and clean your own unit if it is NEVER rented or intended to be rented. You can not paint and clean up getting the property ready for 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 for another one and then another one and another one. If you do this and one of your tenants (who maybe doesn't like you because you evicted them or told them to turn their stereo down when you happen to be in town 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 phone the Homeland Security office or write an anonymous letter and you could be arrested in November 2008 for something you did in December 2007. 

This may seem unreal, but in US terms, working without a visa is just as serious in law as the spontaneous robbing of a convenience store and the penalties can be worse.  Think of those nightly news shows with 28 illegal Mexican or Guatemalan citizens being stuffed into Paddy wagons on the Arizona border. This is not a racist comment but with the Mexican illegal immigrants, bing rounded up and shipped back across the border is a way of life with no social stigma.  For a nice clean living Canadian, being thrown into an immigration detention cell for taking money for rent is a devastating experience. In one case, a mother and her son were thrown into jail for 5 days in Phoenix when she went to Phoenix from White Rock BC.  Her husband owned 18 units and HAD a property manager.  Unfortunately, he also died in the arms of that female property manager and his widow then fired the property manager and she and her 20 year old son went to Phoenix to collect the rent and hire 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 and threw them into the notorious Phoenix Immigration hell with some 300 other illegals. To rub salt into the widow's wounds, the property manager ended up with the property because she was a second mortgage holder on the property and the property fell into default because of the widow's cash flow troubles, largely because she could not go to Phoenix to hire another property manager.

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

It does not stop there.  This type of conviction would stop you getting on 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 in place, the arrest and banning would stop your Nov 6 trip to Cancun because people in this position will not even be allowed on commercial airliners 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 and then back to Mexico City and 'then' to Cancun and reverse it to get home.

This may be overkill but 'You' are / were lucky that the inspector gave you 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 RETURN WITH A SCHEDULE E AND A SCHEDULE 4562  EACH.  Then the same income gets put on Schedule T776 of your Canadian return.  If you have paid tax to the US, you will claim it as a credit on Canadian forms T2209 and T2036.


These older questions will help you AS WELL.

QUESTION: Hello David,

I'm living in Vancouver, finally paid off the student debt but don't see myself getting into
the expensive Vancouver market. I do however like to ski and was thinking of buying an 
inexpensive trailer (25k Cdn) in Maple Falls Washington. 
 
However I'm not sure what other expenses I should expect given that it's in the US. 
I'm not trying to make this an investment with a high return, but I would like to do some 
handy work to it to increase the value. If I add about 10k worth of value, how would that 
affect my taxes in the long term?

Thanks for the advice.
----------------------------------------------
david ingram replies:

One of my favourite weekends ever was in 1973 at the Chandelier (think it has a different name now) when marooned at SnowLine  because of the gas shortage when one could only buy gas on odd days if your licence plate ended with an odd number and even days when it was an even number.

Strangely, it was that weekend 34 years ago that lets me answer you question now.

The cabin I was staying in was not a rental but was built by the fellow who owned it.  When he was building it, buddies would come down and help him and one weekend, the INS raided the spot and deported a bunch of his friends for working in the US .

He was fine building it because he owned it but no one else can hammer a nail, paint a board, install a sink, or carry a shingle if they are not either an owner or a legal US citizen or US resident with a green card.

If your buddy is working and living in the US with a TN, H1, O1, P1, L1 or any other visa but a green card, they cam NOT help you either.

And, if you are intending to rent the trailer out 'EVER', 'you' can NOT hammer a nail, sweep the front steps or clean the toilet.


Assuming you are buying this trailer on its own lot, when you go to sell, you will owe the US income tax on the profit.

If it is your only piece of real estate at that time, you will not owe Canada any tax because you can claim it as your personal residence if you have not bought another place.
-------------------
However, I would far prefer that you stretched your resources to buy something in Canada to live in and combine your present rent and the payments you would have to make for the trailer to buy your home in Canada. If you can't afford a one bedroom, buy a studio.  Go down to Ike on the Lougheed highway and look at how much they can put into a small space. 

Interestingly, I read the other day that IKEA has now sold enough furniture in North America that 10% of all children are conceived in an IKEA Bed.  Now that is information worth knowing.

Good luck

.

QUESTION:

If a Canadian citizen purchases real property in the U.S. are they required to have a U.S. Social Security Number?  Am I correct that my tax liability will be to the U.S., whilst reporting my income to the CRA but with offsetting foreign tax credits due to paying U.S. income tax?  For liability purposes, would it be more beneficial tax-wise to hold the U.S. properties under a Canadian or U.S. corporation?  Thank you.

-------------------------------------------------

david ingram replies:

Assuming that you are going to rent the property out, you will need an ITIN (Individual Taxpayer Identification Number).   Fill in a W-7 and submit it with your first tax return or try and get it at the bank where you get your mortgage. 

I do not suggest a corporation in either country unless you want to spend a couple of thousand dollars a year extra on accounting.  As a foreigner with a US corporation, you will need to fill in form 5472 with your 1120 corporation tax return.  Then, because the mind and control of the corporation is in the hands of a Canadian resident, you will need to file again in Canada.

 This older Q & A may help

My wife and I are Canadian citizens and own a rental property (house) in Arizona. 
Do I need to file income tax in the USA? Can we deduct the mortgage interest 
and any expenses associated with the rental on our Canadian income tax return?
Thanks and regards,
______________________________________________
david ingram replies

If you do not file a US 1040NR with Schedule E and Arizona 140PY or 140NR return, you face the likely Federal penalties of a $1,000 to $10,000 fine each per year for failure to report rental income as a non-resident plus 30% of the gross rent with no expenses allowed. 

That is for each of you if you both own the property.  And, I  have never seen a $10,000 penalty.

Then, you will EACH be assessed 30% of the gross rent with no expenses allowed.

(Canada's penalty of  just 25% of the gross rent with no expenses in reverse seems mild in comparison.)

FILE the US returns for every year you have missed.

THEN - There is NO responsibility for you to claim any rental expenses on your Canadian return.  You can claim them if you wish on form T776.  HOWEVER, you MUST report the gross rent on line 126 of your T1 if you do not claim expenses and the net rent if you do,.If there is a legitimate rental loss which has not been created by your using the unit personally, you can use the loss to reduce your other taxable income.

A Warning.  There is ample evidence that the IRS and CRA are pro-actively sharing information about these.  And, if you are in a complex and using the unit personally NEVER talk about the fact you have not filed a US tax return and don't ask a local.  I personally know of two people who make their living turning in Canadians who are not filing their US returns.  There is a 10% to 30% reward for turning you in by filing US form 211. See it at www.irs.gov - click on forms, etc.

If you need help with this, you now know where we are.
----

--QUESTION:

We have a rental property in the US. Can I claim the property taxes paid on my condominium as a rental expense deduction on my Canadian taxes? Form T776 mentions only Canadian property taxes however, the general guide states that all expenses can be deducted.


--------------------------------
david ingram replies:

Anything
that can be claimed on schedule E of the US return can be claimed on form
T776

You need to do your Schedule E 1040NR first and then convert the US
figures to the T776 on  your Canadian return.  If the condo is in
Arizona, you would do a 140NR or if in California, a 540NR.

There is no
state tax in Florida, Texas or Nevada, the other three popular places for a
Canadian to have a rental US condo.

The difference between the two
counties is the method of claiming depreciation.  In the US, you MUST
calculate the depreciation and include it even if it creates a loss.  The
good news is that the operating loss caries forward as a future deduction
against rent OR Capital Gains as opposed to non-resident losses in Canada which
unfairly disappear into the ether.

In Canada, you do NOT have to claim it
and if you do, can only claim enough to create a zero rental. Depreciation or
CCA (capital cost allowance) as we call it can NOT be used to create or increase
a loss.

Make sure that you do the US returns, particularly if you are
losing money.  The penalty can be a minimum of $1,000 to $10,000 PLUS 30%
of the gross rent for failure to file a US rental return by a
non-resident.

We, of course, are ideally suited to look after these for
you by fax, snail mail, email or courier.

---------

_____________________________________________

QUESTION:

Hi,

My wife and I are looking at possibly purchasing a condo in Palm Springs for our retirement. We are both 50 years old and plan on working for the next 7 or 8 years. Our plan is to purchase and use it a few times a year and rent/lease it out for the remainder of the year until we reach retirement at which time we would spend 4 or 5 months a years there. Looking for some advice on what we should be looking out for and what would be a better choice mortgage wise, U.S. or Canadian funding. Or is it a good idea at all to purchase U.S. real estate as a Canadian? Any advice or literature that's out there that you could direct us to would be greatly appreciated. Thanks!

xxxxx xxxxxxxx
------------------------------------------------------------------------
david ingram replies:

If your intention is to start spending significant time there, buying now is extremely sensible because you are buying it at today's price which will logically go up in the future.  You 'are' of course, also dealing with exchange.

Since your earnings are in Canadian dollars, borrowing the money in Canada and paying cash in palm Springs means that you will be paying in a known currency.

To explain that statement, persons who bought in 1991 with a US mortgage payment of $1,000 needed $1,145.87 Canadian dollars to make the payment.  By 2001, they needed $1,548.62 to stay even.

However, in reverse, if you bought in 2002, you needed 1,570.36 and only need about $1,060 to stay even today.

Currency exchange does go both ways.

You might want to borrow half in Canada and take out a mortgage for half in Palm Springs.

If you are renting the property, you will both need to file a US Federal 1040NR with Schedule E and California 540NR return and then change the currency  to Canadian and file form T776 with your Canadian T1 returns.  Failure to file the form 1040NR can have penalties of $1,000 to $10,000 per year per return per person even if you lose money.  A very real problem is that all sorts of Canadians approach a US accountant and ask about filing and are told they do not need to file a return because they are losing money.  Not so.  When it comes time to file, hunt down a specialist in dual country tax returns like Gary Gauvin in Dallas,, Steve Peters in Halifax, Kevyn Nightingale in Toronto, Brad Howland in Victoria or myself in Good Old North Vancouver.

Whatever you do, do NOT buy it in a corporate name. You will not save anything and end up with another $2 or $3,000 of accounting fees.

You will also need to file personal US tax returns if you are there more than an average  of 120 days a year. See the April 1994 newsletter in the top left hand box at
www.centa.com

David Ingram's US/Canada Tax Services

 

Mortgage Interest as a Deduction in 2009 – dealing with GAAR

 

You can find out how to make mortgage interest, car interest, boat interest and just about any other interest deductible on your CANADIAN Income Tax Return by going to www.centa.com and reading the November 2001 Newsletter in the top left hand corner.

 

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 himself; 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 use 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 published as part of their annual report advertisement in the North Shore News about Nov 1976. 

 

I expanded it and it was next published by Hancock House Publishers in my Investment Guide in 1979, 1980, 1985 and 1991 and in Joe Martin’s 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 still be found in the March 1997 and November 2001 newsletters at www.centa.com (top left)..

 

I was pretty heavily involved in the Federal  Conservative Party (ran for the North Shore Nomination in 1978 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 available in the House of Commons, 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.  Today, in 2009, Fred Snyder includes the cash flow analysis to make YOUR mortgage deductible with his FREE Written Financial Plan – Call (604) 731-8900 to make an appointment.

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 the $300,000 to buy a house and then used the house as security to borrow $300,000 which he then put back into his capital account; this was all done in one day.  Of course, since the money in the account was now clearly 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).  Judge 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:

  1. The Lipsons contracted to buy a home in Forest Hills in Toronto
  2. Mrs Lipson took out a demand loan to buy share in the family business from her husband.
  3. The shares were transferred to Mrs Lipson as a section 73(1)  rollover
  4. Mr Lipson used the funds to buy the house
  5. 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 unclear who had paid the interest.

 

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Authored by: Anonymous on Thursday, April 08 2010 @ 08:33 AM PDT Margin Interest as a deduction for US rental property - Expert Income Tax Help with cross Border tax and immigration and divorce

 

 

 

Dear Sir,

How does the US/Canadian taxation work? If you have an income in US and Canada in the same year and you have already done your income tax return in US what should you include in your Canadian income tax return? My husband worked for a while in US and then moved back to Canada and in the same year worked for a Canadian company. He had already done the tax return in US and had a refund. What exactly should he put in his Canadian tax return? Should he include the income he earned in US plus in Canada together and then subtract all the expenses and tax paid in both countries? Should he attach his US tax return to the Canadian one? In both cases there was only simple income without any bonus or extra income. What forms should be filled out?

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