HELOC and Mortgage Interest as a deduction - -

Hi David,
 
Even though I have not get any reply to my last few emails (with a few questions) - not sure if I'm not doing something right or may be it just doesn't reach you, I'm still trying to ask you a question (only one this time).
 
We're living in a condo and we a HELOC against it. I've been using money from this HELOC to buy a few of my rental property (as a downpayment) and do a Smith Manuver. We're planning buy a new condo (a bigger one since we're expectin of expand of our family). The price for the condo will be almost twice as big as the current amount we own to the bank (mortgage & HELOC together)/
 
The downpayment for the new property will coming out of HELOC.
 
My wife is thinking to move to a new place right away but I'm proposing to keep it as a rental (and subsidise it from our pocket) and have all interest (on mortgage and downpayment money) as tax deductable; and then a few years later switch the property purpose for CRA (so current will be a rental and a new one will become our residential).
 
What do you think we should do (and if my approach is good) and what way would you suggest here???
 
Thanks in advance and looking forward to hear back from you.
 
Thanks,
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david ingram replies:

If your name is not in the Subject Line, it will not likely be replied to.  Even then, it is getting unlikely because of the sheer number of questions.  To date it has been very rare for me to charge for a question unless it is a phone consultation or an "in person".  However, by October 1, 2007, I am going to start a pay in advance PAYPAL account for people who send questions.  It is the only way to separate them out. As it is, my clients are being ignored half the time and people who will never be a client are getting a question answered.

For instance, I have been gone for three days and on my return have 561 emails to try and reply to.  I will answer about 20 and erase the others - No one can answer the email I get so no one should consider email sent to me to be delivered to me.   As I say, if they are not replied to in two or three days, they are gone. I do look for PAYING CLIENT and the Client's name as it suggests in the subject line and will always try and answer another one first for people who have been to see me and have a follow up dealing with the original consultation. 

You are starting over here.

However, in general, if you are taking down payments for rental properties out of a HELOC on your own residence, the interest is clearly deductible.  BUT, if you take a down payment out of the HELOC for a unit you move into, the interest is NOT deductible.

To be deductible the interest must have been paid on money borrowed for investment purposes.

I gave a free seminar on the subject three weeks ago and we had 91 people out. 

James Golombek of Trimark Fund had an interesting article on page FW4 of the Financial Post Weekend.  He suggests that one should say goodbye to the Singleton Shuffle and then proceeds to say that Cash Damming is fine.  In fact, I think is article is positive and the headline writer misread it.

The following is what I handed out at the seminar.  As I have always said, I believe that proper paperwork will still get the mortgage interest as a deduction if a business reason is incorporated into the process

I have no idea what you should do from your question and am not prepared to spend an hour doing what if's with another 400 questions.

The following is what I handed out at the free seminar which lasted from 12 noon to 5:30 at night on August 12th.

taxman@centa.com: Please see bottom of message if you wish to unsubscribe.
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My question is: Canadian-specific

QUESTION: We have a rental property generating regular rental income and got enough equity to cover our outstanding principle residence's mortgage. Is there a way we can move this equity to pay off the principle residence's mortgage and still be able to legitimately claim interest payable as tax deductible?

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david ingram replies:

Had 91 people at a free seminar at the Holliday INN on Sunday August 12th.

The following is the handout at that seminar.  It includes the recent court cases, the history and a couple of worksheets.  Hope it helps


Hope it helps.

-------------------
We recently bought a 4plex in Kitimat as a rental investment. We used a Scotia home equity loan for the down payment and a TD mortgage for the other 75%. We have a mortgage on our principal residence in Langley of $244,000. Our monthly payments on the 4plex will total about $1,300 , and the rents will be about $2,000. What would be the smartest method for paying this mortgage? What do we do with the excess cash flow? Is it possible to deduct the interest on our primary residence mortgage? Thanks.

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david ingram replies:

I had some 90 people at a free seminar on this subject today and am just about all "free"ed up on the subject.

You should be taking the rent you receive and use it to reduce the non-deductible mortgage on you r Langley house.
 
You can find out more by reading my November 2001 Newsletter in teh top left hand box at www.centa.com.

Reading Fraser Smith's Book 'THE SMITH MANOUVRE' will also give you ideas on how to make the Langley Morgage deductible.

Your excess  flow should be used to reduce the $244,000 mortgage as soon as possible.  Of course, the interest on the down payment loan is also dedcutible on Form T776.

The following is part of the handout at today's seminar -

David Ingram's US/Canada Services

Mortgage Interest as a Deduction in 2007 – dealing with GAAR

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 him self, 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 us e 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 then published as part of an advertisement in the North shore News in (I think) November, 1976. 

I expanded it and it was next published by Hancock House Publishers in my Investment Guide in 1979, 1980 and 1985 and 1991 and 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 be found in the March 1997 and November 2001 newsletters.

I was pretty heavily involved in the Federal  Conservative Party (ran for the North Shore Nomination in 19780 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 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.

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

The following was an excel spreadsheet that was presented and you might be able to figure it out.

1
WHY BOTHER MAKING YOUR MORTGAGE INTEREST DEDUCTIBLE??
1
2
  by david Ingram - www.centa.com - 
(604) 980-0321
2
3
WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING 
 $  100,000.00 3
4
Let's pretend that you are paying 6%
0.06  times 6000.00 4
5








5
6
How much do you have to earn to pay 
6000
6000.00 6
7
     At a  0.3 marginal tax rate
you would need  8571.43 7
8


you would pay tax of

2571.43 8
9


To Have enough to pay the interest of
6000.00 9
10
TWO






10
11
WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING 
 $  300,000.00 11
12
Let's pretend that you are paying 6%
0.06  times 18000.00 12
13








13
14
How much do you have to earn to pay 
18000
18000.00 14
15
     At a  0.35 marginal tax rate
you would need  27692.31 15
16


you would pay tax of

9692.31 16
17


To Have enough to pay the interest of
18000.00 17
18
THREE






18
19
WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING 
 $  600,000.00 19
20
Let's pretend that you are paying 6%
0.06  times 36000.00 20
21








21
22
How much do you have to earn to pay 
36000
36000.00 22
23
     At a  0.4 marginal tax rate
you would need  60000.00 23
24


you would pay tax of

24000.00 24
25


To Have enough to pay the interest of
36000.00 25
26








26
27
You can easily see that the larger the mortgage payment

27
28
the more money you have to make and the larger your

28
29
marginal tax rate would be - BC runs from 23% up to $35,000

29
30
and is 44% over $118,000 or so




30
31
DEDUCTIBLE





31
32
But if the last mortgage of 600000 could be deductible
36000.00 32
33
the interest paid of  36000 would get a tax deduction of
14400.00 33
34

and you would only need to earn the difference
21600.00 34
35

instead of the  60000
on line 23 above
35
36
Why only  21600





36
37
Well, you could earn 21600 , borrow
14400 (line 33)
37
38
 for a few days from Fred, and then pay Fred back with the refund
38
39








39
40
The difference in earnings is  60000
line 23

40
41
minus new necessity of 21600
Line 34

41
42
for  an earnings savings of 38400



42
43
or a monthly difference of 3200



43
44








44
45
And, if you are self employed as I am, I would have to do

45
46
$200,000 of business and pay $140,000 of expenses to have a profit  of
46
47
$60,000 left over to pay the tax on the $60,000 on line 23 (Aug 11, 2007) 47

And this will also show the mathematics of paying down a mortgage with the earnings from a Mutual fund.


Using New Securities Account to make mortgage deductible
This is to show the method only














Most, if not all people buy a Mutual fund and have the dividends reinvested




in the fund.  Do NOT DO THAT if you want a deductible mortgage

Non











Deductible Non   HELOC
Assume you  have a borrowed
100,000 to buy funds and they pay  0.06 original  less Deductible interest
A  B  C D E F    New G H I J K L M
You pay  0.06 pay your 35% Tax borrow for Invest't Mutual   earnings worth mortgage earnings original  not de-

borrowed interest Refund new funds loan  Fund 0.06
 

ductible
2007 100000 6000 2100 6000 106000 100000 6000 106000 100000 6000 94000 6000
2008 106000 6360 2226 6360 112360 106000 6360 112360 94000 6360 87640 5640
2009 112360 6742 2360 6742 119102 112360 6742 119102 87640 6742 80898 5258
2010 119102 7146 2501 7146 126248 119102 7146 126248 80898 7146 73752 4854
2011 126248 7575 2651 7575 133823 126248 7575 133823 73752 7575 66177 4425
2012 133823 8029 2810 8029 141852 133823 8029 141852 66177 8029 58148 3971
2013 141852 8511 2979 8511 150363 141852 8511 150363 58148 8511 49637 3489
2014 150363 9022 3158 9022 159385 150363 9022 159385 49637 9022 40615 2978
2015 159385 9563 3347 9563 168948 159385 9563 168948 40615 9563 31052 2437
2016 168948 10137 3548 10137 179085 168948 10137 179085 31052 10137 20915 1863
2017 179085 10745 3761 10745 189830 179085 10745 189830 20915 10745 10170 1255
2018 189830 11390 3986 11390 201220 189830 11390 201220 10170 11390 -1220  













Because the earnings from the mutual fund are mostly dividends and capital gains which are very tax efficient

there will be litle tax on the earnings - certainly less than half of the tax savings in column D
















In this example, I have assumed an interest only HELOC and assumed that you would have paid your regular non-dedcutible interest
which would decrease each year because of the principal being paid down in column K. column M represents HELOC interest













Every one's situation is different.  YOUR cash flow will be different.  And to escape GARR, you must be making a business decision
If you wish to make your mortgage deductible.  A perceived increase in earnings from a mutual fund loan would likely be sufficient
but there are NO, NONE, NOT ANY Guarantees.




















If this situation interests you, you are advised to get a written financial plan from Fred Snyder FIRST - His Number is (604) 731-8900













david ingram,  home office  phone (604) 980-0321 - Please do NOT phone before 10 AM or after 9 PM but you can phone 7 days a week
there are NO message machines - If you do leave a message with a person, If I do not get back in 4 hours, I WILL NOT BE RETURNING 
the call - I leave it to YOU to follow up. I get over 700 emails a day and my record for phone calls on April 30 2006 was over 140.

I hpe the formatting stays with the email.


Not sure if this will help or not.  What you should do is get Fred Snyder to do a written financial plan for you. see the red a couple of lines up.

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David Ingram wrote:
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It is very unlikely that blind or unexpected email to me will be answered.  I receive anywhere from 100 to 700  unsolicited emails a day and usually answer anywhere from 2 to 20 if they are not from existing clients.  Existing clients are advised to put their 'name and PAYING CUSTOMER' in the subject and get answered first.  I also refuse to be a slave to email and do not look at it every day and have never ever looked at it when i am out of town. 

However, I regularly search for the words"PAYING CUSTOMER" and always answer them first if they did not get spammed out. As an example, as I write this on June 28th, since June 16th (12 days), my 'spammed out' box has 7,118 unread messages, my deleted box has 2630 I have actually looked at and deleted and I have answerd 63 email questions I have answered for clients and strangers.  I have also put aside 446 messages that I am maybe going to try and answer because they look interesting.

Therefore, if an email is not answered in 24 to 36 hours, it is lost in space.  You can try and resend it but if important, you will have to phone to make an appointment.  Gillian Bryan generally accepts appointment requests for me between 10:30 AM and 4:00 PM Monday to Friday VANCOUVER (Seattle, Portland, Los Angeles) time at (604) 980-0321

David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is 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 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office)
 
 
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."
 
David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
 
Phone consultations are $400 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada.
 
This is not intended to be definitive but in general I am quoting $800 to $2,800 for a dual country tax return.
 
$800 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,000 would be the same with one rental
 
$1,200 would be the same with one business no rental
 
$1,200 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,500 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,600 would be for two people with income from two countries

$2,800 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $150.00 up.
 
With a Rental for $350
 
A Business for $350 - Rental and business likely $450
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $800 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.
 
Just a guideline not etched in stone. 
 
This from "ask an income trusts 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, 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 Income Tax Convention

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