deducting Canadian line of credit interest on US rental -

 
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My_question_is: Both

question: We are thinking of purchasing a rental home in California.  
We will be using a Canadian line of credit to purchase the home.  
Can we deduct the interest from the rental income on our US income taxes 
and also our Canadian income taxes?  I know that we have to claim depreciation 
on the US taxes but what about the Canadian taxes?

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david ingram replies:
 
You do NOT need to claim depreciation on your Canadian return.  You do on the US return on form 4562.

The interest on your Canadian line of credit is deductible on your schedule E which goes with the US 1040NR return you must file and is deductible on the 540NR for California as well.

After filing the 540NR with schedule CA(NR) and 1040NR with Schedules E and 4562 for each of you, the numbers have to be converted to Canadian and put on Canadian form 776.  If there was tax paid to the US because you made a profit, you claim credit for the US tax on Canadian forms T2209 (Federal) and T2036 (Provincial) or TP-772-V if a resident of Quebec). 

Please note that the California 540NR requires the reporting of your world income.  All of your Canadian income INCLUDING ANY INTERNAL EARNINGS OF YOUR RRSP must be reported to California on the 540NR return.  California tax is calculated on the total income and then you owe California tax on a proportional basis.

To make it simple,

Assume your World income is $100,000 and that the California rental was $4,000,

If the California tax on the $100,000 worked out to $7,000, your California tax would be $4,000/$100,000 by $7,000 or $280.00.

If there was a loss on the California property, there would not be any California tax to pay under this system.

However, if there is ANY profit, there will be California Tax to pay at what would be your AVERAGE rate

You now know where to bring your tax returns when you get involved in this project.  And, If you do not live in Vancouver, you can email (pdf files only please) snail mail, fax or courier the information

The following should help as well

Ozzie asked me to send this to you.  I also put you on a US Canada tax news service I have.  If too many, just send an email to Taxman@centa.com with "REMOVE" in the subject line.


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.
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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, being 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.
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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 can 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.

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

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.  expert  US Canada Canadian American  Mexican Income Tax help
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 Oct 18, 2007 since June 16th (124 days), my 'spammed out' box has 34,939 unread messages, my deleted box has 11854 I have actually looked at and deleted and I answered 1078 email questions for clients and strangers.  I have also put aside 622 messages that I am maybe going to try and answer because they look interesting. -expert  US Canada Canadian American  Mexican Income Tax help

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 AND YOU TRULY WANT OR NEED AN ANSWER, 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.
expert  US Canada Canadian American  Mexican Income Tax help.



SUGGESTED PRICE GUIDELINES - Aug 5, 2008
 
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My Home office is at:
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Cell (604) 657-8451 -
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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) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & 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 $450 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. ($472.50 with GST for in person or if you are on the telephone in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 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.
 
$1,600 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

$1,700 would be for two people with income from two countries

$3,000 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 $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
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 $900 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.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.

--
IRS Circular 230 Disclosure:  To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.--

-
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