US citizen buying Baddeck, Cape Breton Island,

Subject:        US citizen buying canadian vacation property
Expert:         taxman at
Date:           Thursday September 16, 2004
Time:           06:02 PM -0700
My wife and I have vacationed in Baddeck, Cape Breton numerious times, and want to buy a vacation home there, likely next year.  I've read your "Border book" excerpt on
I tried to find "Border Book" by David Ingram on, but wasn't sucessful.  If I could find it, I'd buy it.
We'd like to rent the Baddeck home out mostly for the next 10-15 years, then reside there up to 3 months / year (under the magic 131 days).
Are there any special USA+Canada tax consequences to the following:
1. take a mortgage to purchase, then offset interest expense vs rental income.
2. take a 2nd mortgage on my USA home, and pay cash for the Canadian home.
david ingram replies:
The border book is out of print and not likely to be republished in the near future.  Most of the good stuff has been put on the web and you are free to download and print from
Beddeck is a marvelous place, home of the Alexander Graham Bell museum and the birthplace of many of Bell's inventions.  Also, just down the road from Rita McNeil's coffee house at Big Pond, and around the corner (relatively speaking) from the Marconi towers, Fort Louisburg and a whole lot of North American history.
However, enough of the history lesson.
1.    If you rent the place out in Canada, you are wise to have a mortgage or line of credit which will generate enough interest expense to offset the income when added to the property taxes, management fees, utilities,  and repairs and maintenance. 
This will create a neutral tax return for Canada and you "HAVE to file an annual return.  If you do not file an annual return and the Canadian Income Tax department finds out, you will be taxed 25% of the "gross" rent received with no allowance for any expenses more than two years old.
One new client (H & P XXX) just found this out to their amazement.  They were just assessed over $50,000 for taxes interest and penalties back to 1995 for a place that rented out for an average of $16,500 a year but lost money.  They had been told (they say) by a Canadian Accountant that they did NOT have to file a Canadian return if they lost money.
And just in case you think Canada is unreasonable, the US in reverse has a 30% of Gross rent penalty plus $1,000 to $10,000 a year penalty for failing to file.
Remember that the tax and penalties are then subject to late "paying" interest for the years so a 1995 tax penalty of $4,125  (25% of $16,500) plus a 17% late filing penalty plus late paying interest from 1995 to 1004 is over $8,000 by itself.
2.    If you have a paper trail showing that you borrowed money in the US to buy the Canadian property, the interest is still deductible on your Canadian return.
Of course, you will be caught up in the personal use rules.  for the US, they are that you cannot use the rental vacation house as a tax deduction if you stay in it more than 14 days or 10% of the days it was rented at fair market value.  So to use it for 20 days without penalty, you would have to rent it out for 200 days at a fair market value to strangers.
It is important not to file your Canadian return with a rental loss because rental losses can NOT be carried forward or saved up against future capital gains.  If you do see a loss coming, you can capitalize repairs and interest expense to raise the adjusted cost base (ACB).
Hope this helps.  
If you have any more questions, I am available for private consultation by phone or in person for $350 Cdn for up to an hour or you can phone the radio program on Sunday mornings for "free".  
It is long distance from the US.
Answers to this and other similar  questions can be obtained free on Air every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Cartier Partners and I will be hosting an INFOMERCIAL but LIVE talk show called "ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the internet at CKBD Radio
Local phone calls to (604) 280-0600 - B C Long distance calls to 1-866-778-0600. 
Old shows are archived at the site.
This from ask an income tax immigration planning and bankruptcy expert consultant guru or preparer  from or or Canadian David Ingram deals daily with tax returns dealing with expatriate:
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