Part III What about the cash flow and tax

Christine Louw, a realtor I suggested to use in an email last
week, took exception to my seeming negative answer to the
questioner who was looking at a downtown condominium with a 10%
down payment.  Christine's comment does not change my answer an
iota.  My questioner was talking about a 10% down payment and a
negative cash flow of $600 a month for three years.  I quite
properly pointed out that the CRA (old Revenue Canada) would NOT
allow the rental loss deduction in this case if they picked him
for an audit.
Christine has sold dozens of downtown condos and knows the market
inside and out.  I respect her opinion completely but it is quite
easy to buy a downtown condo for "nothing down".  25% is not
needed if one is a strong enough covenant or if one wants to
borrow the down payment with a HELOC (Home Equity Line of Credit)
on their present house.  Goodness knows, In the last two years I
have talked to over 1000 people who have come out to find out how
to do this at our Thursday evening seminars at Fred Snyder's
office.  (in the last two years we have had from 10 to 35 people
come out EVERY Thursday night to find out how to make their
mortgage interest deductible, why they should buy their house
instead of renting, why they should do a leveraged investment
rather than buy an RRSP,  and how to take advantage of a HELOC
(home equity line of credit). etc.
Christine has given some very real figures for your perusal.
Just remember, that if you buy with the intention of selling in
the short term (less than five years) with nothing down, the
rental loss can b e turned down by the CRA and  the Capital Gains
will likely be treated as straight income if you bought with the
intention of buying for the purpose of flipping the property
rather than for the LONG TERM rental profits.  Bulleting IT-533
is very clear that there must be an expectation of profit to
deduct the interest expense.
Last but not least, I have and still regularly recommend
Christine for out of town investors who are interested in
downtown condos. She is an international person herself who
understands the problems of out of country investors.  For the
most part, most realtors do NOT recognize these problems.
-----Original Message-----
From: Christine Louw [mailto:christinelouw at]
Sent: Saturday, October 15, 2005 5:42 PM
To: taxman at
Cc: davidingram at
Subject: Re:  What about the cash flow and tax
deductibility if I buy a downtown condo and lose $600 a month?
FREE mortgage interest as a deduction seminar every Thursday Eve
As a Realtor and investor in condos I believe that condos in
Downtown and in North Vancouver are an excellent investment.
When doing the calculations one needs to assume realistic
1) A resident investor can only qualify for a 75% first mortgage
and not a 90% mortgage, a non resident investor can usually only
qualify for a 65% first mortgage. So the holding costs of a condo
are payments on a 75%/65% mortgage, monthly management fees and
annual property tax.
2) In Downtown Vancouver Realtor's commission is generally not 6%
of the selling price. I charge 7% on the first $100,000 and 2
1/2% on the balance of the purchase price which is shared between
the Seller's and the Buyer's Realtor.
Very few buildings in Downtown Vancouver do not allow longer term
rentals. In North Vancouver rental restrictions are in place in
many buildings. New buildings do not have rental restrictions.
The value increase of condos in Downtown Vancouver has been
substantial in the last few years. According to the Real Estate
Board of Greater Vancouver in September 2005 the 12 month
increase in value of a benchmark condo in Vancouver West (a
typical condo in this area) was 16.9% and 36 month increase 58%,
while for August 2005 the percentages were 17.2% and and 57.2%
and for July 2005 14.7% and 52.7%. For North Vancouver the
percentages were even higher.
The rental income covers my holding costs and I have an excellent
return on my cash investment because of the considerable value
increase I can expect to realize at the moment of sale. And even
if I would have to pay in a small amount every month, I would not
regard this as a loss but as part of a payment towards a future
larger return. Compare the return on the cash investment in a
Downtown/North Vancouver condo to the return on other possible
investments and you will ask yourself why you did not buy a
Downtown/North Vancouver condo sooner.
I have sold condos to many local and international investors and
all are very happy with their investment. My advice is to buy a 1
bedroom or 1 bedroom plus den condo in a sought after location in
a newer building.
Sincerely,        Christine Louw
604 990 3936
Remax Masters Realty
----- Original Message -----
  From: centapede at
  To: CENTAPEDE ; Webmaster at Jurock. Com
  Sent: Saturday, October 15, 2005 11:54 AM
  Subject:  What about the cash flow and tax
deductibility if Ibuy adowntown condo and lose $600 a month? FREE
mortgage interest as a deduction seminar every Thursday Evening -
see below - David Ingram and Fred Snyder
  Ross is an old business partner of mine and we still have an
very limited trailing commission between us.  I say this because
I want you to know there is and has been a long term friendship
and business relationship between Ross and I if you should decide
to follow up on this information.
  In fact Ross and I participated in at least 2,000 Condo buys,
sells and rentals over the last 25 years.
  david ingram
  -----Original Message-----
  From: Ross McDonald [mailto:rossmcd at]
  Sent: Saturday, October 15, 2005 8:26 AM
  To: taxman at; centapede at
  Subject: RE:  What about the cash flow and tax
deductibility if Ibuy a downtown condo and lose $600 a month?
FREE mortgage interest as a deduction seminar every Thursday
Evening - see below - David Ingram and Fred Snyder
  Hi David,
  Further to the question about rental losses on the $300,000
condo in Vancouver perhaps he should take a look at Abbotsford.
  Right now there are a few 2 Bedroom units in 20 year old
buildings that allow rentals ( a huge problem in BC because so
many buildings do not allow rentals at all) that will break even
on a cash flow basis.  Over time they have a very real
expectation of providing rental profit and in 25 years the tenant
will have paid off the mortgage and the property will now provide
a nice bit of additional income in those retirement years.
  Eg.  Full Price $84,900 with 25% down Rent is $600 per month.
1st Mtge @5% is $357, condo Fees $140, Mgmt $50, Repair allowance
$50 Cash flow = 0
   Ross McDonald
  -----Original Message-----
  From: at
[ at] On
Behalf Of centapede at
  Sent: Friday, October 14, 2005 11:32 PM
  To: CENTAPEDE; Webmaster at Jurock. Com
  Subject:  What about the cash flow and tax
deductibility if I buy a downtown condo and lose $600 a month?
FREE mortgage interest as a deduction seminar every Thursday
Evening - see below - David Ingram and Fred Snyder
  My question is: Canadian-specific
  QUESTION: I am considering purchasing an investment (rental)
property in the downtown Vancouver.
  This would most likely be one bedroom + den apartment in the
concrete high-rise building. Current asking prices seem to be in
$300,000 range.
  I am offered quite reasonable variable rate mortgage and are
trying to decide if there is any way to make a profit at the end
of the 3-year mortgage term.
  - 10% down-payment
  - 4% average mortgage rate
  - $1,100 rental monthly income
  - $200 monthly maintenance fee
  I would still be in red $600/month.
  At the end of 3-year period property value would have to
increase 9%/year in order to just cover: all initial costs
(down-payment, property transfer tax, closing costs), on-going
costs (maintenance fee, property tax payments, and mortgage
payments) as well as realtor's fee (6% of property value).
  What are the tax considerations in all of this?
  I constantly hear terms like capital gain, rental loss etc.,
but don't know how would they apply to my case.
  Can you give me some general pointers that would allow me to
fully understand all cost involved?
  Thank you very much!
  david ingram replies;
  The major problem is that if your intent is to rent at a loss
for three years and then sell it for a capital gain, the rental
losses in the meantime are NOT a tax deduction.  Rental losses
while you hold a property for resale are not deductible.  To be
deductible against other income, rental losses must have been
incurred for the purposes of making an eventual rental income and
I guarantee that you will not make a rental profit in three
  The following cases are excerpts from my old Ultimate Tax
Guide - you can read the whole chapter at
  In 1986, Ivan Glavanovic lost his claim for five years of
rental losses. He had built a house for sale in 1975 and was
unable to sell it. He therefore rented it out at a loss for six
years. DNR turned down his losses for 1979 and 1980. Judge
Tremblay of the Tax Court of Canada agreed with DNR. He ruled
that the rental was not to earn income but to hold on to the
property. The losses were therefore capital in nature and should
be added to the adjusted cost base of the house. It was also
clear that there was no reasonable expectation of profit from the
  Also in 1986, Kelvin Lee found the same thing. He had rented
his house on an option to purchase. Judge Couture of the Tax
Court of Canada ruled that the renting while holding had no
expectation of profit and was not deductible.
  in 1989, Virginia Maloney was turned down by Judge Mogan of the
Tax Court of Canada. She had rented her house to her mother. The
rent charged was not realistic with regard to the cost of and the
maintenance to keep up the property. Ms Maloney had charged her
mother $100 rent in 1984 with $4,600 of expenses and $1,800 rent
in 1985 with $11,000 of expenses. See Special Problems below.
  and in 1990, Michel-Guy Huot was also turned down for a
deduction when he rented a house to his parents for less than
market value. Judge Garon of the Tax Court of Canada ruled that
the taxpayer "Had failed to establish that the rental expenses
were incurred in order to earn income." Because of the low rent
and the uncertainty of their stay, there was no "expectation of
  Bulletin IT-533 found at is very clear
on the subject of interest deductibility.  It shows that if your
investment is to make capital gains, the interest may be added to
the ACB of the property but not deducted against current income.
Admittedly, the bulletin does NOT use rental properties as an
example but the general tone of the bulletin is quite clear.
  You need to sit down with someone who understands the premise
BEFORE you buy an alligator consuming $600 per month of hard
earned cash.
  PS: Over the years I participated in the purchase and sale of
over 3,500 rental condominium units.  At the moment, I do not see
rental profits in the purchase of downtown condos.  There may be,
indeed WILL be a long term capital gain and with 7% increase in
rents, the rent received will double in ten years but there is no
  For instance, a building on East Keith in North Vancouver has
had rent rise form $600 / month in 1987 to $950 a month today.
  Another building at 145 East 4th in North Van had apartments
sell to "green" investors for $140,000 in 1981 and they are only
in the $180,000 range today, 24 years later.  And, they went from
$140,000 DOWN to $38,000 in 1985.  I know because I bought 16 of
them with two partners.
  You have to be careful and make sure that you are not just
buying on hype.
  I am of the opinion that anyone without an apartment to live in
should buy now if they are renting.  The reason is that they are
not buying for resale and it does not matter if the property goes
down in value 10 or even 30% IN THE SHORT RUN because it WILL
rise again and pass the present sale price even if it is too
  However, if you hold on, waiting to buy when it goes down and
it doesn;t go down but goes up another $30,000, you have to earn
$60,000 and pay $30,000 of tax, CPP, EI and back and forth to
work expenses to have $30,000 left over to pay the difference.
Of course, you could finance the $30,000 at 4% and then you would
have to earn $100,000 more to make up the $30,000 plus interest
because THAT $30,000 IS the LAST $30,000 you pay off.
  Hope this helps.  Remember, if you have money for a down
payment on this unit, you should pay that money down on your
existing non-deductible personal home mortgage and then borrow
the money for the down payment. A good advantage of having
investment properties is that you can use the rent to make your
own residential mortgage deductible.  Goto and read
the Nov 2001 newsletter (In box at top left of home page) for
more information.  You can also come out to one of our Thursday
seminars on the subject.
  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, I, david ingram
am a permanent guest on Fred Snyder of Dundee Wealth Managers'
LIVE talk show called "ITS YOUR MONEY"
   Those outside of the Lower Mainland will be able to listen on
the internet at
   Call (604) 280-0600 to have your question answered.  BC
listeners can also call 1-866-778-0600.
   Callers to the show and questioners on this board can also
attend the Thursday Night seminars on finance and making your
Canadian Mortgage Interest deductible.
   David Ingram's US/Canada Services
  US / Canada / Mexico tax, Immigration and working Visa
  US / Canada Real Estate Specialists
  Home office at:
  4466 Prospect Road
  North Vancouver,  BC, CANADA, V7N 3L7
  Cell (604) 657-8451 -
  (604) 980-0321 Fax (604) 980-0325
  Calls welcomed from 9 AM to 9 PM 7 days a week (please do not
fax or phone outside of those hours as this is a home office)
   email to taxman at
  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 in connection with personal or
business affairs such as at If you forward this
message, this disclaimer must be included."
  Be ALERT,  the world needs more "lerts"
   Every Thursday Evening, Fred Snyder of Dundee Wealth
Management conducts one of 17 different financial seminars at his
   Time:    7:00 to 9:30 PM
  Date:    Every Thursday evening
  Place    1764 West Seventh
               Vancouver (corner of Burrard)
  Phone (604) 731-8900 to register
   No cost - no obligation
   Topics always cover mortgage interest as a deduction
   other topics - getting the mortgage, estate planning, critical
care insurance, income taxation, differences between stocks and
bonds, and usually the most innovative HELOC mortgage offered in
Canada from Manulife Bank
  ask international income tax expert preparation & immigration
consultant david ingram, North Vancouver, BC, Canada experts on
RRSP RESP IRA 401(K) radio CKBD 600AM 9 AM Sunday mornings on
Fred Snyder's IT's YOUR MONEY
  Hope this helps.
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