rental losses in Canada - free

QUESTION: Mortgage interest on a rental ppty is deductible form rental
income, and if it creates a loss that can be used to reduce tax on other
income. The Tax guide says that if you have consecutive years of loss they
may not be deductible.
A business loss becomes an abil and has a 3 bck and 10 forward aplication.
I cannot get a clear picture for buying a rental ppty and being confident of
my tax position. Please advise.
---------------------------------------------------------------------------
david ingram replies:
To be deductible a rental loss must be incurred on a property that you
bought to earn rental income and have prepared a business plan that shows
that a rental profit will eventually be earned with rental increases and
maybe a deduction in interest as a mortgage is paid down.
An ABIL does NOT apply to rental property.
In my 43 years in the business and thousands of tax returns prepared with
rental losses, I have never - not once - had the CRA turn down a rental loss
for a return where there has been a rental profit projected.
On the other hand, in the last two weeks. I stopped an investor from buying
in Powell River, because I could not project a rental profit or close to a
rental profit in ten years.
On the same basis, I stopped investments in Brazil, Peru, Chile and
Guatemala in the last two weeks as well.
The same concept can be used in the US as well.
Reading the Canadian CRA's Bulletin IT-533 might help you and attending some
of Fred Snyder's free seminars is likely a good idea as well.
And the following Q & A might serve you well
taxman at centa.com: Please see bottom of message if you wish to unsubscribe.
------------------------------------------
My question is: Canadian-specific
QUESTION: In a Jurock Newsletter 07/2002 you stated that there is a process
by which mortgage interest can be "shifted" from personal to business over a
4-5 year period to allow it to become deductible interest on an investment
property.  I have also heard that CRA has taken this to court and at first
won 2 and then lost 1 on appeal.  So what is the status on this today
'2006'.  Can this approach still be taken or am I relying on old news?
---------------------------------------------------------------------------
david ingram replies:
The process is very legitimate and was really brought home with the
Singleton case in the
Supreme Court of Canada.
I am too busy for a new reply but this old one should suffice.  You could
also ask again tomorrow morning (Sunday) at 9:00 AM on 600 AM CKBD Radio.
----------------------------------------------------------------------------
----
Date:           Tuesday February 01, 2005
Time:           10:02 PM -0800
QUESTION:
Your Nov/01 Cen-Tapede gives several examples of how to create
interest deductions by associating the borrowing with your business.
In further web searches on this subject I have just found Mohammad v.
Canada (1998) and now I am confused.
My wife and I live in a small city in B.C. We are considering the
purchase of a rental property.  The purchase price would be about
$150,000, annual taxes $1500, monthly rental income $700.  We have
approximately $500,000 equity and a mortgage principal remaining of
$40,000 in our principal residence.
Naturally, the method that was described in your newsletter looked
attractive to us.  If I understand it correctly we should take a loan
for the down payment, then take an additional pre-arranged floating
business loan to pay the mortgage and maintenance costs of the rental
home.  Rental income would be used to pay down the remaining principal
on our principal residence.
In Mohammad v. Canada the court found that interest could be deducted
from the rental income even if the purchase was 100% financed.  Okay,
that I understand.  However, the judge referred to "reasonable
expectation of profit" and in doing so wrote that an acceptable
standard for CRA to apply would be that there can be "no reasonable
expectation of profit so long as no significant payments are made
against the principal amount of the indebtedness".  He goes on in more
detail, but no doubt you are familiar with the judgement so I won't
quote it here.
My question is this:  How do I square that judgement with your method
of financing the rental property, a method that would involve not only
100% financing of the initial purchase price, but additional financing
via the floating business loan.  If I go that route am I likely to
have CRA disallow the whole thing on the basis that I never had any
reasonable expectation of profit?
Looking forward to whatever comments you care to make.
G XXXXXXXXXXXX
----------------------
david ingram replies:
You either misread the case or you read the tax court case and missed
the Federal Court of Appeal ruling
The Tax Court disallowed the deduction and the Federal Court of Appeal
allowed the deduction.  However, the question is moot. Further cases
have stated clearly that the concept of "expectation of Profit" no
longer applies if there is no personal use of the item.  Therefore
Expectation Of Profit rules really only apply to the likes of Whistler
Condos, Saltspring cabins and rental sailboats or Motorhomes where the
item is used by the owner for personal use as well.
In addition John Singleton LLB won his case for interest deduction in
the Supreme Court of Canada and The CRA issued Bulletin IT 533 which
deals with the issue of deductibility.  The bulletin is quite clear
that you must have a cash flow sheet showing that you "will" make a
"cash flow" profit in the future.
Therefore, having a sheet showing you will lose money for three years
to six years and then start making a profit with a combination of
rental increases and the paying down of the mortgage makes good sense.
Note that capital gains do NOT count as profit for this set of rules.
Following is the  link to the Court of Appeal Mohammad case:
http://reports.fja.gc.ca/fc/1998/pub/v1/1998fc21037.html
A-652-96
Zahid Mohammad (Applicant)
v.
Her Majesty the Queen (Respondent)
Indexed as: Mohammad v. Canada (C.A.)
Court of Appeal, MacGuigan, Robertson and McDonald JJ.A."Toronto, June
11; Ottawa, July 28, 1997.
<snip>
The issue was whether the Tax Court erred in refusing to permit the
deduction of interest paid on the $25,000 personal loan.
Held, the application should be allowed.
Taxpayers frequently acquire a residential property for rental
purposes by financing the entire purchase price. The amount of yearly
interest payable on the loan often greatly exceeds the rental income
that might reasonably have been earned. There can be no reasonable
expectation of profit so long as no significant payments are made
against the principal amount of the indebtedness. A rental loss can be
claimed even though no such payment(s) were made in the taxation years
under review, if the taxpayer establishes to the Court's satisfaction
that he had a realistic plan to reduce the principal amount of the
borrowed monies. The taxpayer will discharge that burden by showing
that significant payments were made against the principal indebtedness
in the taxation years closely following the year of purchase. The
application record referred to such payments having been made, but
evidence thereof was not before the Tax Court Judge and was not raised
during this hearing.
<snip>
Make out a cash flow sheet showing eventual rental cash flow profits
and sleep well.
========================
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 Dundee
Wealth Management and I, David Ingram  host a LIVE talk show called
"ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the
internet at
www.600AM.com
Local calls are taken at (604) 280-0600 and Long Distance calls are
taken at 1( 866) 778-0600
Callers to the show are invited to attend free seminars on financial
planning with such specialities as deductible mortgage interest. They
are held at Fred Snyder's Office at 1764 West 7th in Vancouver - (604)
731-8900 for more information.
=========================================
Every Thursday Evening, Fred Snyder of Dundee Wealth Management conducts one
of 17 different financial seminars in the boardroom of his office
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
If you are starting in downtown Vancouver and do not want to go home first,
one of the excellent THAI HOUSE restaurants is in the same building and
makes a nice start to the evening. If it is your first seminar, Fred will
buy you dinner if you are pre-registered.
I, david ingram, will be at the Thursday evening following the last Sunday
of each month to cover mortgage interest as a deduction and give the class
an adding test.
--------------
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321 Fax (604) 980-0325
Email to taxman at centa.com
www.centa.com www.david-ingram.com
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 www.centa.com.
If you forward this message, this disclaimer must be included."
Be ALERT,  the world needs more "lerts"
==============================
This from "ask an income 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:
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=========================
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Ask a cross-border International real estate rental mutual funds
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-----------------------------------------
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 10 PM 7 days a week  Vancouver (LA) time -
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<http://www.david-ingram.com/>
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 <http://www.centa.com> . If you forward this message, this
disclaimer must be included."
Be ALERT,  the world needs more "lerts"
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to China or Chile - Cross border, dual citizen - out of country investments
are all handled with competence & authority.
-----
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California,  Colorado, Connecticut,
Delaware, District of Columbia,  Florida,
Garland, Georgia,  Hawaii,  Idaho,  Illinois,
Indiana,  Iowa,  Kansas,  Kentucky,
Louisiana,  Maine,  Maryland,
Massachusetts, Michigan, Minnesota,
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Nevada, New Hampshire,  New Jersey,
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Texas,  Utah, Vermont,  Virginia,
West Virginia, Wisconsin, Wyoming,
British Columbia, Alberta, Saskatchewan,
Manitoba, Ontario, Quebec City,
New Brunswick, Prince Edward Island,
Nova Scotia, Newfoundland, Yukon and
Northwest and Nunavit Territories,
Mount Vernon, Eumenclaw, Coos Bay
and Dallas Houston Rockwall Garland
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This from "ask an income tax and immigration expert" from www.centa.com
<http://www.centa.com/>  or www.jurock.com <http://www.jurock.com/>  or
www.featureweb.com <http://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

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