QUESTION: I am looking at buying property in the US. What tax implications should I be looking at beforehand? Also, can trips taken there to look at properties be claimed as an expense after I've bought? Can trips just to look be claimed against anything (what if I look in Vegas, Arizona, and Portland, but only end up buying in one or none).------------------------------------------------
David Ingram's US/Canada
Services
US/Canada/Mexico Tax Immigration &
working Visa Specialists
US / Canada Real Estate
Specialists
4466 Prospect Road
North Vancouver,
BC, CANADA, V7N 3L7
Calls accepted from 10 AM to 10 PM 7 days a
week
Res (604) 980-3578 Cell (604) 657-8451
Bus (604)
980-0321 Fax (604) 980-0325
[email protected]
www.centa.com www.david-ingram.com
Jan 6, 2008.
Rentals in the USA.
QUESTION that came to me from ASK AN EXPERT at www.jurock.com
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.
----------------------------------------------------------
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 strereo 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
Guatamelan citizens being stuffed into Paddy wagons on the Arizona border. This
is not a racist comment but with the Mexican illegal immigrants, bing rounded up
and shipped back across the border is a way of life with no social stigma.
For a nice clean living Canadian, being thown into an immigration detention cell
for taking money for rent is a devestating 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.
David Ingram's US/Canada
Services
US/Canada/Mexico Tax Immigration &
working Visa Specialists
US / Canada Real Estate
Specialists
4466 Prospect Road
North Vancouver,
BC, CANADA, V7N 3L7
Calls accepted from 10 AM to 10 PM 7 days a
week
Res (604) 980-3578 Cell (604) 657-8451
Bus (604)
980-0321 Fax (604) 980-0325
[email protected]
www.centa.com www.david-ingram.com
-------------------------
The
second dealt with making your personal mortgage interest in Canada deductible
and the Overs, Evans, Lipson and Singleton tax cases and
GAAR
David Ingram's US/Canada
Services
Mortgage Interest as a Deduction in 2008 – 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). Judge 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:
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 unclear who had paid the
interest.
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CEN-TA Cross Border Services - Tax, Visas, Immigration
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