Renting to children at less than market value -

This has been sent to the US Canada list rather than just to the 
Canadian List because of the number of Canadians who might have family 
members in the same boat.  AND, to a large extent, it would or could 
apply to a pure US family as well.
Americans may also appreciate the references to the US Military bases in 
Newfoundland, the last of which Argentia, closed in 1994.
QUESTION: Hi David...I recently purchased a two apartment house, did 
extensive renovations, and one son is renting the basement apartment for 
less than the going rate, and another son and his live in girlfriend are 
renting the main portion of the house, also for less than the going 
rate. The monies I collect from them cover the mortgage cost, insurance 
and property taxes, or a portion of. My question I have to 
declare what they pay me as rental income, and use the insurance and 
property taxes and interest re the mortgage as deductibles, or leave it 
all alone.??? Thanks!
david ingram replies:
Well, it is one way of getting the kids out of the house but expensive. 
Under the circumstances, You can not create a loss but must report the 
gross rent received and claim the expenses.  You cannot claim a loss 
because you are renting for less then market value and it is a non 
arm's-length situation.  You will have Capital gains tax to pay on the 
property when sold though so make sure you capitalize all repairs and 
remodeling under class 1 and keep a detailed record of anything you  
spend on the house UNLESS,
You might want to explore putting the house in your sons' name so that 
any future profits are capital gains tax free to the family.
By the way I have been to Newfoundland twice and I was in your town in 
1998 when I did the circle loop of your peninsula.   Even took the ferry 
across the Straits of Belle Isle to Quebec and drove up to Red Bay, 
Labrador to see the old Basque Whaling Ship that was raised and sunk 
again and the oldest grave in North America and the old whaling station 
on the island, etc., etc., etc. .  Managed to see  everything from 
L'anse Aux Meadowes and St Anthony to Maryston and Fortune, St John's, 
Hant's Harbour, Bay of Bulls, Cape Spears, Signal Hill, Stephensville, 
Argentia and all the other places in between - When I travel, I wear a 
T-Shirt that says "Tourist from Hell". I loved E. Annie Proulx's 1994 
Pulitzer Prize-winning The Shipping News.
And if you goto
You can find an interview I did with /*John Winter, President of the BC 
Chambers of Commerce*/ who is also a member of
The *Newfoundland Baseball Hall of Fame*.
And over the years i must have run into 40 of the up to 20,000 
Newfoundland women who married American Servicemen stationed at one of 
the Three Main US military bases in Newfoundland in the Second World War 
(When Newfoundland was a country and not a province and thinking of 
joining the US rather than Canada).
These older questions may give you some other ideas.
We have two homes, both the same value. Our son lives in one (it is 
really his home: he pays all home expenses, but it's in our name). Can 
we sell the home we live in to him and move in to his home which will 
become our principal residence thus avoiding capital gains we would have 
to pay if we sold his residence.
david ingram replies:
NO - If both houses are yours, you trigger a tax bill as a deemed 
disposition when you move into the second house.
See CRA Form T2091 to see how this works and the formula that would 
create the tax bill.
At the same time, if the house your son lives in was really his and put 
in your name for mortgaging purposes or to protect during a divorce, 
etc.,  and he has paid "all" the costs including heat, light, repairs, 
property tax and mortgage since it was purchased, the house is likely 
his under Constructive Trust Rules.
These older Q & A's will likely help you.
QUESTION: Me and my husband own a second house, title and mortgage is in our names. My mother lives there for free, thus we do not declare any rental income. We want to sell the house. What's the best way to pay less tax or avoid it? Do I have to pay tax even if it's my mom's primary residence? Can I transfer a title in her name, she sells it as her primary residence and pays no tax?
david ingram replies;
This is the kind of income tax help I like giving because it deals with 
family matters and expert family matter income tax help is really hard 
to find.
If the house was yours, bought and paid for by you and mother did not 
pay anything towards its upkeep or its purchase, then, any profit on 
this second residence is taxable to you.
On the other hand if mom sold another property and put her money into 
this second residence which was registered in your name for estate 
purposes and mom paid the mortgage, hydro, gas and repairs, etc., then 
it is your mother's house and you only held it in trust for her.  She 
had a constructive trust as the owner of the property and it would be 
tax free.
Your situation may be somewhere in between.  The problem is that for 
some reason or other few lawyers and tax people understand what a 
constructive trust is. Your mom, for instance, may not have had enough 
to buy the place you wanted so you and your husband ponied up more and 
rather than loan her the money, put it in your name to protect your 
interest from 0..
In general, a constructive house is formed when a person who does not 
own a property (car, boat, mobile home, house, condo) treats it as their 
own by paying all the bills and doing all the maintenance, etc, as if it 
was their own.
If you put up a lot of money and mom put up half and you put it in your 
name to protect your money from the possibility that mom might die and 
you were trying to keep 'your' money from your siblings, it was likely 
your mother's and tax free.
If on the other hand, you and your husband are clearly getting all the 
money when the house is sold, you and your husband  will owe capital 
gains tax on the sale.
hope this helps.
And of course, when it comes time to do the return for the sale, you 
know where we are.
My question is: Canadian-specific
QUESTION: We in the process of purchasing a house in Penticton and will 
rent it out, retire (in about 4 years)and  move into it ourselves.  If 
we live there for 2 or more years are we liable for capital gains for 
the period we collected rental income?  What type of home insurance is 
best for a rental property?  What are your thoughts re the real estate 
market in the Okanagan in the next five years - steady growth or a slump 
after "2010"?  Many thanks, Jacklin
david ingram replies:
You are liable for capital gains income tax for the period you rented it 
out.  In fact "When you move into the house", you will trigger a capital 
gains tax because of a change in use from a business use to a personal use.
The good news is that you can make an election under Section 45(3) of 
the income tax act to defer paying the tax until you actually sell the 
property. To make the calculation, fill in schedule 3 and put the 
taxable profit on line 127 of your T1.  then deduct the same amount on 
line 256 under Section 45(3).
I think the Okanagan AND the lower mainland markets are already 
overheated and think the prognosis is for little or no growth for the 
next five years but I have been wrong before.
That does not mean you should not buy because if I am wrong, it will 
cost so much more to buy six or seven years from now that you will be 
cursing me all the way to the mortgage broker.  If you buy and it goes 
down a bit, it does not matter because you are buying it to live in and 
that gives you the property in the future at today's price which is 
historically lower.
*NEW as of May 26, 2008.  anyone thinking of investing in Real estate 
should get hold of Garth Turner's newest book, the GREATER FOOL.  If and 
when you do start to read it, READ THE 2 PAGE AFTERWORLD FIRST.  The 
is at the BACK of the book.  If you read it first,  You will look at it 
as a learned piece of research you should take into account but will not 
be paralyzed with fear.*
/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 -
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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./*
 email to taxman at <mailto:taxman at> <> 
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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 
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.


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