multiple Canadian family members buying US vacation property to rent out part time -
My question is: Applicable to both US and Canada
the decline in the US real estate market south of the border I have started to
review some options for a recreational property with my family.
I have my primary residence in Vancouver that has a mortage
outstanding. The term in up in about a year and I should have the cash to pay
off the primary residence mortgage when the term is up. The intent is to then
start investing in rental property and write off intrest expenses (as I don't
write off my primary residence intrest expenses now).
Now in looking at a
US property a CDN bank will not give me a mortgage, so I am looking at taking a
credit line for my % of the purchase (thus there would be some "investment
intrest" paid). My question here is...
Can I write of intrest paid if I
am not earning rental income on this property? The goal is to have it rented for
some of the year, but I will probably not see much of it due to the small % of
the purchase I would be contributing. I am really a capital/silent investor that
will end up with the property down the road.
An alternate option is that
I can use cash on hand for the property purchase instead of paying off my
primary mortgage. With this scenario could I make a common sense argument to CRA
that I had the cash and instead of paying off the primary, used the cash on hand
for the investmnet and re-upped by current mortgage...can I then write off my
primary mortgage interest? I know its not clean, but it makes good
Really looking forward to a response.
If you borrow money to buy rental property, the
interest paid is a deduction in both the US and Canada.
If you borrow
money to buy a recreational property and are a US resident, the interest is a
deduction for the US resident on his or her US tax return.
If you borrow
money to buy a recreational property which is also rented, a pro-rated
percentage of the interest can be deducted based upon the number of days of
rental and the number of days of personal use.
For a US resident, this
deduction gets complicated because part can be deducted as mortgage interest and
part would be deducted against the rental income.
For the Canadian, you
can only deduct the interest against the rent received if there is personal use
unless you can prove there is / was a reasonable expectation of profit which
will be difficult, if not impossible if a property is owned by multiple family
members who are all wanting the best weekends, etc.
described, I doubt if you have any deduction for Canadian tax purposes.
goto www.centa.com and read the November 2001
newsletter in the top left hand corner.
Also note, if this
property is rented for one day, or even intended to be rented,
none of the people involved can paint, decorate or physically collect the rent
without the possibility of actually being arrested and jailed in the US as
What is the
best way to either structure a company (Canadian or USA)or set myself up
personnel to shelter / minimize taxes paid as a Canadian resident, working in
BC, investing in real estate in San Diego,California, USA?
david ingram replies:
is no one best way because everyone is different in terms of estate, family,
immigration and other issues.
In general I do NOT recommend buying in the
name of a company. If the desire is to escape public liability, you do
that with a good insurance policy.
Directors can be held liable for many, if not 'most' responsibilities of a
limited company if the creditor or wronged person wants to pursue it. Think
of the driver of a car belonging to a limited company. They sue the
company AND the driver.
If you incorporate cross border, be prepared for an extra
$2,000 a year in accounting plus legal fees plus extra state filing fees.
California where you are thinking of investing, has a minimum $800 a year
government filing fee for an LLC as an example even if you lost or lose money on
The following older Q & A may help.
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
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
Thanks for your
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
or how about a married woman's ordeal in Georgia for a traffic
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
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
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
stereo 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
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 Guatemalan 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 thrown into an immigration detention cell for taking money for rent is a
devastating 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
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.
These older questions
will help you AS WELL.
QUESTION: Hello David,
I'm living in Vancouver, finally paid off the student debt but don't see myself getting into
the expensive Vancouver market. I do however like to ski and was thinking of buying an
inexpensive trailer (25k Cdn) in Maple Falls Washington.
However I'm not sure what other expenses I should expect given that it's in the US.
I'm not trying to make this an investment with a high return, but I would like to do some
handy work to it to increase the value. If I add about 10k worth of value, how would that
affect my taxes in the long term?
Thanks for the advice.
david ingram replies:
One of my favourite weekends ever was in 1973 at the Chandelier (think it has a different name now) when marooned at SnowLine because of the gas shortage when one could only buy gas on odd days if your licence plate ended with an odd number and even days when it was an even number.
Strangely, it was that weekend 34 years ago that lets me answer you question now.
The cabin I was staying in was not a rental but was built by the fellow who owned it. When he was building it, buddies would come down and help him and one weekend, the INS raided the spot and deported a bunch of his friends for working in the US .
He was fine building it because he owned it but no one else can hammer a nail, paint a board, install a sink, or carry a shingle if they are not either an owner or a legal US citizen or US resident with a green card.
If your buddy is working and living in the US with a TN, H1, O1, P1, L1 or any other visa but a green card, they cam NOT help you either.
And, if you are intending to rent the trailer out 'EVER', 'you' can NOT hammer a nail, sweep the front steps or clean the toilet.
Assuming you are buying this trailer on its own lot, when you go to sell, you will owe the US income tax on the profit.
If it is your only piece of real estate at that time, you will not owe Canada any tax because you can claim it as your personal residence if you have not bought another place.
However, I would far prefer that you stretched your resources to buy something in Canada to live in and combine your present rent and the payments you would have to make for the trailer to buy your home in Canada. If you can't afford a one bedroom, buy a studio. Go down to Ike on the Lougheed highway and look at how much they can put into a small space.
Interestingly, I read the other day that IKEA has now sold enough furniture in North America that 10% of all children are conceived in an IKEA Bed. Now that is information worth knowing.
If a Canadian citizen purchases real property in
the U.S. are they required to have a U.S. Social Security Number? Am I
correct that my tax liability will be to the U.S., whilst reporting my income to
the CRA but with offsetting foreign tax credits due to paying U.S. income
tax? For liability purposes, would it be more beneficial tax-wise to hold
the U.S. properties under a Canadian or U.S. corporation? Thank
Assuming that you are going to rent the property out, you
will need an ITIN (Individual Taxpayer Identification Number). Fill
in a W-7 and submit it with your first tax return or try and get it at the bank
where you get your mortgage.
I do not suggest a corporation in
either country unless you want to spend a couple of thousand dollars a year
extra on accounting. As a foreigner with a US corporation, you will need
to fill in form 5472 with your 1120 corporation tax return. Then, because
the mind and control of the corporation is in the hands of a Canadian resident,
you will need to file again in Canada.
This older Q & A may
My wife and I are Canadian citizens and own a rental property (house) in Arizona.
Do I need to file income tax in the USA? Can we deduct the mortgage interest
and any expenses associated with the rental on our Canadian income tax return?
Thanks and regards,
david ingram replies
If you do not file a US 1040NR with Schedule E and Arizona 140PY or 140NR return, you face the likely Federal penalties of a $1,000 to $10,000 fine each per year for failure to report rental income as a non-resident plus 30% of the gross rent with no expenses allowed.
That is for each of you if you both own the property. And, I have never seen a $10,000 penalty.
Then, you will EACH be assessed 30% of the gross rent with no expenses allowed.
(Canada's penalty of just 25% of the gross rent with no expenses in reverse seems mild in comparison.)
FILE the US returns for every year you have missed.
THEN - There is NO responsibility for you to claim any rental expenses on your Canadian return. You can claim them if you wish on form T776. HOWEVER, you MUST report the gross rent on line 126 of your T1 if you do not claim expenses and the net rent if you do,.If there is a legitimate rental loss which has not been created by your using the unit personally, you can use the loss to reduce your other taxable income.
A Warning. There is ample evidence that the IRS and CRA are pro-actively sharing information about these. And, if you are in a complex and using the unit personally NEVER talk about the fact you have not filed a US tax return and don't ask a local. I personally know of two people who make their living turning in Canadians who are not filing their US returns. There is a 10% to 30% reward for turning you in by filing US form 211. See it at www.irs.gov - click on forms, etc.
If you need help with this, you now know where we are.
We have a rental property in the US. Can I claim the property taxes paid on my condominium as a rental expense deduction on my Canadian taxes? Form T776 mentions only Canadian property taxes however, the general guide states that all expenses can be deducted.
david ingram replies:
that can be claimed on schedule E of the US return can be claimed on form
You need to do your Schedule E 1040NR first and then convert the US
figures to the T776 on your Canadian return. If the condo is in
Arizona, you would do a 140NR or if in California, a 540NR.
There is no
state tax in Florida, Texas or Nevada, the other three popular places for a
Canadian to have a rental US condo.
The difference between the two
counties is the method of claiming depreciation. In the US, you MUST
calculate the depreciation and include it even if it creates a loss. The
good news is that the operating loss caries forward as a future deduction
against rent OR Capital Gains as opposed to non-resident losses in Canada which
unfairly disappear into the ether.
In Canada, you do NOT have to claim it
and if you do, can only claim enough to create a zero rental. Depreciation or
CCA (capital cost allowance) as we call it can NOT be used to create or increase
Make sure that you do the US returns, particularly if you are
losing money. The penalty can be a minimum of $1,000 to $10,000 PLUS 30%
of the gross rent for failure to file a US rental return by a
We, of course, are ideally suited to look after these for
you by fax, snail mail, email or courier.
My wife and I are
looking at possibly purchasing a condo in Palm Springs for our retirement. We
are both 50 years old and plan on working for the next 7 or 8 years. Our plan is
to purchase and use it a few times a year and rent/lease it out for the
remainder of the year until we reach retirement at which time we would spend 4
or 5 months a years there. Looking for some advice on what we should be looking
out for and what would be a better choice mortgage wise, U.S. or Canadian
funding. Or is it a good idea at all to purchase U.S. real estate as a Canadian?
Any advice or literature that's out there that you could direct us to would be
greatly appreciated. Thanks!
If your intention is to start spending significant time
there, buying now is extremely sensible because you are buying it at today's
price which will logically go up in the future. You 'are' of course, also
dealing with exchange.
Since your earnings are in Canadian dollars,
borrowing the money in Canada and paying cash in palm Springs means that you
will be paying in a known currency.
To explain that statement, persons
who bought in 1991 with a US mortgage payment of $1,000 needed $1,145.87
Canadian dollars to make the payment. By 2001, they needed $1,548.62 to
However, in reverse, if you bought in 2002, you needed
1,570.36 and only need about $1,060 to stay even today.
does go both ways.
You might want to borrow half in Canada and take out a
mortgage for half in Palm Springs.
If you are renting the property, you
will both need to file a US Federal 1040NR with Schedule E and California 540NR
return and then change the currency to Canadian and file form T776 with
your Canadian T1 returns. Failure to file the form 1040NR can have
penalties of $1,000 to $10,000 per year per return per person even if you lose
money. A very real problem is that all sorts of Canadians approach a US
accountant and ask about filing and are told they do not need to file a return
because they are losing money. Not so. When it comes time to file,
hunt down a specialist in dual country tax returns like Gary Gauvin in Dallas,,
Steve Peters in Halifax, Kevyn Nightingale in Toronto, Brad Howland in Victoria
or myself in Good Old North Vancouver.
Whatever you do, do NOT buy it in
a corporate name. You will not save anything and end up with another $2 or
$3,000 of accounting fees.
You will also need to file personal US tax
returns if you are there more than an average of 120 days a year. See the
April 1994 newsletter in the top left hand box at www.centa.com
SUGGESTED PRICE GUIDELINES - Aug 5,
david ingram's US / Canada Services
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
Cell (604) 657-8451 -
980-0321 Fax (604) 980-0325
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.
pert US Canada Canadian American
Mexican Income Tax service and
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 &
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 help.
This is not intended to be definitive but in
general I am quoting $900 to $3,000 for a dual country tax
$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
$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
$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
$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
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
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
18 RRSPs would be $900.00 - (maybe amalgamate a
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
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.
--IRS Circular 230
Disclosure: To ensure
compliance with requirements imposed by the IRS, please be advised that any U.S.
tax advice contained in this communication (including any attachments) is not
intended or written to be used or relied upon, and cannot be used or relied
upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code,
or (ii) promoting, marketing or recommending to another party any transaction or
matter addressed herein.--
-Disclaimer: This question has been
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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
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CEN-TA Cross Border Services - Tax, Visas, Immigration