CEN-TA Cross Border Services - Tax, Visa
http://www.centa.com/index.php?topic=can_tax
Canadian Tax and Immigration Answers and Issuesadmin@centa.comadmin@centa.comCopyright 2010 CEN-TA Cross Border Services - Tax, Visas, ImmigrationglFusionFri, 19 Mar 2010 10:14:16 -0500en-gbMortgage Interest as a deduction in Canada - the CEN-TA CLAUSE
http://www.centa.com/article.php/Mortgage_Interest_as_a_deduction
http://www.centa.com/article.php/Mortgage_Interest_as_a_deductionSat, 27 Jun 2009 12:14:15 -0500http://www.centa.com/article.php/Mortgage_Interest_as_a_deduction#commentsAdminCanadian Tax/Immigration<p>XXXXX XXXX wrote: <br />
Do you think that the Smith manouver is still legal in view of the recent <br />
decision in the Lipson case regarding mortgage interest deduction and the <br />
General Anti-Avoidance Tax Rule?<br />
<br />
References: <a href="http://csc.lexum.umontreal.ca/en/2009/2009scc1/2009scc1.html">csc.lexum.umontreal.ca/en/2009/2009scc1/2009scc1.html</a><br />
<br />
Thanks</p>
<p><br />
----------------------------------------------------<br />
david ingram replies:<br />
<br />
The 1985 Smith Maneuver came out of seminars that Fred Snyder presented using methods i pioneered and first published in 1976.<br />
<br />
Noting in Lipson takes away from the methods i pioneered at that time. For one, the Lipson case involved a corporation. I was adamant that if you wanted to make your mortgage deductible you should cancel or stop using a corporation. You can see a five times update of that November 1976 publication by reading the November 2001 newsletter in the top left hand box at www.centa.com. (the march 1987 version is there as well).<br />
<br />
The following will give you the info I have handed out at several seminars lately including five i did with former Minister of National Revenue, Garth Turner.</p>
<p>----------------------------<br />
My question is: Canadian-specific<br />
<br />
QUESTION: We have a rental property generating regular rental income and got enough equity to cover our outstanding principle residence's mortgage. Is there a way we can move this equity to pay off the principle residence's mortgage and still be able to legitimately claim interest payable as tax deductible? <br />
<br />
------------------------<br />
Question: We recently bought a 4plex in Kitimat as a rental investment. We used a Scotia home equity loan for the down payment and a TD mortgage for the other 75%. We have a mortgage on our principal residence in Langley of $244,000. Our monthly payments on the 4plex will total about $1,300 , and the rents will be about $2,000. What would be the smartest method for paying this mortgage? What do we do with the excess cash flow? Is it possible to deduct the interest on our primary residence mortgage? Thanks. Al Wood. 604-530-3430.<br />
<br />
<br />
--------------------------<br />
david ingram replies:<br />
<br />
I had some 90 people at a seminar on this subject today and am just about all "free"ed up on the subject.<br />
<br />
You should be taking the rent you receive and use it to reduce the non-deductible mortgage on your Langley house.<br />
<br />
You can find out more by reading my November 2001 Newsletter in the top left hand box at www.centa.com.<br />
<br />
Reading Fraser Smith's Book 'THE SMITH MANOUVRE' will also give you ideas on how to make the Langley Mortgage deductible.<br />
<br />
Your excess flow should be used to reduce the $244,000 mortgage as soon as possible. Of course, the interest on the down payment loan is also deductible on Form T776.<br />
<br />
The following is part of the handout at today's seminar - <br />
<br />
<br />
<br />
David Ingram's US/Canada Services<br />
<br />
Mortgage Interest as a Deduction in 2007 – dealing with GAAR<br />
<br />
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. <br />
<br />
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. <br />
<br />
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.<br />
<br />
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. <br />
<br />
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. <br />
<br />
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. <br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
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.<br />
<br />
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”. <br />
<br />
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<br />
<br />
(rollovers), 110.6 (capital gains exemption), 112 (tax free inter-corporate dividends), 74.5 (attribution) and ss. 84(3) (deemed dividends). <br />
<br />
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.<br />
<br />
However, he was not of the same opinion with the LIPSON Family who lost in Lipson v. The Queen, 2006 TCC 148 <br />
<br />
Mr Lipson owned a profitable business and:<br />
<br />
The Lipsons contracted to buy a home in Forest Hills in Toronto <br />
1. Mrs Lipson took out a demand loan to buy share in the family business from her husband. <br />
2. The shares were transferred to Mrs Lipson as a section 73(1) rollover <br />
3. Mr Lipson used the funds to buy the house <br />
4. They “both” took out a mortgage on the house to repay the demand loan <br />
5. <br />
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 what the 'business' reason was for the transaction.<br />
<br />
Note that in Jan 2009, the Supreme Court of CANADA upheld the LIPSON Case and ruled against the Lipson family BUT, they left expenses damming and the methods in my Nov 2001 newsletter as valid and business reasons as I read the case.<br />
<br />
<br />
The following was an excel spreadsheet that was presented and you might be able to figure it out.<br />
<br />
1 <br />
WHY BOTHER MAKING YOUR MORTGAGE INTEREST DEDUCTIBLE?? <br />
1<br />
2 <br />
by david Ingram - www.centa.com - <br />
(604) 980-0321 <br />
2<br />
3 <br />
WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING <br />
$ 100,000.00 3<br />
4 <br />
Let's pretend that you are paying 6% <br />
0.06 times 6000.00 4<br />
5 <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
5<br />
6 <br />
How much do you have to earn to pay <br />
6000 <br />
6000.00 6<br />
7 <br />
At a 0.3 marginal tax rate <br />
you would need 8571.43 7<br />
8 <br />
<br />
<br />
you would pay tax of <br />
<br />
2571.43 8<br />
9 <br />
<br />
<br />
To Have enough to pay the interest of <br />
6000.00 9<br />
10 <br />
TWO <br />
<br />
<br />
<br />
<br />
<br />
<br />
10<br />
11 <br />
WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING <br />
$ 300,000.00 11<br />
12 <br />
Let's pretend that you are paying 6% <br />
0.06 times 18000.00 12<br />
13 <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
13<br />
14 <br />
How much do you have to earn to pay <br />
18000 <br />
18000.00 14<br />
15 <br />
At a 0.35 marginal tax rate <br />
you would need 27692.31 15<br />
16 <br />
<br />
<br />
you would pay tax of <br />
<br />
9692.31 16<br />
17 <br />
<br />
<br />
To Have enough to pay the interest of <br />
18000.00 17<br />
18 <br />
THREE <br />
<br />
<br />
<br />
<br />
<br />
<br />
18<br />
19 <br />
WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING <br />
$ 600,000.00 19<br />
20 <br />
Let's pretend that you are paying 6% <br />
0.06 times 36000.00 20<br />
21 <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
21<br />
22 <br />
How much do you have to earn to pay <br />
36000 <br />
36000.00 22<br />
23 <br />
At a 0.4 marginal tax rate <br />
you would need 60000.00 23<br />
24 <br />
<br />
<br />
you would pay tax of <br />
<br />
24000.00 24<br />
25 <br />
<br />
<br />
To Have enough to pay the interest of <br />
36000.00 25<br />
26 <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
26<br />
27 <br />
You can easily see that the larger the mortgage payment <br />
<br />
27<br />
28 <br />
the more money you have to make and the larger your <br />
<br />
28<br />
29 <br />
marginal tax rate would be - BC runs from 23% up to $35,000 <br />
<br />
29<br />
30 <br />
and is 44% over $118,000 or so <br />
<br />
<br />
<br />
<br />
30<br />
31 <br />
DEDUCTIBLE <br />
<br />
<br />
<br />
<br />
<br />
31<br />
32 <br />
But if the last mortgage of 600000 could be deductible <br />
36000.00 32<br />
33 <br />
the interest paid of 36000 would get a tax deduction of <br />
14400.00 33<br />
34 <br />
<br />
and you would only need to earn the difference <br />
21600.00 34<br />
35 <br />
<br />
instead of the 60000 <br />
on line 23 above <br />
35<br />
36 <br />
Why only 21600 <br />
<br />
<br />
<br />
<br />
<br />
36<br />
37 <br />
Well, you could earn 21600 , borrow <br />
14400 (line 33) <br />
37<br />
38 <br />
for a few days from Fred, and then pay Fred back with the refund <br />
38<br />
39 <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
39<br />
40 <br />
The difference in earnings is 60000 <br />
line 23 <br />
<br />
40<br />
41 <br />
minus new necessity of 21600 <br />
Line 34 <br />
<br />
41<br />
42 <br />
for an earnings savings of 38400 <br />
<br />
<br />
<br />
42<br />
43 <br />
or a monthly difference of 3200 <br />
<br />
<br />
<br />
43<br />
44 <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
44<br />
45 <br />
And, if you are self employed as I am, I would have to do <br />
<br />
45<br />
46 <br />
$200,000 of business and pay $140,000 of expenses to have a profit of <br />
46<br />
47 <br />
$60,000 left over to pay the tax on the $60,000 on line 23 (Aug 11, 2007) 47<br />
<br />
And this will also show the mathematics of paying down a mortgage with the earnings from a Mutual fund.<br />
<br />
<br />
Using New Securities Account to make mortgage deductible <br />
This is to show the method only <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Most, if not all people buy a Mutual fund and have the dividends reinvested <br />
<br />
<br />
<br />
<br />
<br />
in the fund. Do NOT DO THAT if you want a deductible mortgage <br />
<br />
Non <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Deductible Non HELOC<br />
Assume you have a borrowed <br />
100,000 to buy funds and they pay 0.06 original less Deductible interest<br />
A B C D E F New G H I J K L M<br />
You pay 0.06 pay your 35% Tax borrow for Invest't Mutual earnings worth mortgage earnings original not de-<br />
<br />
borrowed interest Refund new funds loan Fund 0.06 <br />
<br />
<br />
ductible<br />
2007 100000 6000 2100 6000 106000 100000 6000 106000 100000 6000 94000 6000<br />
2008 106000 6360 2226 6360 112360 106000 6360 112360 94000 6360 87640 5640<br />
2009 112360 6742 2360 6742 119102 112360 6742 119102 87640 6742 80898 5258<br />
2010 119102 7146 2501 7146 126248 119102 7146 126248 80898 7146 73752 4854<br />
2011 126248 7575 2651 7575 133823 126248 7575 133823 73752 7575 66177 4425<br />
2012 133823 8029 2810 8029 141852 133823 8029 141852 66177 8029 58148 3971<br />
2013 141852 8511 2979 8511 150363 141852 8511 150363 58148 8511 49637 3489<br />
2014 150363 9022 3158 9022 159385 150363 9022 159385 49637 9022 40615 2978<br />
2015 159385 9563 3347 9563 168948 159385 9563 168948 40615 9563 31052 2437<br />
2016 168948 10137 3548 10137 179085 168948 10137 179085 31052 10137 20915 1863<br />
2017 179085 10745 3761 10745 189830 179085 10745 189830 20915 10745 10170 1255<br />
2018 189830 11390 3986 11390 201220 189830 11390 201220 10170 11390 -1220 <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Because the earnings from the mutual fund are mostly dividends and capital gains which are very tax efficient <br />
<br />
<br />
there will be little tax on the earnings - certainly less than half of the tax savings in column D <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
In this example, I have assumed an interest only HELOC and assumed that you would have paid your regular non-deductible interest<br />
which would decrease each year because of the principal being paid down in column K. column M represents HELOC interest<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Every one's situation is different. YOUR cash flow will be different. And to escape GARR, you must be making a business decision<br />
If you wish to make your mortgage deductible. A perceived increase in earnings from a mutual fund loan would likely be sufficient<br />
but there are NO, NONE, NOT ANY Guarantees. <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
If this situation interests you, you are advised to get a written financial plan from Fred Snyder FIRST - His Number is (604) 731-8900<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
david ingram, home office phone (604) 980-0321 - Please do NOT phone before 10 AM or after 9 PM but you can phone 7 days a week<br />
there are NO message machines - If you do leave a message with a person, If I do not get back in 4 hours, I WILL NOT BE RETURNING <br />
the call - I leave it to YOU to follow up. I get over 700 emails a day and my record for phone calls on April 30 2006 was over 140. <br />
<br />
<br />
I hope the formatting stays with the email.<br />
<br />
<br />
Not sure if this will help or not. What you should do is get Fred Snyder to do a written financial plan for you. see the red a couple of lines up.</p>http://www.centa.com/trackback.php/Mortgage_Interest_as_a_deduction