CEN-TA Cross Border Services - Tax, Visa

tax deductable mortgage in Canada Red Frog Program Richard Rochard, Glen Kelleway, Fred Snyder Importance of a Written Plan

Taxman — Sat, 04 Jul 2009 20:10:00 -0500

I have just refinanced my house and withdrawn some equity. I planned to use some of the equity to pay off a line of credit. I now realise (thanks to you) that I could make the additional amount that I have put on my mortgage tax deductable - if I play my cards right.

I have a rental property the rental income from which I now plan to use to pay off the line of credit. The equity that I recieved from the refiance I plan to use to pay the mortgage on the rental property. If my understanding is correct this would make that portion of the refiance tax deductable.

The only problem is that it will take me many months to pay off the line of credit as my rental income is not that high. I am paying non tax deductable interest on the line of credit while I have the money (from the house equity) to pay it off in full sitting in a savings account earning a poultry amount of interest.

My question is "can I put the equity into the line of credit and use the line of credit only on mortgage and other expenses for the rental property and still claim that the refianace is tax deductable? Or would the refiance be considered to be used to pay off a personal debt (thereforenot tax deductable) and the paper trail end there?"

If I could do this it would allow me to "save" my rental income while keeping my interest payments at a minimum. If I can do this would be able to also be able to "save" my rental income in the line of credit, therefore keeping it always paid off? eg. $1000 out of the line of credit to make the mortgage payment, $1000 into the line of credit from the rental income to bring the balance back to $0.

Thanks for your help

david ingram replies:

Note. Although this is aimed at Canadians making their mortgage interest deductible, it also applies to American residents who wish to make the mortgage interest deductible when they have borrowed more than the original purchase price of their residene.

To Your Question.

Your last paragraph does not work although in general your concept is correct. You should go to www.centa.com and read the November 2001 newsletter on the subject.

Take any cash you have and pay down any non-deductible interest. Establish a second line of credit that is used solely to pay for expenses on the rental. this line of credit will increase every month and may end up being equal to your present mortgage which is not deduuctible.

The advantage is that the interest on the new line of credit is now deductible.

Take your rent and pay off your non-deductible loans. It will take a while (maybe five or six or seven or eight years) but you CAN make the mortgage interest deductible. In the meantime, evry year your tax bill will be decrease because the deductible portion of the mortgage increases.

To do this, you need a mortgage person who understands the process.

* Richard Rochard, the manager of the Greater Vancouver Community Credit Union at 25th and Cambie understands it and his assistant Nick Wong also understands the process. Call (604) 876-7101 to talk to them.

* A Good Mortgage Broker can also help. Few understand the process and I can prove it. If they did, everyone who dealt with a mortgage broker would have a tax deductible mortgage. Glen Kelleway understands the system as well and I am always glad to help him with the concept if something is just a little different. His phone number is (604) 836-7242 or (604) 476-0053

* The Envision Credit Union has the Red Frog program which works well. Call assistant manager Rob Watkins at the Lougheed Highway branch (604) 539-5903

* I will do an individual consultation with you to explain in detail, I charge $450.00 for that consultation which lasts from 30 minutes to an hour and can be done by phone or in person.

Last but not least. This is an ideal question to ask Fred Snyder on his weekly radio programs on CISL and CKNW

However, you are also in luck - Fred Snyder (www.mutualfund101.com) will be my guest at 6 PM on Wednesday July 8, 2009 at 6 PM on/at www.david-ingram.com. Fred and I are going to talk about Mortgage Interest as a deduction and the importance of having a written financial plan and how to get a free one. You can call free of charge from anywhere in North America to 1-866-980-0499. If not in North america or in the lower mainland, call (604) 980-0321.

And, you can talk to Fred every Sunday and Fred and I tomorrow (Sunday July 5, 2009) as Follows:

Every Thursday at 12 noon and 7 PM, Fred Snyder of Dundee Wealth Management
presents free Financial Seminars for his clients, potential clients and anyone who phones and asks to attend. Note that the seminars are suspended for July and August 2009 and will resume in September 2009.

THERE is NO CHARGE! (I used to charge up to $999.00 for essentially the same thing)
AND - NO ONE'S ARM IS TWISTED TO BUY SOMETHING.

They are presented at the Dundee Boardroom (holds about 30 people max)

1764 West 7th
Vancouver, BC

phone (604) 731-8900 - ask for Freda to register for free.

These are genuine educational seminars dealing with everything from how to buy a house to making your mortgage tax deductible to buying an RRSP to alternatives to RRSP accounts to estate planning. So what started as 13 separate seminars has now evolved into 23 separate topics.

IT IS NOT UNUSUAL FOR PEOPLE TO COME TO ALL OF THEM.
ONE LADY CAME TO 53 separate seminars and her husband came to about 20 with her.

If you have a financial consultant, bring them. People have brought their bankers and life insurance agents with them.

Take your spouse, your best friend, your son, your daughter, your mother or your worst enemy But do phone 604-731-8900

Fred Snyder also is the host of ITS YOUR MONEY every Sunday morning on CISL (650 on AM dial) from 9:00 to 10:30. This is a phone in financial show which I appear as a guest on the first Sunday of every month. You can listen to the program live around the world every Sunday morning on/at www.am650radio.com. We have taken calls from around the world. In one case, a lady phoned from Florida, got her answer and then asked if I was the David ingram she knew in Regina back in 1959. Small world as they say.

Call (604) 280-0650 with your question on Sunday Morning from 9 AM to 10:30.

And as of July 20, 2008, IT'S YOUR MONEY also appears in a different version LIVE on CKNW from 5 PM to 6 PM as a phone in show to answer your questions. Call (604) 280-9898 or 1-877-399-9898 or *9898 on your cell to get your question on the air. I am a guest on the first Sunday of each month as above. Try July 5, August 2 (same day as the Gay Pride Parade which I am also in), Sept 6, October 4, November 1 and December 6, 2009.

Callers to the show are awarded a free written financial plan for the future - be prepared to spend a couple of hours on this. This written financial plan also includes what happens if an dwhen mortgage interest is deductible.

As an aside, I do not do them any more but used to charge up to $3,000 for essentially the same thing in the days before the wonderful computer programs available today to assist.

standard disclaimer

david ingram's Expert Income Tax Help with five US / Canada / Mexico International tax consultants to deal with your Income Tax and Immigration Matters

Mortgage Interest as a deduction in Canada - the CEN-TA CLAUSE

Admin — Sat, 27 Jun 2009 12:14:15 -0500

XXXXX XXXX wrote:
Do you think that the Smith manouver is still legal in view of the recent
decision in the Lipson case regarding mortgage interest deduction and the
General Anti-Avoidance Tax Rule?

References: csc.lexum.umontreal.ca/en/2009/2009scc1/2009scc1.html

Thanks

----------------------------------------------------
david ingram replies:

The 1985 Smith Maneuver came out of seminars that Fred Snyder presented using methods i pioneered and first published in 1976.

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).

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.

----------------------------
My question is: Canadian-specific

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?

------------------------
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.

--------------------------
david ingram replies:

I had some 90 people at a seminar on this subject today and am just about all "free"ed up on the subject.

You should be taking the rent you receive and use it to reduce the non-deductible mortgage on your Langley house.

You can find out more by reading my November 2001 Newsletter in the top left hand box at www.centa.com.

Reading Fraser Smith's Book 'THE SMITH MANOUVRE' will also give you ideas on how to make the Langley Mortgage deductible.

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.

The following is part of the handout at today's seminar -

David Ingram's US/Canada Services

Mortgage Interest as a Deduction in 2007 – 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:

The Lipsons contracted to buy a home in Forest Hills in Toronto
     1. Mrs Lipson took out a demand loan to buy share in the family business from her husband.
     2. The shares were transferred to Mrs Lipson as a section 73(1) rollover
     3. Mr Lipson used the funds to buy the house
     4. They “both” took out a mortgage on the house to repay the demand loan
     5.
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.

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.

The following was an excel spreadsheet that was presented and you might be able to figure it out.

1
    WHY BOTHER MAKING YOUR MORTGAGE INTEREST DEDUCTIBLE??
    1
2
    by david Ingram - www.centa.com -
    (604) 980-0321
    2
3
    WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING
    $ 100,000.00     3
4
    Let's pretend that you are paying 6%
    0.06    times    6000.00    4
5








    5
6
    How much do you have to earn to pay
    6000
    6000.00    6
7
         At a     0.3    marginal tax rate
    you would need     8571.43    7
8


    you would pay tax of

    2571.43    8
9


    To Have enough to pay the interest of
    6000.00    9
10
    TWO






    10
11
    WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING
    $ 300,000.00     11
12
    Let's pretend that you are paying 6%
    0.06    times    18000.00    12
13








    13
14
    How much do you have to earn to pay
    18000
    18000.00    14
15
         At a     0.35    marginal tax rate
    you would need     27692.31    15
16


    you would pay tax of

    9692.31    16
17


    To Have enough to pay the interest of
    18000.00    17
18
    THREE






    18
19
    WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING
    $ 600,000.00     19
20
    Let's pretend that you are paying 6%
    0.06    times    36000.00    20
21








    21
22
    How much do you have to earn to pay
    36000
    36000.00    22
23
         At a     0.4    marginal tax rate
    you would need     60000.00    23
24


    you would pay tax of

    24000.00    24
25


    To Have enough to pay the interest of
    36000.00    25
26








    26
27
    You can easily see that the larger the mortgage payment

    27
28
    the more money you have to make and the larger your

    28
29
    marginal tax rate would be - BC runs from 23% up to $35,000

    29
30
    and is 44% over $118,000 or so




    30
31
    DEDUCTIBLE





    31
32
    But if the last mortgage of    600000    could be deductible
    36000.00    32
33
    the interest paid of     36000    would get a tax deduction of
    14400.00    33
34

    and you would only need to earn the difference
    21600.00    34
35

    instead of the     60000
    on line 23 above
    35
36
    Why only     21600





    36
37
    Well, you could earn    21600    , borrow
    14400    (line 33)
    37
38
    for a few days from Fred, and then pay Fred back with the refund
    38
39








    39
40
    The difference in earnings is     60000
    line 23

    40
41
    minus new necessity of    21600
    Line 34

    41
42
    for an earnings savings of    38400



    42
43
    or a monthly difference of    3200



    43
44








    44
45
    And, if you are self employed as I am, I would have to do

    45
46
    $200,000 of business and pay $140,000 of expenses to have a profit of
    46
47
    $60,000 left over to pay the tax on the $60,000 on line 23    (Aug 11, 2007)    47

And this will also show the mathematics of paying down a mortgage with the earnings from a Mutual fund.

Using New Securities Account to make mortgage deductible
    This is to show the method only















Most, if not all people buy a Mutual fund and have the dividends reinvested





in the fund. Do NOT DO THAT if you want a deductible mortgage

    Non











    Deductible    Non    HELOC
Assume you have a borrowed
    100,000    to buy funds and they pay     0.06    original     less    Deductible    interest
A     B     C    D    E    F    New    G    H    I    J    K    L    M
You pay     0.06    pay your    35% Tax    borrow for    Invest't    Mutual     earnings    worth    mortgage    earnings    original     not de-

    borrowed    interest    Refund    new funds    loan     Fund    0.06


    ductible
2007    100000    6000    2100    6000    106000    100000    6000    106000    100000    6000    94000    6000
2008    106000    6360    2226    6360    112360    106000    6360    112360    94000    6360    87640    5640
2009    112360    6742    2360    6742    119102    112360    6742    119102    87640    6742    80898    5258
2010    119102    7146    2501    7146    126248    119102    7146    126248    80898    7146    73752    4854
2011    126248    7575    2651    7575    133823    126248    7575    133823    73752    7575    66177    4425
2012    133823    8029    2810    8029    141852    133823    8029    141852    66177    8029    58148    3971
2013    141852    8511    2979    8511    150363    141852    8511    150363    58148    8511    49637    3489
2014    150363    9022    3158    9022    159385    150363    9022    159385    49637    9022    40615    2978
2015    159385    9563    3347    9563    168948    159385    9563    168948    40615    9563    31052    2437
2016    168948    10137    3548    10137    179085    168948    10137    179085    31052    10137    20915    1863
2017    179085    10745    3761    10745    189830    179085    10745    189830    20915    10745    10170    1255
2018    189830    11390    3986    11390    201220    189830    11390    201220    10170    11390    -1220














Because the earnings from the mutual fund are mostly dividends and capital gains which are very tax efficient


there will be little tax on the earnings - certainly less than half of the tax savings in column D

















In this example, I have assumed an interest only HELOC and assumed that you would have paid your regular non-deductible interest
which would decrease each year because of the principal being paid down in column K.    column M represents HELOC interest














Every one's situation is different. YOUR cash flow will be different. And to escape GARR, you must be making a business decision
If you wish to make your mortgage deductible. A perceived increase in earnings from a mutual fund loan would likely be sufficient
but there are NO, NONE, NOT ANY Guarantees.





















If this situation interests you, you are advised to get a written financial plan from Fred Snyder FIRST - His Number is (604) 731-8900














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
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
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.

I hope the formatting stays with the email.

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.