is pied a terre interest deductible? -

My question is: Canadian-specific

QUESTION: I am an employee but also run a service business on the side. The service business accounts for 

about 25% of my annual income. My primary residence is on one of the Gulf Islands, while both my business and 

work is in the lower mainland. If I were to purchase a condo for living purposes in the lower mainland, 

would the interest on the mortgage payments be deductible on my business income?

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david ingram replies:

The answer is no as you have described the case.  However, if you use the methods you can find in the last eleven pages of my  November 2001 Newsletter in the top left hand box at www.centa.com, you can make it deductible as long as your service business is NOT incorporated.

You should listen to the Sunday radio shows, call in with a question and attend a couple of the free seminars.

Information on that follows and then there is a b it about the history of making a Canadian Mortgage deductible.

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david ingram replies:

I had 91 people at a free 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 a car accident 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 use 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 a lot of Internet sites and can be found in the March 1997 and November 2001 newsletters at www.centa.com in the top left hand corner.

I was pretty heavily involved in the Federal  Conservative Party (ran for the North Shore Nomination in 1978) 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 in the House (there were enough if he had waited for the Social credit members to arrive)  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 from his law partners 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 back into the law firm's capital account to fund the law practice. 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 these ‘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, Judge Bowman 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:

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

 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 for the transactions were.

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.

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