IT-533 Disappearing Source Rules for sale of Rental

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Happy Canada Day!
One of my rental properties in Calgary has now sold and I want to make =
sure that I understand the tax implications correctly.
As you know, I've been applying 100% of the rental income to pay down =
non-deductible debt and in turn have been borrowing to cover operating =
expenses (mortgage payments including principle and interest, property =
taxes, management fees, repairs, maintenance, etc).
I read the CCRA Bulletin No IT-533 that you forwarded a couple of weeks =
back but I'm not real clear on the "Disappearing Source Rules" for my =
particular situation.
I'll keep the numbers simple for the purpose of this discussion.
-Purchased property in 1993 for $60,000 (joint title with my wife).
-After deducting the closing costs, I grossed $120,000 on the sale.
-A $50,000 mortgage on the property was discharged which left me with a =
net of $70,000 that was deposited into my personal bank account.
-Since I have been borrowing to cover the rental property expenses over =
the past year, I have also incurred a debt of $20,000 directly related =
to the property, that is still accruing interest charges.
I understand that the interest on this $20,000 loan would be deductible =
as long as I continued to own the income producing rental property. But, =
now that the source asset has "disappeared" due to the sale of the =
property, will the interest on the $20,000 continue to be deductible or =
Does it make a difference as to what my intent is for the $70,000 that I =
just deposited into my personal bank account (ie. applying the money to =
a new investment vs keeping the money to cover personal expenses during =
my transition period between jobs - FYI : I no longer work for The =
Finally, based on the above numbers, what would the amount be for =
capital gains that my wife and I will have to pay tax on?
Thank you in advance for your response.
david ingram replies:
The answer is that if you segregate the $20,000 into a money market fund =
or mutual fund or a GIC, the interest will continue to be deductible.  =
You should likely phone Fred Snyder at (604) 731-8900 and investigate =
the Manulife Seg Fund alternative to an RRSP.  Put $20,000 in, borrow =
another $50,000 and you will have an interesting investment that is not =
touchable by creditors and does not pass by will and the principal is =
guaranteed at the end of 10 years.
If you commingle the funds as it sounds like you have done, you are in =
danger of them suggesting that the money was used for personal purposes.
Another method would be to put the $20,000 in another account that you =
use for your home based business.  Your home based business is a real =
one that has generated many thousands of dollars and using that $20,000 =
for the business in the next year would allow for expansion, new =
equipment, more supplies and inventory. =20
You or anyone else can read  IT-535 at:
I think it has done a marvelous job of codifying what the CRA will and =
will not allow.
The Bulletin, in fact, makes interest as a deduction easier to follow.
Assuming the property in Calgary has a $60,000 profit after taxes, the =
taxable portion will be $30,000 which is in turn divided between =
yourself and your spouse and $15,000 each is added to the top of your =
other income at your highest marginal tax rate.  As I remember it, Cindy =
would be paying about 24% of this in tax or less than $3,600.  You will =
likely pay 33% or $5,000.
In addition, we claimed CCA on the unit.  I do not have all the figures =
that were claimed,  but in 2002 (the only year I can access from home), =
you claimed $1369 on one an $1569 on the other and I think we claimed in =
2003 as well.  I do not know what you claimed in prior years.  The CCA =
claimed also had to be recaptured and is tacked on top of your =
respective incomes (likely 24% for your spouse and 33% for you.
Hope this helps.  Remember, A good friend will come and bail you out of =
jail...but, a true friend will be sitting next to you saying, =
"Damn...that was fun!"=20
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Disclaimer:  This question has been answered without detailed =
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