Canadian TN visa holder Tax QuestionHello Taxman,
I am a Canadian citizen working in the US with a TN visa. I have a
great opportunity to purchase an rental investment property back home
in Canada and I want to know if my mortgage interest can be deducted
from my US income tax.
For further background:
* I will soon meet the requirement for a "Resident Alien" (I
can't explain how much I hate that term) in the US
* I believe under the TN visa I do have to flexibility to
maintain a residence in Canada. (But please let me know that is true)
I hope you can shed some like on my problem, if not, hopefully you can
direct me to someone who can.
Thanking you in advance,
======================================
david ingram replies:
You do NOT need a residence in Canada to maintain your TN status.
the following answer may help you.
======
Subject: US citizen buying canadian vacation property
Expert: taxman at centa.com
Date: Thursday September 16, 2004
Time: 06:02 PM -0700
QUESTION:
My wife and I have vacationed in Baddeck, Cape Breton numerious
times, and want to buy a vacation home there, likely next year. I've
read your "Border book" excerpt on
http://www.centa.com/articles/U.S.Cdntaxation.htm
I tried to find "Border Book" by David Ingram on amazon.com, but
wasn't sucessful. If I could find it, I'd buy it.
We'd like to rent the Baddeck home out mostly for the next 10-15
years, then reside there up to 3 months / year (under the magic 131
days).
Are there any special USA+Canada tax consequences to the following:
1. take a mortgage to purchase, then offset interest expense vs
rental income.
2. take a 2nd mortgage on my USA home, and pay cash for the Canadian
home.
=======================================
david ingram replies:
The border book is out of print and not likely to be republished in
the near future. Most of the good stuff has been put on the web and
you are free to download and print from www.centa.com
Beddeck is a marvelous place, home of the Alexander Graham Bell
museum and the birthplace of many of Bell's inventions. Also, just
down the road from Rita McNeil's coffee house at Big Pond, and around
the corner (relatively speaking) from the Marconi towers, Fort
Louisburg and a whole lot of North American history.
However, enough of the history lesson.
1. If you rent the place out in Canada, you are wise to have a
mortgage or line of credit which will generate enough interest expense
to offset the income when added to the property taxes, management
fees, utilities, and repairs and maintenance.
This will create a neutral tax return for Canada and you "HAVE to
file an annual return. If you do not file an annual return and the
Canadian Income Tax department finds out, you will be taxed 25% of the
"gross" rent received with no allowance for any expenses more than two
years old.
One new client (H & P XXX) just found this out to their amazement.
They were just assessed over $50,000 for taxes interest and penalties
back to 1995 for a place that rented out for an average of $16,500 a
year but lost money. They had been told (they say) by a Canadian
Accountant that they did NOT have to file a Canadian return if they
lost money.
-----------------------
And just in case you think Canada is unreasonable, the US in reverse
has a 30% of Gross rent penalty plus $1,000 to $10,000 a year penalty
for failing to file.
Remember that the tax and penalties are then subject to late
"paying" interest for the years so a 1995 tax penalty of $4,125 (25%
of $16,500) plus a 17% late filing penalty plus late paying interest
from 1995 to 1004 is over $8,000 by itself.
-----------------------------
2. If you have a paper trail showing that you borrowed money in
the US to buy the Canadian property, the interest is still deductible
on your Canadian return.
Of course, you will be caught up in the personal use rules. for the
US, they are that you cannot use the rental vacation house as a tax
deduction if you stay in it more than 14 days or 10% of the days it
was rented at fair market value. So to use it for 20 days without
penalty, you would have to rent it out for 200 days at a fair market
value to strangers.
It is important not to file your Canadian return with a rental loss
because rental losses can NOT be carried forward or saved up against
future capital gains. If you do see a loss coming, you can capitalize
repairs and interest expense to raise the adjusted cost base (ACB).
Hope this helps.
If you have any more questions, I am available for private
consultation by phone or in person for $350 Cdn for up to an hour or
you can phone the radio program on Sunday mornings for "free".
It is long distance from the US.
---------------------------------
Answers to this and other similar questions can be obtained free on
Air every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of
Cartier Partners and I will be hosting an INFOMERCIAL but LIVE talk
show called "ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the
internet at
www.600AM.com CKBD Radio
Local phone calls to (604) 280-0600 - B C Long distance calls to
1-866-778-0600.
Old shows are archived at the site.
This from ask an income tax immigration planning and bankruptcy
expert consultant guru or preparer from www.centa.com or
www.jurock.com or www.featureweb.com. Canadian David Ingram deals
daily with tax returns dealing with expatriate:
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David Ingram's US/Canada Services
US/Canada/Mexico Tax Immigration & working Visa Specialists
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4466 Prospect Road (Personal residence by appointment only please)
North Vancouver, BC, CANADA, V7N 3L7
Calls accepted from 10 AM to 10 PM 7 days a week
Res (604) 980-3578 Cell (604) 657-8451
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davidingram at shaw.ca www.david-ingram.com
Disclaimer: This question has been answered
without detailed information or consultation and
is to be regarded only as general comment.
Nothing in this message is or should be construed
as advice in any particular circumstances. No contract
exists between the reader & the author and any and all
non-contractual duties are expressly denied. All readers should
obtain formal advice from a competent financial, or real estate
planner or advisor & appropriately qualified legal practitioner, tax
or immigration specialist in connection with personal or business
affairs such as at www.centa.com.
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