Can Your Home Lower Your Tax bill?
Can Your Home Lower Your Tax bill?

Can Your Home
Lower Your Tax bill?

Don Campbell, author of 81 Financial and Tax Tips for the Canadian Real Estate Investor, answers your questions.  Click here to read the full article.

Exclusive Q&A session courtesy of the Globe And Mail

Dianne Nice:
Hi, I’m Dianne Nice, personal finance editor for Globe Investor. Welcome to our discussion with Don Campbell, Real Estate Investment Network president. Don will join us shortly to take your questions.

Don R. Campbell:
Welcome to the discussion. Looking forward to answering some questions today.

[Comment From Rocco: ]
Can I deduct anything from my principle home when filing my taxes?

Don R. Campbell:
We are assuming that you are wishing to deduct, from your regular income, some expenses incurred at your home. Yes there are a few things you can, but only if you have 1. If there is a requirement from your employer for you to have an office from your home. or 2. You have self-employment income based in an area in your home that is exclusively used for business purposes.

Dianne Nice:
PierreC1 asks: What do you think of TDMP’s (Tax Deductible Mortgage Plans), as promoted by some Canadian companies. Is it something you recommend for a principal residence?

Don R. Campbell:
Commonly discussed as a Smith Manoeuvre. This is where a person has investment income such as real estate rentals and has non-deductible debt such as a mortgage on their personal residence. This plan they take the GROSS revenues from rental income and pay down the non-deductible debt. Then they borrow money from their LOC to pay the expenses pertaining to the investments.

[Comment From Guest: ]
Condominium owners feel they should not pay the same rate of property taxes as owners of ‘regular’ single family homes. They feel that since they often don’t get the same level of municipal services (garbage pick-up for example) they are being double taxed. What do you think?

Don R. Campbell:
Interesting question. Sadly, it doesn’t matter how we feel (YES I agree that there is an over-tax situation on condominiums), however that is too large of a tax base to have the city change the rate. When investing in real estate we have found that whatever the reality is, we need to factor that into our cash flow calculations. For those with larger multi-family investments, you can reduce property taxes (in Ontario only) by converting them to condominiums. All other provinces, this strategy INCREASES property tax

[Comment From falifali: ]
Bought a condo last year and used the reno and new home tax credits to get break this year but how can ownership reduce tax bills in the future?

Don R. Campbell:
As the Renovation tax credit is only available on principal residences, we must assume that you purchased the condo for personal use. The good news is that the one major tax ‘shelter’ that we have in this country is that profits from the sale of your principal residence are 100% tax free… hence there are no real expenses you can deduct against it along the way. (Unless you have a home office used exclusively for the purpose of generating income – see above)

[Comment From Ben Oosterveld: ]
What is the benefit of being a home owner compared to a a renter from a tax position?

Don R. Campbell:
3 great benefits. 1. 100% of any profit you generate from the sale of your home in the future is tax free. 2. Each and every month you are investing in yourself and your future financial situation by mortgage pay down. 3. If you are a prudent investor, you can use the equity to purchase solid investments (not to be confused with speculative or sales-pitch oriented investments) The interest payments on these most likely be tax deductible

[Comment From Adrian V: ]
My employer allows me to work from home 1 day a week. Can I deduct some expenses for my home office?

Don R. Campbell:
Great question. There is a big difference between ‘allows’ and ‘requires’ under the tax act: You can only deduct the expenses if your employer ‘requires’ you to have an office in the home and your employer is not ‘related’ to you. (typically on-the-road sales professionals).

[Comment From Neil: ]
Hello Don, when reporting office expenses under “statement of business activity or professional income”, is it OK if I leave the business name blank in the first year as long as in the following years I register a business name OR is it important to do everything under a business name from day one? section

Don R. Campbell:
CRA doesn’t really ‘care’ about your business name. It is more important for you to keep track of the business activity you are reporting along with the receipts you are claiming. Not only does this cover expense, but also you MUST keep a record of your sales. Another tip is to ensure you are able to match your sales with your ‘deposits into your bank’ on your bank statement. Deposits that are not easily identifiable MAY be deemed to be sales, even if they are not, if you can’t prove otherwise.

[Comment From JJJJ: ]
Is deducting mortgage interest (principal home) challenged often by RevCAn?

Don R. Campbell:
It will definitely be challenged. The burden of proof falls on you to prove that the funds borrowed were DIRECTLY used for investment purposes. That is why you must NEVER mix personal expenses in the same Line of Credit with your investment expenses.

[Comment From Rookie Investor: ]
Hi Don, I hope this is not off topic. As a home owner who also wants to start investing in rental properties, are there tax implications that one should be mindful of? Should a home owner establish an corporation before acquiring a rental property to minimize the taxes paid (so that the properties would be under the company and not the individual)?

Don R. Campbell:
Typically, investment income in a Canadian corporation is taxed at the highest rate. Therefore it is not advisable to incorporate from a tax perspective. Also remember Corporations are more expensive to maintain. Many people who just start out pour a lot of money in corporate structures not understanding that even if you are buying under a corporate name, it will be a requirement that you signing a ‘personal guarantee’ on that loan thus tying you directly to the payments anyway. Also it is much more difficult to arrange financing on smaller residential rental units under a corporate name. This is just from the tax and accounting side. Lawyer can provide you with the legal implications and insurance can mitigate some of the liability issues than many people fear.

[Comment From doug: ]
If I put the same money in an RSP vs a house over 25 years then sell both…I’m 40-50% ahead making the house my RSP…why dont more people make their house the RSP and get rid of the Gov’t/Bank run RSP?

Don R. Campbell:
I agree. However, we can’t speak for other Canadians and their investment strategies. Most people, unfortunately, spend more time planning their vacations then they do planning their investments.

[Comment From Michael: ]
I heard on CBC today that if you own a rental property, and claim any depreciation, you can no longer switch use (back to primary residence). Which didn’t really make sense to me, I would think that perhaps you would need to ‘return’ the amount depreciated. But is it true that you couldn’t switch it’s use?

Don R. Campbell:
It is a CRA rule. Once you claim depreciation you can no longer claim principal residence exemption, hence it will be taxed as a capital gain. If you ever have a plan, in the future, to rent out your principal residence, then move back into it, don’t depreciate.

[Comment From Jeff: ]
What is your forecast for the ottawa real estate rental property this year and the years to come?

Don R. Campbell:
Ottawa is one of the most consistent performers in Canada. It often avoids the dramatic high and low cycles that other areas in the country experience. I call it, using baseball terms, a consistent single or double… never a home run. And I LIKE markets like that. The last thing I want is exciting investments.

[Comment From Guest: ]
Hello Don, have a water-front cottage 2 hrs north of Toronto, where we rent out weekly in July/August and from Sept-June, have had it for 3 yrs and reasonably happy with this investment. Question….when do you think real estate values for this segment of the market will pick-up? We are being told its flat right now. thanks.

Don R. Campbell:
These recreational properties are always the first to fall off when the residential market (or national economy) turns negative, and they are the last to come back. Recreational properties are a bell-weather of consumer confidence (and income increases). Discretionary investments make for high and low cycles. Some regions in the coutry are already seeing a resurgance in recreational property while others (including your area) will have to wait another year at least.

[Comment From Denis: ]
My employee mandated that I work from home 9 out of every 10 days. What home expenses can I deduct if any?

Don R. Campbell:

I trust you mean your ’employer,’ if your employees are mandating what you do something is very wrong LOL. First off: take the whole square area of your house and find out what % of that floor area is used EXCLUSIVELY for your work. Next, you then can claim this % of expenses such as: property tax, insurance, heating, lighting, etc. Sadly you can not deduct your land line (telephone) unless you have a separate land line for work purposes only.

[Comment From Matt: ]
With a rental property would you consider paying off the entire mortgage, or keep the mortgage permanently to write-off the interest.

Don R. Campbell:
This depends completely upon your long term goal. Positive cash flow (not equity growth) provides the investor with the financial freedom. If cash flow is your ultimate goal, then as you close in on your retirement ‘goal’ age then get rid of the mortgage. Before that, you will want to strategically use your capital as you build your portfolio (rather than tie it all up in one property). A strategy that many use is to build a strong cash flowing portfolio and then, as they get closer to their ‘goal’ age, they sell a few of the properties and use these funds to pay down the remaining mortgage on the other properties. Thus increasing their ‘income’.

[Comment From chad: ]
how is mortgage interest expenses allocated when you are renting out your basement on your principle resident property? Thanks.

Don R. Campbell:

First off, the rental portion must be less than 50% of the overall floor space in order to continue to claim principal residence ‘capital gains free’ exemption. Now you can claim a percentage of the mortgage interest based on the percentage of your floor space that is rented out. But it is important to note that you cannot create a loss on your tax return based on this deduction.

[Comment From Fredrick: ]
My wife and myself are considering investing in a rental property. My wife has no income at present. From a tax perspective, how should the ownership of the rental investment be structured?

Don R. Campbell:
This is a very complex question/answer. To simplify this we are going to assume that the property makes money every year (cash-flows positive). Then you would purchase it in your wife’s name. Understanding that she will not be able to get approved for a mortgage without you signing as a guarantor of the mortgage.

[Comment From mark: ]
I own student rental condos in Waterloo and have a question about CCA. How do I calculate the value of the land vs the value of the buildings so I can accurately depreciate the buildings to minimize my tax payable?

Don R. Campbell:
This can only be set at the time of purchase. Your professional appraisal should, if done correctly, break the two out. If not, I suggest that you ask them to provide this to you. Guessing and estimation does not work in an audit situation. As you probably know but others on this discussion might not, you cannot derpreciate land, depreciation only can be used on buildings and appliances.

[Comment From Stephen: ]
Do you feel that it may be better to go into the US market such as Phoenix? If so, what would be the tax implications of entering that market compared to the Canadian market?

Don R. Campbell:
We have just concluded our latest analysis of the US real estate market’s future and it is not pretty. Foreclosures will continue to grow right until the end 2012 if not further on, which means this shadow inventory will keep being added to the market. It is a mess (even though it seems very cheap right now). Other considerations that Canadians often ignore until too late (because they are lured south by the sun and cheap property) are: currency fluctuations, immigration rules (deemed to be working in the US even if you are working on your own rental property, or if you have set up a corporation down there to invest, you are deemed to be working there – CAREFUL), the withholding tax is upward of 40% on rents ( you can get a reduction on this if you jump through some hoops) and on sale proceeds which means if you sell you may not get enough to pay off your underlying mortgage). Going over the border to invest is in and of itself a HUGE undertaking that investors MUST not ignore the implications.

[Comment From Gary: ]
Can you explain the Senior Homeowners’ Property Tax Grant. My Parents may be eligable for this. Is this a yearly refund or a one off?

Don R. Campbell:

Each province has a separate rule for this. for instance, most provinces will deduct the grant from the property taxes when you make your annual payment on June 30th as long as the seniors are on-title and living there.

Don R. Campbell:
Many Canadians have been using a Line of Credit against their principal residence to invest. If this is well managed and the investments actually pay the payments on these loans, this can be a good strategy. However poorly managed (or poorly invested), this can get a home-owner into deep trouble. One tip is to NEVER mix personal and investment expenses in the same Line of Credit.

Dianne Nice:
I’m afraid we’re out of time for questions today. Don, you are a popular guy. Perhaps we can have you join us again to answer more questions sometime soon. Is there anything you would like to add?

Don R. Campbell:

Another tip is to NEVER invest based solely on ‘Tips’. Ironic coming from an author who writes tips books. However a very important point. Investing in real estate is like owning a business and must be planned. Take the emotions out of the equation, don’t fall in love with a property or a person selling you a property. It MUST be all about the numbers, like any other good investment. Never be afraid to ask the tough questions before you sign any documents from purchasing to mortgage application. I would enjoy coming back anytime to answer real estate questions. In the mean time please feel free to jump into the conversation at my blog site or CGA Navaz Murji’s tax and accounting site

Dianne Nice:
We had so many questions today, far too many for you to answer in an hour. Glad to hear that you will join us again. I know our readers really appreciate your advice, so thank you!

Can Your Home Lower Your Tax bill? was last modified: May 13th, 2010 by admin

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