# Tax deductions and Real Estate



## Fain (Oct 11, 2009)

Here's my plan, I'm 23 years old and have around $50,000 to invest. I wanted to know if i can put $25,000 into an RRSP, then take out $25,000 under the HomeBuyersClause as a downpayment on a property in Downtown Hamilton(2bedroom condo$100,000ish). THEN i want to start my own 'xyz' company, transfer my own property that i just purchased to its name and rent it out to others. 

The reason is because the mortgage interest would be tax deductable and to be able to write off my phonebills, gas etc. Is this doable???


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## OhGreatGuru (May 24, 2009)

One of the qualifying conditions of the HBP is that the residence be your "principal place of residence."

Mortgage interest is not tax deductible on your principal residence. So your proposed scheme has to contravene the income tax act in some way.

You do realize that by changing the ownership to a corporation you would also giving up the principal residence exemption for capital gains tax purposes?


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## Fain (Oct 11, 2009)

This is true about the HomeBuyersClause but you can convert it from a principal residence immediately after though. I checked that bit out.

****************************
You do realize that by changing the ownership to a corporation you would also giving up the principal residence exemption for capital gains tax purposes? 
****************************

I did realize this but in my mind i thought the tax deductability for rental investment outweighed capital gain exemption for principal residences.

In addition, I heard that if you sell a property and the use that money "pretty much immediately" to put towards a different property(proabably more expensive) you can defer paying the tax and sorta ladder yourself up the property chain.

E.g. 
Buy House for $100,000,
Value increase to $120,000
Capital Gain is $20,000 when house is sold.

But using $120,000 soon after to put towards a $300,000 property you can defer the tax till you sell that one.

I'm not toooo sure about this, but i remember this tidbit from one of the "Rich Dad, Poor Dad's" books and was being hopeful that Canada had the same thing going on. Does anyone know bout this???????


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## Potato (Apr 3, 2009)

That's an American thing, doesn't apply here.


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## Cal (Jun 17, 2009)

Not sure from your post, but if you intend to live in any portion of your investment property, you can only claim up to a maximum of 50% deduction on all expenses related to the property. Even if you only occupy a smaller portioin of it.


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## GeniusBoy27 (Jun 11, 2010)

The number corp to invest, only make sense in this scenario if you're sheltering gains. The reporting mechanisms of the corp, i.e. the accountant and lawyers fees are there, and for 1 property by itself, it rarely makes sense (until we're talking a multi-unit property).

Most CAs will say, why bother ... because our need to do a proper account, will cost too much. If you're a CA, sure ... maybe it makes sense. But otherwise, I wouldn't do it in that fashion. 

I did what you suggested. Bought a condo, and converted it to rental, but I bought another house. The transparency and purpose should be as a principal residence, and what I bought our condo, the initial intention was for it to be our principal residence. If that transparency isn't there, it can be challenged by CRA, and that's not a route you want to go down.

How do you envision this, straight up rental of the property and no intention of living in it, or something else?


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## Fain (Oct 11, 2009)

GeniusBoy27 said:


> The number corp to invest, only make sense in this scenario if you're sheltering gains. The reporting mechanisms of the corp, i.e. the accountant and lawyers fees are there, and for 1 property by itself, it rarely makes sense (until we're talking a multi-unit property).
> 
> Most CAs will say, why bother ... because our need to do a proper account, will cost too much. If you're a CA, sure ... maybe it makes sense. But otherwise, I wouldn't do it in that fashion.
> 
> ...


It would be a a straight-up rental property with no intention of living in it. It's just a good long-term location i believe(Downtown Hamilton, next to Hess Village).

Did your changing your condo into a rental get challenged by the CRA??? I want to somehow use the HomebuyersClause and also somehow use it for a rental property. Hmmmm

And the main purpose behind having it under a company name is sheltering the gains, yes you are correct. My lawyer fees are free(my uncle), and my accounting fees i considered minimal since there's not too many numbers to work with(and i'm educated in accounting). I also wish to start accumalating properties slowly and have $60,000 in disposable income every year to invest. 

With that in mind do you bilieve the company approach is worthwhile still? Lemme know your input and critiques


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## kcowan (Jul 1, 2010)

If you acquire the property with the intent to make it your principal residence it might work. Would be good to check with CRA.


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## GeniusBoy27 (Jun 11, 2010)

It wasn't challenged, and won't be. My accountants believe it's legal. If you incorporate, you must get formal audited statements, no way around that, and it's about $1500-2000 per year.

I think you'll have a challenge. I lived in my property for 5 months, before I bought my present place. If there's a straight follow through, then I could see a possible challenge.


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## Fain (Oct 11, 2009)

GeniusBoy27 said:


> It wasn't challenged, and won't be. My accountants believe it's legal. If you incorporate, you must get formal audited statements, no way around that, and it's about $1500-2000 per year.
> 
> I think you'll have a challenge. I lived in my property for 5 months, before I bought my present place. If there's a straight follow through, then I could see a possible challenge.


What about tax sheltering the gains through a sole proprietorship. I'd lose Liability protection but could claim more expenses. It might seem over the top with my first property but if(when) i aquire more it might make more sense.

You are right, $1500-$2000per year is way too expensive and i'm too frugal for that.


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## MoneyGal (Apr 24, 2009)

You should get some advice beyond this forum. Rental income is just that - rental income. It isn't business income (in the setup you've described) and owning a rental property does not create a sole proprietorship. 

You can take deductions against the income without running the rental income through any kind of separate business structure.

Here is the CRA guide to rental income: http://www.cra-arc.gc.ca/E/pub/tg/t4036/README.html

Spending a few minutes reading this guide should answer your questions. 

In addition, you should be cautious about telling people that you intend to use the HBP to finance the purchase of the property, and then rent it out without occupying it yourself. 

In order for the RRSP withdrawals to qualify as HBP withdrawals, you must intend to occupy the purchased house as your principal residence. If CRA discovers that you did not intend to follow this rule, they can disqualify your participation in the HBP, which means the entire withdrawn amount will be taxed as income in the year of withdrawal.


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## MoneyGal (Apr 24, 2009)

In addition: there's no real capacity to "shelter gains" on a property held through a sole proprietorship. Gains are realized and thus taxable when a property is sold. Unless the property is your principal residence, you will be taxed on any gain at the time of sale. However, capital gains are already tax-preferred income.


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## GeniusBoy27 (Jun 11, 2010)

I agree with MoneyGal on this. However, my point is just do it as rental income. For what you want to do, there's no need to make it that complicated on relatively small amounts.

Our main reason was that we had multiple properties, and that we wanted to direct the money down the road to my wife when she decided to stop working, so that she got the dividends from the gains directed toward her and not me, being taxed at the highest marginal tax rate. 

However, I agree with Money Gal, you should get formal advice, if you want to pursue this avenue (or a friend with a CA designation with some expertise in real estate/tax).


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## Eclectic12 (Oct 20, 2010)

Fain said:


> [ ... ]
> In addition, I heard that if you sell a property and the use that money "pretty much immediately" to put towards a different property(proabably more expensive) you can defer paying the tax and sorta ladder yourself up the property chain.
> 
> E.g.
> ...


Hmmm ... I'd have to see it explained. My understanding is the "Rich Dad, Poor Dad" book is US based, where the the mortgage is already tax deductible. I'm not sure what effect the corporate structure has on expenses.

As for the capital gains part - assuming this was supposed to work in Canada, it sounds like someone has confused keeping "interest to earn income" tax deductible with capital gains. 

If I borrow $100K to buy the house to earn income through renting, when I sell and buy another property, as long as the new property is worth at least $100K, the interest on the $100K is still tax deductible. I'm assuming the new property is for rental.

Capital gains, on the hand, are generated when the property is sold. So at the end of the tax year, the capital gain of $20K has to be reported and paid.


It is much simpler to keep the residence as principal residence (and capital gains free). You can still rent out part of the residence and claim the matching percentage of the expenses. The two main tricks are to keep the amount rented low enough and to avoid anything that CRA classes as a capital expense - otherwise the capital gain becomes taxable. A tax book a had gave the example of replacing the rugs. Even if the expense was pro-rated to the rented section, as it was classes as a capital expense, this triggered the tax.

In summary, if you want the full range of deductions, set your corporation up to be a full rental company or if you want to preserve the capital gains exemption, run with fewer write-offs.

Most good tax books have a section discussing both scenarios.

As always, it's good to get the input of a tax professional.


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## Mwycliff (Jul 11, 2011)

Revisiting the thread as it showed up on my google search. 

What are the mortgage related mechanics involved in transferring my primary home into a corporate entity? 

Do mortgage financing companies allow the mortgage to transfer to the new entity? And more importantly, does the procedure free my credit to purchase another home as my primary residence?

Thanks for any comments and have a nice day.


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## Charlie (May 20, 2011)

you'll still be on the hook for the mortgage -- why would the bank drop your guarantee???-- so it won't free up your credit. 

in my experience banks will rarely transfer a mortgage on a personal property to a corporation -- even if you maintain the personal guarantee. It makes life more complicated and less secure for them. It is possible to transfer the debt (for CRA purposes) through a trust document drawn up by a lawyer. Effectively transferring the beneficial interest in the property and debt -- without changing anything legally -- if there are other planning reasons to do this. But it won't free up credit or allow you to borrow more...if that's your goal.


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