# Using investment property equity for retirement income?



## G613 (May 30, 2016)

Hello, 

Quick question for anyone willing to take a look...

Let's say Im retired, I have investment savings and a rental property. Can I use the equity in my *investment property* to draw as retirement monthly income? Let's say I put a HELOC on it - Is the tax deductible in this case? 

Thanks, 

G


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## Market Lost (Jul 27, 2016)

It's not a good idea because your rental business is suppose to be a separate entity from you, even if unincorporated, and things get dicey if you start mixing the two. If you do put a HELOC on the rental property, which you draw for your personal benefit, then that interest is not deductible as it isn't a business expense. The exception would be if you used the loan to purchase business assets, such as stocks, or another property.


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## heyjude (May 16, 2009)

What Market Lost said. 

There are basically three ways to generate income from a rental property.
1. When cash flow (rent minus expenses) is positive. A good investment property should be at least cash flow neutral from day 1. When the mortgage has been discharged, net cash flow greatly increases. This is taxable income.
2. Sell the property, generating a one-time lump sum. After paying off any remaining mortgage, there may be capital gains tax and recapture of depreciation to pay. 
3. When you have significant equity in the property, refinance it for a larger amount. This cash will not be taxable AFAIK. My bank recently called me several months prior to the end of a mortgage term to offer a new, lower rate, and invited me to refinance. I declined, because I would prefer to get the mortgage paid off more quickly and exercise option 1.


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## Just a Guy (Mar 27, 2012)

The only time you can deduct the tax on borrowed money is if the money were used for investment purposes. So, when you buy a rental property, it's important to borrow as much money before you purchase as possible. If you put your money into the down payment you can't get it back out later.

This is why I purchase using a heloc (either for the full purchase or at least the down payment). You are allowed to change the terms of the loan (refinance) and keep the money tax deductible, as long as it all remains balanced and traceable, but you can't take out more to "repay" yourself for the down payment. 

The same is true for renovations. You can borrow to improve the property, and deduct the interest, if you do it properly.


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## nobleea (Oct 11, 2013)

If you put a HELOC on it, then use the HELOC to invest in stocks and other income producing equities, then it would be deductible and you would have your income.


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## Soon Forget (Mar 25, 2014)

Isn't this just a cash dam scenario?

Use the monthly revenue from your rental property as your personal retirement income, and set up a HELOC on the property which you will use for all expenses related to that property only. All of the interest on this debt is tax deductible because it was generated via business expenses. Of course your overall debt goes up, but that's what you proposed in the first place by taking out equity.


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## Market Lost (Jul 27, 2016)

Soon Forget said:


> Isn't this just a cash dam scenario?
> 
> Use the monthly revenue from your rental property as your personal retirement income, and set up a HELOC on the property which you will use for all expenses related to that property only. All of the interest on this debt is tax deductible because it was generated via business expenses. Of course your overall debt goes up, but that's what you proposed in the first place by taking out equity.


 With all due respect, you are giving 100% wrong advice. It amount so the same thing as taking a loan for personal benefit. You just can't use a business as a tax write off. I'm all for providing advice, but you should make sure that you understand what it is you are advising on. Please read line 8710 in the link - http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html#P387_37921


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## andrewf (Mar 1, 2010)

^ Not sure that that reference disallows cash damming. It seems to me that cash dam could work here in line with what Soon Forget suggests. Of course, don't implement this without advice from your accountant.


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## Market Lost (Jul 27, 2016)

andrewf said:


> ^ Not sure that that reference disallows cash damming. It seems to me that cash dam could work here in line with what Soon Forget suggests. Of course, don't implement this without advice from your accountant.


It does because interest on rental property is highly restricted in what you can write off. I was also a CPA for a decade, so I'm not just talking out my hat, I've had to deal with these situations many times. Just about every property owner I dealt with thought they could use their rental as a licence to write off what ever they felt like. This is a sentiment that CRA doesn't agree with.


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## Soon Forget (Mar 25, 2014)

Market Lost - can you give some examples of things your clients 'thought' they could write off but were disallowed by the CRA?

Cash damming is a well known strategy used by rental property owners and, to my knowledge, is completely legit with the CRA. It's simply based on the fact that there is no Canadian law that says business revenue must be used to pay expenses for that business. Instead owners use rental income to pay down their non-deductible personal mortgages (or in the OP's case, he would use it as his retirement income) and pay their business expenses using a LOC which creates tax-deductible interest. No shady expenses, just the usual things like property tax, maintenance costs, utilities, etc.

http://mortgagepal.ca/rental-cash-damming/

http://www.milliondollarjourney.com/the-cash-flow-dam-explained-cash-damming.htm


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## Nerd Investor (Nov 3, 2015)

Soon Forget said:


> Market Lost - can you give some examples of things your clients 'thought' they could write off but were disallowed by the CRA?
> 
> Cash damming is a well known strategy used by rental property owners and, to my knowledge, is completely legit with the CRA. It's simply based on the fact that there is no Canadian law that says business revenue must be used to pay expenses for that business. Instead owners use rental income to pay down their non-deductible personal mortgages (or in the OP's case, he would use it as his retirement income) and pay their business expenses using a LOC which creates tax-deductible interest. No shady expenses, just the usual things like property tax, maintenance costs, utilities, etc.
> 
> ...


+1, this is absolutely legitimate planning. Like anything else, you just want to ensure very clear transparent records of what you are doing.


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## kcowan (Jul 1, 2010)

Make sure you understand what you bank wants to loan you in retirement. They do not consider real estate equity as an asset. My friend in Toronto wanted to mortgage his house in The Beach to buy a home in Collingwood and then rent out the home in Toronto. No dice says the bank! Show us the rental contract (preferably 5 years) on the Toronto home before you get any money.


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## Market Lost (Jul 27, 2016)

Soon Forget said:


> Market Lost - can you give some examples of things your clients 'thought' they could write off but were disallowed by the CRA?
> 
> Cash damming is a well known strategy used by rental property owners and, to my knowledge, is completely legit with the CRA. It's simply based on the fact that there is no Canadian law that says business revenue must be used to pay expenses for that business. Instead owners use rental income to pay down their non-deductible personal mortgages (or in the OP's case, he would use it as his retirement income) and pay their business expenses using a LOC which creates tax-deductible interest. No shady expenses, just the usual things like property tax, maintenance costs, utilities, etc.
> 
> ...


As per the link I posted, you can only write off interest for purchase of the property and renovations, plus any rent deposits. They also do allow for maintenance, as long as you can substantiate it. I don't know what you know about CRA, but I've dealt with them for 10 years, and it's clear what they allow. The whole idea behind rental property is that it is passive and should be generating enough income to cover the expenses at market rates. If you can't then you don't have a business, which is the case for every "business" you have. If you're starting to put monthly expenses on a HELOC, when it's clear the cash flow is there, then CRA can deny the deduction of any any interest that should have been used to cover your normal operating costs.

With all due respect, I don't pay much attention to some Internet "expert" posting information that flies in the face of what I've dealt with in a professional career. You are free to follow this advice, but I remember another famous "expert" name Brian Costello who would repeatedly announce that you could make your mortgage tax deductible by cashing in your investments, paying off your existing mortgage, and then borrowing to buy back the investments you sold. Great advice, and I'm sure it made a lot of people lives very happy once CRA hit them with all the interest and penalties.


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## Market Lost (Jul 27, 2016)

Nerd Investor said:


> +1, this is absolutely legitimate planning. Like anything else, you just want to ensure very clear transparent records of what you are doing.


According to the tax regulation, it's not. The fact that someone on the Internet claims it can be done, or has got away with it isn't proof that CRA allows it. There are plenty of people dealing with tax bills that climb into the six-figure range and beyond because they followed bad advice. Here are a few example

http://business.financialpost.com/p...ited-and-your-claim-will-probably-be-rejected

http://www.ctvnews.ca/w5/w5-taxpayers-face-huge-penalties-after-bad-advice-1.1676215



These are general advice, and some here would be advised to take note of point 10 in the first link
http://www.cbc.ca/news/business/tax...o-attract-a-cra-auditor-s-attention-1.2969196
http://www.theglobeandmail.com/glob...e-a-red-flag-for-tax-auditors/article4097374/


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## Nerd Investor (Nov 3, 2015)

Market Lost said:


> According to the tax regulation, it's not. The fact that someone on the Internet claims it can be done, or has got away with it isn't proof that CRA allows it. There are plenty of people dealing with tax bills that climb into the six-figure range and beyond because they followed bad advice. Here are a few example
> 
> http://business.financialpost.com/p...ited-and-your-claim-will-probably-be-rejected
> 
> ...


I haven't come across any regulations that prohibit cash damming. This really just comes down to deductibility of the interest under section 20(1)(c). The CRA folio on interest deductions even mentions cash damming: 
http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s3/f6/s3-f6-c1-eng.html Obviously a totally different example, but the concept of segregating accounts is the same. 

Although it seems we're likely going to disagree on the viability of cash damming, your point about taking what you find on various internet blogs with a grain of salt is spot on, as is your point about being aware of costs CRA scrutiny can entail. There is a difference between whether a tax planning strategy is technically permitted/supported by case law and whether you will ever get challenged on it. If you get too stupid with any strategy (ex: getting to a point where you're showing rental losses) you are much more likely to be challenged, and even if you win you may find the cost of paying your accountant to straighten everything out more than offsets the few hundred in tax you save implementing a given strategy. 

Lastly, I just want to clarify my opinion was on cash damming period and not as it applies to this situation. I would generally only consider cash damming to the extent one had other non-deductible debt. As far as the op's scenario, taking on debt just to create a tax deduction is almost never a good idea in my opinion and make you more likely to be attacked under GAAR (which no one wants regardless of the outcome). 

By the way, number 10 in that first link always makes me chuckle. If I can ever figure out how to day-trade $40K to over a million dollars in a few years I'll happily pay the tax.


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## Market Lost (Jul 27, 2016)

Nerd Investor said:


> I haven't come across any regulations that prohibit cash damming. This really just comes down to deductibility of the interest under section 20(1)(c). The CRA folio on interest deductions even mentions cash damming:
> http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s3/f6/s3-f6-c1-eng.html Obviously a totally different example, but the concept of segregating accounts is the same.
> 
> Although it seems we're likely going to disagree on the viability of cash damming, your point about taking what you find on various internet blogs with a grain of salt is spot on, as is your point about being aware of costs CRA scrutiny can entail. There is a difference between whether a tax planning strategy is technically permitted/supported by case law and whether you will ever get challenged on it. If you get too stupid with any strategy (ex: getting to a point where you're showing rental losses) you are much more likely to be challenged, and even if you win you may find the cost of paying your accountant to straighten everything out more than offsets the few hundred in tax you save implementing a given strategy.
> ...


If you look specifically at 20(1)(c)ii, then you'll see what I mean about cash damning not be permitted. Again, it comes down to the fact this is passive income, so CRA expects that cash be used for paying operating expenses prior to paying out the owners. An owner who is pocketing the rent, and then using a loan to cover normal operating expenses is not considered to be incurring the interest for the purposes of earning income of their property. 

I thank you for clarifying, so I want to clarify one point, if the person had multiple properties that they managed full-time, as JAG does in this forum, then I wouldn't hesitate to say that you can use an operating loan to cover normal operational costs, as this is now an active business. Although, the amounts would have to be reasonable, and not incur a loss. Of course, if this were the case, I would have suggested the person incorporate their assets, and then be paid a salary for management.

And I'd be happy to be able to get a few million in my TFSA, too.


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## Nerd Investor (Nov 3, 2015)

Market Lost said:


> If you look specifically at 20(1)(c)ii, then you'll see what I mean about cash damning not be permitted. Again, it comes down to the fact this is passive income, so CRA expects that cash be used for paying operating expenses prior to paying out the owners. An owner who is pocketing the rent, and then using a loan to cover normal operating expenses is not considered to be incurring the interest for the purposes of earning income of their property.
> 
> I thank you for clarifying, so I want to clarify one point, if the person had multiple properties that they managed full-time, as JAG does in this forum, then I wouldn't hesitate to say that you can use an operating loan to cover normal operational costs, as this is now an active business. Although, the amounts would have to be reasonable, and not incur a loss. Of course, if this were the case, I would have suggested the person incorporate their assets, and then be paid a salary for management.
> 
> And I'd be happy to be able to get a few million in my TFSA, too.


Got ya. I've only ever come across this scenario in unincorporated businesses so I'll defer to you if you say this doesn't fly in a rental property situation.


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