# Income taxes: mortgage



## bettrave (Jan 10, 2013)

Hi,

We started renting a condo last april.
I know that the interest on the mortgage is deductible.
We have a private lender.
Are we supposed to receive a letter telling how much interest we paid last year?

Maybe this question can't be answer.
But, does the gov. check with the mortgage lender the interest we paid?


----------



## Addy (Mar 12, 2010)

You should receive an annual mortgage statement which lists the principal (principle?) and interest paid. I believe it's mandated by law they issue this, but it's a bit early, I imagine they have until the end of February to issue.


----------



## Pennypincher (Dec 3, 2012)

You can ask the lender for a statement for the year on the interest and principal paid. You only have to provide this document in the event that you are audited. You *might* also want to have proof of payment to the lender, especially since you mentioned it is a private one. If you paid your mortgage in cheques, you should keep copies or at least have a bank statement that proves you made payments to a lender who is in fact charging you interest. I would also expect that you would need a document outlining the original lending contract and what the terms for interest rates and repayment schedules and when it was established.

Basically what the tax department doesn't like to see interest deductions on are situations where you live in your own house with a mortgage or not, and you are renting out your condo that your parents bought you 100% in cash, with a "private lender" with a supposed 4% interest rate. It's not going to fly. I had a friend who tried to do this


----------



## bettrave (Jan 10, 2013)

Pennypincher said:


> You can ask the lender for a statement for the year on the interest and principal paid. You only have to provide this document in the event that you are audited. You *might* also want to have proof of payment to the lender, especially since you mentioned it is a private one. If you paid your mortgage in cheques, you should keep copies or at least have a bank statement that proves you made payments to a lender who is in fact charging you interest. I would also expect that you would need a document outlining the original lending contract and what the terms for interest rates and repayment schedules and when it was established.
> 
> Basically what the tax department doesn't like to see interest deductions on are situations where you live in your own house with a mortgage or not, and you are renting out your condo that your parents bought you 100% in cash, with a "private lender" with a supposed 4% interest rate. It's not going to fly. I had a friend who tried to do this


But if I have a real mortgage but at VERY low rate, I could use instead something more "real"...?


----------



## MoneyGal (Apr 24, 2009)

no. You may only deduct costs you actually incur.


----------



## andrewf (Mar 1, 2010)

Investment loans between non-arms length parties were legit, I thought, so long as the loan is at least at the prescribed rate (could be above, so long as it is a 'reasonable' rate wrt to market rates), and the lender declares the interest income.


----------



## iherald (Apr 18, 2009)

andrewf said:


> Investment loans between non-arms length parties were legit, I thought, so long as the loan is at least at the prescribed rate (could be above, so long as it is a 'reasonable' rate wrt to market rates), and the lender declares the interest income.


My understanding would be that the lendor would have to declare interest at a prescribed rate, and the lendee would have to declare the interest that he actually paid. So if a parent lends their child money at 1%, the parent would be deemed to have lent it at the prescribed rate (say 3%) and therefore declare interest as though they got paid on 3%. However, the child would only be able to write off the actual interest paid (1%).


----------



## P_I (Dec 2, 2011)

iherald said:


> So if a parent lends their child money at 1%, the parent would be deemed to have lent it at the prescribed rate (say 3%) and therefore declare interest as though they got paid on 3%. However, the child would only be able to write off the actual interest paid (1%).


For completeness, per CRA - Interest rates for the first calendar quarter, the prescribed rate is 1% (and has been a while).


----------



## Charlie (May 20, 2011)

Unless it's a child under majority age or a spouse, I don't think prescribed rates matter at all. The borrow deducts what he pays. The lender is taxed at what he earns. You'll need to support the expense if you're asked to do so....they may ask for the calculation (usually the amortization schedule), the identification of the lender, and may require proof of payment. The lender is taxed on the interest -- so if it's a family member, make sure they know you're deducting so they don't 'forget' to include the income.

If it's a scheme to artificially reduce tax, they can attack that....but here, based on what you've noted...a loan to buy real estate where the borrower has the risks and rewards of ownership, I don't see a problem.


----------



## Pennypincher (Dec 3, 2012)

If you want to take an interest deduction, I am quite sure you have to use at least the prescribed rates if it is a loan in the situation that prescribed rates are called for.

And yes, you have to use real situations. Otherwise when audited, you cannot provide proof. Usually rental properties aren't audited unless there is a loss reported for a few years in a row, or the rental income is very low compared to the expenses, or there is a massive capital expense claimed, creating a loss.


----------



## MoneyGal (Apr 24, 2009)

andrewf said:


> Investment loans between non-arms length parties were legit, I thought, so long as the loan is at least at the prescribed rate (could be above, so long as it is a 'reasonable' rate wrt to market rates), and the lender declares the interest income.


Where are we getting non-arm's-length in this transaction?


----------



## andrewf (Mar 1, 2010)

Between parent and adult child, no?


----------



## bettrave (Jan 10, 2013)

The mortgage is between my girlfriend, myself and a company owned by my "father".
I know he's my father, but legally is not since on my birth certificate there's no name for father.
the mortgage is at 1%


----------



## MoneyGal (Apr 24, 2009)

I'm missing where this is coming from, too.

Whoops. Ignore. I'm behind. Will catch up on this thread later.


----------



## Charlie (May 20, 2011)

If it was from your father, I think you'd be OK. If it's from his company, even if he charges you 'market' interest and if you're not a minor, I think he's potentially in trouble with the shareholder loan rules....


----------



## bettrave (Jan 10, 2013)

Charlie said:


> If it was from your father, I think you'd be OK. If it's from his company, even if he charges you 'market' interest and if you're not a minor, I think he's potentially in trouble with the shareholder loan rules....


He's the founder, president and only member of a board all by himself.
It's his company 100%


----------



## andrewf (Mar 1, 2010)

It's not arms-length. Technically when you received the mortgage, the entire amount (say $300k) would have been added to your income and taxed (mostly at ~46%). You must not have paid this tax, and thus owe tax.

You should seek professional tax advice immediately.


----------



## balexis (Apr 4, 2009)

If his "father" is not legally his father, how can that be non-arms-length? Methinks OP should give some precisions about this "situation"...


----------



## MoneyGal (Apr 24, 2009)

What in the Sam Hill is going on in this thread? 

First, parents can lend or give money to their adult children with no attribution and no problem. 

However, if the loaned money is used to generate income, that income can be attributed back to the lender and taxed in his/her hands. 

The way around this is to structure the loan at the prescribed rate, which is very low. 

All of this rests on the assumptions that the condo being rented is being rented for pay to tenants. 

CRA doesn't care about birth certificates: if this person is your father "by blood" (their term), they are your father for income tax purposes. 

CRA also doesn't care about the use of a corporation *for the purposes of income attribution* - a corporation majority-owned by the father is equivalent to the father acting on his own from the POV of income attribution and determining whether an arm's-length relationship is in place. 

The OP does not need to take the loan amount into income: a family mortgage is A-OK with the tax man so long as the prescribed rate (at a minimum) is being charged on the loan.


----------



## andrewf (Mar 1, 2010)

So a corp can lend to shareholder's family, but not the shareholder (without having to take the loan amount into income), so long as it is at the prescribed rate?


----------



## MoneyGal (Apr 24, 2009)

I still find this very confusing. Speaking only from the POV of the recipient of the funds _w/r/t attribution_, CRA is indifferent as to whether the funds come from a corporation owned by a non-arm's-length person (or, in CRA-speak, a "connected person") or the person themselves. 

Shareholder loans are a whole different matter. You can borrow from a corporation without taking the amount of the loan into income even as a connected person so long as you make _bona fide_ arrangements to repay the loan in a reasonable timeframe and the rate charged is at least the prescribed rate. However, who knows what's actually going on in this situation.

p.s. In my previous response (the Sam Hill) comment, I forgot that the OP says he's borrowed the funds from "a company" owned by his "father."


----------



## andrewf (Mar 1, 2010)

I asked this question in the 'Borrowing from a CCPC' thread I created a few days ago:

http://canadianmoneyforum.com/showthread.php/14589-Borrowing-from-a-CCPC

Did I misinterpret the rules, particularly rule 2?



> 2. The Lenders Rule - If the corporations’ business is lending money or the debt is from the normal business activities then the loan is not considered a shareholder loan, provided standard arrangements are made for repayment and are maintained.


So if the corp makes a loan at the prescribed rate, it doesn't matter whether the shareholder uses it for consumption, or to invest (and deduct the interest expense), provided the loan is made with standard terms (ie, annual interest payments, at or above prescribed rates)?


----------



## Charlie (May 20, 2011)

I may have been wrong about the father being in trouble with CRA regarding the loan. It may our OP himself!

The bulletins are a hornets nest of definitions....but here's a blurb from an accounting firm:



> With some specific exceptions as noted below, if you receive a loan from a corporation of which you are an employee or shareholder, CRA will include the amount of the loan in your income for that tax year.
> 
> The situation is the same for anyone connected to you who receives a loan from the corporation - the amount will be included in his or her income. A connected person is someone who is non-arm's length, such as your spouse, children and siblings.


http://www.fbc.ca/corporation-loans-count-taxable-income

The exceptions are the ones we've gone through in other threads....treasury stock; car for use in business; principal residence; repaid in the year. None applies here. And in order for them to apply they'd have to be on account of employment rather than shareholdings and then all your bona fide rules kick in. Since he's not an employee of dad's company, he'd be hard pressed to say the loan is on account of employment. All this is independent from rates charged or repayment terms! You cannot borrow money personally from your, or your parents' corporation regardless of the terms unless you fall into one of those very restrictive purposes.

And there's a whole other set of hoops before a corp can be considered in the business of lending...

There's a full set of definitions for parent. I'm guessing "father" fits.

....and if girlfriend is common law spouse -- we get a whole new set of considerations regarding her loan! What fun. It's like an attribution/shareholder loan case study.


----------



## MoneyGal (Apr 24, 2009)

Charlie. From your same link (a little down from what you posted):

Fortunately, ITA rules for shareholder loans include a number of exceptions. If you meet these criteria you could get a tax-free loan from your company.

*The shareholder loans rules do not apply if:*

You are an employee of the corporation, but not a specified employee. A specified employee usually owns at least 10% of any one class of the corporation's shares; and
You received the loan because of your employment with the corporation as opposed to your shareholder status; and
*You have made bona fide arrangements to repay the loan within a reasonable timeframe.*


----------



## MoneyGal (Apr 24, 2009)

I did not consider the girlfriend the scenario. She is a connected person from CRA's POV if she is a common-law spouse. Who knows who the loan is actually with, though. I'm not convinced it is a loan through a corp (or it could be; we just have so little information).


----------



## Charlie (May 20, 2011)

MG--you have to meet all three of those.

OP's dad is a specified employee (>10% ownership) --which nails our guy too!
The loan was not on account of employment (OP's not an employee)

So you've missed 2 out of three!


----------



## MoneyGal (Apr 24, 2009)

andrewf said:


> I asked this question in the 'Borrowing from a CCPC' thread I created a few days ago:
> 
> http://canadianmoneyforum.com/showthread.php/14589-Borrowing-from-a-CCPC
> 
> ...


You did not misinterpret the rules. When you are not the owner/a shareholder of the company, the rules are different. Shareholder loan rules are, generally speaking, very strict. Loans from a company to a connected person are not shareholder loans, which is what's being discussed here, MAYBE.


----------



## MoneyGal (Apr 24, 2009)

Charlie said:


> MG--you have to meet all three of those.
> 
> OP's dad is a specified employee (>10% ownership) --which nails our guy too!
> The loan was not on account of employment (OP's not an employee)
> ...


Charlie, I should just stop posting in this thread, because I'm not making any sense. I especially should have not bolded only the one case. My intention was to show that it is possible, as a connected person, to borrow from a corp as long as certain conditions are met. I know all three conditions are required, for what it's worth this was supposed to be a theoretical example of how to get the funds out.


----------



## andrewf (Mar 1, 2010)

I'm going to reiterate my recommendation that OP talk to his accountant pronto.


----------



## bettrave (Jan 10, 2013)

WoW!


----------



## Pennypincher (Dec 3, 2012)

You make sense to me MG. I follow you. I think it's a simple non arm's length loan where the prescribed rate should be used for the interest deduction against rental income, and the father should report the interest as income.


----------



## andrewf (Mar 1, 2010)

Yes, if the loan is from Dad. If it is from DadCo, then no.


----------



## Pennypincher (Dec 3, 2012)

Does Dadco actually have a corporation? We never established that. He could be a sole prop for all we know.


----------



## MoneyGal (Apr 24, 2009)

I still honestly can't figure out how we knew there was a dad in the first place - until the OP came back and clarified.


----------



## bettrave (Jan 10, 2013)

The mortgage is from ma "dad's" compagny.
His company is incorporated.


----------



## andrewf (Mar 1, 2010)

Maybe I read "private lender" and "very low rate" and understood "Bank of mom and dad".


----------



## OhGreatGuru (May 24, 2009)

bettrave said:


> Hi,
> 
> We started renting a condo last april.
> I know that the interest on the mortgage is deductible.
> ...


1. I presume you mean you are renting out a condo which you and your girl friend own, but don't live in. If not, then we need to start this thread all over again.
2. As has already been stated, you cannot deduct more mortgage interest than you actually paid as an "expense" against your rental property income. That's fraud.
3. Reading between the lines, your "Dad" may be reluctant to give you a statement of interest earned because he would have to declare it as investment income if it comes to CRA's notice. So maybe you should leave well enough alone.


----------



## andrewf (Mar 1, 2010)

This is just screaming for an audit...

I guess you can claim that the mortgage was 'a gift'.


----------



## bettrave (Jan 10, 2013)

Does the prescribeb rate apply to my case?


----------



## MoneyGal (Apr 24, 2009)

Who knows? We don't have enough information about how the loan is structured to respond. But generally speaking, in order to avoid attribution, the prescribed rate must be charged at a minimum.


----------



## bettrave (Jan 10, 2013)

MoneyGal said:


> Who knows? We don't have enough information about how the loan is structured to respond. But generally speaking, in order to avoid attribution, the prescribed rate must be charged at a minimum.


What information do you need?


----------



## andrewf (Mar 1, 2010)

Bett, you should talk to accountant, not get advice over the internet (though MG is the person to give it).

There is a good chance that you owe a lot in taxes, and you at least have penalties on those taxes piling up at 5% interest. Don't mess around--get some tax advice.


----------



## RBull (Jan 20, 2013)

andrewf said:


> Bett, you should talk to accountant, not get advice over the internet (though MG is the person to give it).
> 
> There is a good chance that you owe a lot in taxes, and you at least have penalties on those taxes piling up at 5% interest. Don't mess around--get some tax advice.


This sounds like this best tact to me. With the information we've been given I don't understand why this transaction would have been done without first getting some advice.


----------

