February 2003

The  CEN-TAPEDE
Newsletter of: the CEN-TA Group

In this issue:

Moving to Canada - Selling UK business

My question is: Canadian-specific

QUESTION: I am British and intend to emigrate to BC. I am looking at buying a B&B or ski Chalet. I have a substantial deposit from the sale of my UK house. What are my tax implications? And would you recommend a personal or business mortgage? And any advice would be appreciated.

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david ingram replies:

There are no tax implications in Canada from or about the sale of your UK residence. However, new currency laws in Canada mean that you have to declare the money you are bringing with you if the amount is over $10,000 Canadian Dollars.

Structuring the purchase of your business real estate venture properly can result in substantial interest deductions. The best mortgage broker to handle the purchase is Joan Marsh at (604) 535-9981. She can arrange to have the deductible business part of the mortgage separated out with a longer payment time so that you can pay down the non-deductible personal part of the mortgage first.

Go to www.centa.com and read the Nov 2001 newsletter in the newsletters section. The first page deals with US tax returns and the next 11 pages deals with making mortgage interest deductible in Canada.

We, of course, provide individual counseling. You would likely be better off to buy an hour or so BEFORE you make your offer. You can do the consultation in person or by phone.

Contributions for RRSP on past years

My question is: Canadian-specific

QUESTION: Dear Mr. Ingram,

I have not file the tax return for the years 2000 after. Now I want to file the returns for all these years separately. In my 1999 tax assessment, future contribution to RRSP is shown to be $10,125.45. Now my questions are:

Could I contribute to my RRSP for the year 2000 before March 3rd and this contribution be counted as RRSP for year 2000?

Could I deduct this contribution for my taxable income for the year 2000 for filing my 2000 tax return?

I would like to do the same for subsequent years and pay the allowable contributions.

Am I allowed to do so?

Best regards,

SXXX XXXXXXX

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david ingram replies

The answer is no. Any contribution you make from now to March 3, 2003 can only be used on your 2002 OR your 2003 income tax return.

However, the qualification that your 1999, 2000, and 2001 income created can be carried forward and used in 2002 and we can calculate that for you so that you know the amount in advance.

The best person to see for that purpose would be George Hatton CA in our West Vancouver office at (604) 913-9133. George represents Cartier Partners for RRSP services and the CEN-TA Group for tax planning.

Getting the Best Price on a Home Sale

My question is: Canadian-specific

QUESTION: David, I am planning on selling my home, once I have my house evaluated & appraised, how do I know I am getting the best possible price for my home? Should I speak with 2 separate realtors for a second opinion

Thank you in advance,
SXXXX XXXXX
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david ingram replies:

Talk to at least two realtors and three would not hurt either.

Ask them for their written opinion of how much they expect your home would sell for. Then, give the listing to the one who seems to like the house best, not necessarily the one who suggests the highest price.

Have them hold an agents' open. In an Agents' open, the agents who traipse through the house will all leave a business card with their opinion of what they think the price will be. Analyze the prices suggested and adjust yours up or down as the case may be.

Don't be afraid to negotiate the commission you pay. Ian Bailey with 1% Realty is certainly experienced and John McKilligan of Care Realty is also very experienced. These are only two of the local agencies who will negotiate a "non-standard" commission.

REMAX Agents have just won the right to advertise "non-standard" commissions as well. As I understand it, Ian Bailey left REMAX and started 1% Realty because REMAX would not allow him to advertise a different real estate commission than the standard 7% of the first $100,000 and 2 1/2% of the balance.

Remember that a well presented home will sell quicker at a better price.

Make sure that anything that needs a little paint gets a little paint, the lawn is cut and neat, and that all teh light switches work, etc.

Take a good look at your light bulbs. Some softer or brighter bulbs will work wonders in the right places. Put junk in the garage or rent a storage space to get it out of the way. Don't get rid of it or you will miss it at your new house. Just HIDE IT!

I am also an Agent/Nominee for CEN-TA Realty. However, I am not actively selling real estate at this time.

The previous question was left at "ask an expert" at www.jurock.com at the link shown here
http://www2.jurock.com/askexpert/ask.asp?aid=121&cid=63

Financing a Living Trust in Canada

The following client has properties in California and Hawaii and is just in the process of buying a rental property in Whistler. All of his other properties are in a US living trust for estate purposes but the TD/Canada Trust would not finance a US Living Trust in Canada. I did receive confirmation that the CIBC (call Joan Marsh at 604-535-9981) would accept a Living trust as the owner of the property.

Dear David,

I am hearing a lot about the value of currency and exchange rates, especially in regards to the USED and CAD. IF I were convinced that the CAD was going to increase in value in the next years, and that the USD was going to lose some overall value in relation to the CAD, would you recommend that I leave my Canadian rental income (in CAD) in my Canadian bank, in Canadian investments, or such, as opposed to sending it to my US bank and changing it to USD as the rent comes in?

Do you think that I should keep my Canadian rental income separate from my US rental income so as to make Canadian financing, banking and taxation easier and maybe try to deduct some expenses from my Canadian tax? When is the separation of my Canadian rental from my US rental income important, if at all?

Thank you very much!
RXXXX XXXXXXX

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david ingram replies:

I think that the Canadian loonie will do fine against the US greenback in the short and long term. I see a 70 cent loonie in the next few months. However, a sure way to lose an extra one or two percent is to get involved with changing your Canadian money to US money and then back to Canadian Currency.

Send up your first down payment and then try and keep the Canadian Accounts separate from what you are doing in the USA. My understanding now is that you are going to buy the property in your own name.

You will be filing a Canadian tax return under section 216(4) of the Canadian
Income Tax Act and we will convert the figures to US dollars and you will file a schedule E with your US 1040. If you have paid any income tax to Canada, you will then claim the Canadian tax as a credit on your US return by filing a form 1116 and possibly a form 1116 AMT.

Your tax life will be very much simpler if you keep the properties separate.

Remember that because you have had over $10,000 US in a foreign account (even if the $90,000 down payment is only there for just a "few" minutes), you also have to file a TDF-90 to report your foreign (Canadian) bank account(s).

Property Purchase Tax Deductible?

Subject: IS the PTT deductible? - Or should the question be is the PPT deductible.

I will be purchasing a rental property. I know the interest on the
down payment (borrowed) and the mortgage is deductible. Is the PTT itself deductible? The PTT is not covered by my mortgage. Should I pay the PTT with my after-tax money. Or does it make sense to borrow for the PTT as well - in this case, will the interest on the borrowed funds for the PTT be tax deductible? Thank you.

JXXX XXXXXX
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david ingram replies:

I can't figure out if you are referring to the PPT (property purchase tax) paid once as part of the purchase price or if you are referring to the Property Tax which is paid annually based upon the fair market value of the property.

So - I will do both -

PPT/PTT - The Property Purchase Tax (Property transfer tax) is NOT deductible. You add it to the purchase price of the property and it gets split up between land and building. You do get to claim capital cost allowance (depreciation) on the total amount of the building at the rate of up to 2% the first year and up to 4% of the diminishing balance annually after that. Please note that you cannot claim CCA (Capital Cost Allowance/depreciation) to create or increase a loss against other income. If you have a profit from one rental, you can use depreciation from a different rental to reduce the taxable income from the first one.

If you borrow money to pay the PPT above or the Property tax below, the interest is deductible if the property is a rental house or business use building.

PT - Property tax is deductible on an annual basis against rent and/or other income.

Hoping this helps, I remain

Yours truly

Estate with Personal Use Property in Hawaii

To: 'taxman@centa.com'
Subject: Please Help...
Importance: High


I found your website and found it very interesting. I trying to figure out my fathers 2002 taxes and need a bit off assistance - hopefully you have a book or something out there I can purchase. He sold "Personal Use Property" in Hawaii in July 2002 that he has owned for over 20 years. They withheld state tax as well as federal tax. He wants to know how to get it back??

Can you please direct me in the proper direction. I appreciate your help.

Sincerely,

 XXX XXXXX XXXX, CGA
 Calgary, Alberta > *>
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david ingram replies:

I do not know of any book you can purchase. I have 25 or thirty Q & A's and a newsletter out there but no book on that exact situation.

Here is what you have to do.

Figure out the ACB (adjusted cost base) of the Property.

What he paid for it
plus any special tax assessments for sewer, etc,
plus any improvements
plus his legal
plus his escrow
plus his title insurance, etc.

Then take his sale price and subtract his legal, the real estate commission, the title insurance, the termite inspection, the advertising, the fax, the courier, etc.

The difference is his profit.

He has to file a US federal 1040NR and he will pay a minimum tax of 26% of the profit to the US federal government. You calculate the AMT of 26% by following the directions in the 1040NR instruction book VERY carefully and filling in the 6251 and redefining line 23 of the form 6251. If they withheld $26,000 federal tax and his profit worked out to exactly $100,000, he would not get a refund and he would not owe anything.

He then has to file a Hawaii tax return - either a N12 or a N15 (I am writing this at home and can't remember which is the non-resident version at this moment).

Hawaii does NOT have an alternative minimum tax as some states (California, Vermont, etc.) do. You will fill out the (I think) N15 and calculate the tax.
Hawaii deducts 5% of the gross sale and this usually results in a refund.

You then have to convert the figures to Canadian dollars and report the profit on line 127.

You would claim the foreign tax on lines 431 and 433 of the Canadian Income tax return. Note that Canada only allows half of the foreign tax pa\id as a credit because Canada only taxes half of the gain.

We, of course are ideally suited to prepare these returns for you.

Identity Theft

From WXXX XXXXXXXXX

David

For years we have eschewed having more than two credit cards, due to the knowledge that limiting the number of places where sensitive personal information dwells, is a level of protection against abuse, including identity theft. A recent experience where we did apply for a credit account only later to find out that there was an unwanted 'group credit insurance policy' attached to the account. Receipt of 'insurance documents' was followed by a phone call from the insurer's 'credit office', asking a plethora of very personal questions. We refused to answer some, believing they were an unnecessary invasion of privacy, and not necessary to the matter at hand. The phone conversation ended with our firm request that the credit account and insurances be canceled. We are left with returning all documents to the business.

The situation caused us to consider the implications of information already 'out there' and available to various businesses, and if the information is accurate. So my question is: how does a private citizen find out what credit information is 'on file' with credit agencies for use by businesses having access? And if he should find such a file to be inaccurate, how to go about getting it corrected?

WXXX XXXXXXXXX
North Vancouver, B.C.

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David Ingram replies:

You can get a copy of your Canadian credit report online from EQUIFAX at:

www.equifax.com
This is / should be the same report that a creditor would obtain if you were applying for credit.

The fee is $14.95 Canadian.

If you find errors, you would then deal with Equifax to get them corrected.
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Because you are an American citizen living in Canada with business assets in the US, I should also add that Equifax has a 30 day free trial and then a $70.00 a year service to monitor your credit and notify you of any changes to your file or new credit issued.

You can check this out at:
www.econsumer.equifax.com

It is a sad state of affairs that such a service would be necessary but I would highly recommend it to anyone who travels or who uses multiple cards. It is so easy to misplace one or leave one behind and it does not matter how closely you monitor your card, it is easy to have a third person distract you while a clerk does a double swipe.

This was a major problem in Capilano Mall (where you shop) when Castor was working there before his conviction for murdering Mirhadi at the Esplanade Theater (see http://www.nsnews.com/issue/w031097/03079702.html).

See also the addendum below

Tax Filing Deadlines?

Dear David,

Just for the record, are there any deadlines coming up soon that I
should know about? When should I file my Canadian return? If there is a schedule of dates for Canadian tax season and document deadlines, could you refer it to me? My US CPA has your book which you loaned to me. If your book has a schedule of dates and deadlines, etc., just refer me to that. Should I be the initiator of communication regarding the Canadian tax season filings, or should we expect you to ask for the required documents and information prior to Canadian tax season?

Thank you for all of your help! I'll be at your lawyer's office on Tuesday, March 4 to sign the purchase agreement. I'll drop by to say hello.

RXXX XXXXXXXX
213-700-xxxx mobile
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The US and Canadian tax years match each other. they both run from Jan 1 to Dec 31st as opposed to Australia and England and New Zealand and some other countries which have different fiscal years.

However, you and your Canadian Agent have to file an NR6 with the CCRA BEFORE you start renting the property. I gave you that form when you were in my office and I am assuming that your rental agent in Whistler knows about the form and has already had you sign one. If you ask them and they do NOT know about it, get back to me.

The NR6 you are filing now is for 2003. You and the agent must file another NR6 for 2004 BEFORE December 31, 2003.

Then, your Canadian AGENT has to file a report to tell the Canadian government how much he or she paid you in 2003. "That" report is due by March 31, 2004.

Your Canadian rental return for 2003 will be due on June 30, 2004. Your US return is due April 15, 2004 but I suggest that you apply for an automatic extension to Aug 15, 2004.

That way, there is no rush in either country to get it done. Sometime around 2 PM, May 17th (for example) we will prepare the 2003 Canadian Return and fill out a dummy US return with the figures for your US CPA to just plop in.

Because of your other business ventures and US living trust, it makes more sense for your US accountant to prepare your US return. In 99% of other cases, I recommend that we do both the US and Canadian and US state returns because it is easier for one person to do the whole thing.

However, your CPA understands Foreign tax credits and we will prepare a dummy and he just has to plug the figures into the return he prepares.

david

GST Goody

David;

Does a Canadian company providing services to a Canadian company in the United States have to charge GST?

LXX XXXXX
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david ingram replies

What a great question!

The answer is:

If you do the work in Canada and "YOU" export it, you do not have to charge GST.

That means that if you made a documentary in Canada and sent it to the US for broadcast on a US network, there would be no GST. However, you have to put it in the mail or in the hands of a commercial carrier to have exported it. You cannot give it to a friend to deliver in the US.

And, if you produced a documentary in Canada gave it to a representative of an end user, even if you knew that the person was going directly to the airport to fly to Los Angeles, you would have to charge GST although the payer could then claim it back at the Duty Free Shop or by sending in an application.

If you produced the documentary IN the US for sale to a Canadian Company who was only going to use it in the USA, you would not have to charge GST and the other Canadian Company would not have to pay GST.

If the Canadian company purchaser imported it into Canada later, they would have to pay GST on it as they crossed the border.

I can also imagine a scenario where you produce it in the US and deliver it in the US to a Canadian Company that broadcasts it over the internet and it is available in Canada. Since you produced and delivered it in the USA, I would live with a NO GST answer.

Now, I am going to send this out to the CEN-TAPEDE list and if any of the 50 accountants on the list have a different idea, please let me know. For "their" information, the person who asked the question is a documentary film producer and I am assuming that the product is a documentary.

Tax Planning, Incorporation and other confusions

Hello David,

My husband and I are members of Ozzie Jurock's Real Estate Action Group mentor program. Last night during a discussion about owning real estate in a company or in a trust or in our personal name, your name came up as an expert in this area. I was told that you have owned many properties and that you are a tax expert. I am confused. We currently own 2 revenue properties (single family with a suite) and have offers on a couple of others. For the past 10 years we have owned a couple of revenue properties. The mortgages are in our personal name because the banks preferred that, but we have the lawyer put together a letter stating that they are held in trust for our company and for accounting purposes, they are owned by our company, XXXXX Enterprises Inc. Our accountant is happy with this but our lawyer would like to see us put the mortgages in our company name also (I believe, for liability purposes). He has also mentioned that we look at tax planning as we have three children (17, 20, 22) and would like to pass these properties to them with the least amount of taxes payable. We were general contractors for 18 years which is why we started our company - we no longer do that so our company is now mainly our revenue properties and a very small consulting business. Recently, we have started talking to different people as we have become involved with the real estate group and have found out that we should have been deducting our principal residence mortgage interest payments and some other things.

An accountant we recently talked to suggested that we own our real estate in a holding company that is then owned by a family trust??? It would cost as much as $8 - 10,000 to set up. I am not convinced that we are ready for this as we aren't making a lot of money from our properties each month and our present accountant is usually able to write most of it off or income split with our children. Now that they are working and going to university, those options are becoming limited. (We also had a couple of business losses from non real estate ventures that we are still using. Our accountant likes to put everything in our company but we do also have one marketing business that is still in our personal names). It seems that everyone has a different opinion. I hear that you are a tax expert and also have invested in real estate. In your opinion, taking into consideration liability, income tax and tax planning (to pass on the properties to our family with the least taxes paid when we die) what is the best entity to hold revenue properties in?? We plan to purchase many more properties in the future - some we will fix up and flip for cash, but each year we plan to buy two or more to hold for cash flow and the unearned income that Ozzie talks about.

Thank you. DXXXXXX XXXXX

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David Ingram replies:

I could write two or three books in answer to your question and time restraints in our tax season makes this one a short answer.

What you are describing to me is turning into a business. It may already be a business because if you plan to buy properties to fix up and flip, that is a venture in the nature of trade and the profits will be taxed at full rates, not as capital gains. You can find out more about taxation of real estate deals at www.centa.com. Click on the Tax Guide and go to the chapter on Capital Gains. This chapter is so old that the taxable Capital gains rate went from 50% to 66 2/3% to 75%, back down to 66 2/3% and ended where it started in 1972 at 50%. The direct URL is: http://www.centa.com/taxguide/capital_gains.htm  but if you go there directly, you will miss the chapters on rental income, and income splitting, etc. You ask what the best way to hold the properties is: There is no best way. It might be that you should get the family together and work as a limited partnership. It might be that you should continue with your corporation and it might be that you should have a family trust. However, I still prefer that people own the properties in their own name because that is the easiest to administer, the cheapest accounting for years and simplest for anyone to understand. There are few things funnier than watching someone try and explain their multi-layered trusts in my office. And as one recent visitor to my office found out, he has spent over $250,000 defending his trusts with the CCRA. By the way, he spent the $250,000 defending his trusts with the lawyers and accountants who had set them up in the first place and he was losing big time. In asking him how, why, what, where and when he had set them up, he only knew that they had been set up to avoid tax and that other people he knew had used the same setup and the same lawyers and the same offshore banks, etc.. But he did not understand them. If you do not understand them yourself, do not do it.

Revenue agents can smell blood when they find a taxpayer who says, "I don't know why" or "my accountant set it up. If it does not have an obvious business reason which YOU understand, do NOT do it.

For instance in the last week, Judge Bonner of The Tax Court of Canada turned down $27,000 of legitimate receipted travel expenses. The taxpayer owns his own company. He had filled out his own T2200 which is the document that the CCRA asks employers to fill out to justify their employee's travel expenses. The taxpayer owns the company and has absolute control over how he pays himself and pays his expenses.

In order to qualify for full Canada Pension Plan benefits in the future, he was paying himself more than he was actually earning from his company and deducting his travel expenses on line 229 of his return. This is the way most realtors, life insurance, general insurance and other commission salespeople are paid. The company pays them a salary or commission which they have to pay CPP on and the employee deducts his automobile and sales expenses. It is very clear. However, in this case, before 1986 when I suggested the change after he adopted a child, the taxpayer had been paying expenses through his company and taking very nominal salary. After the change which was promoted more by his wife who wanted CPP protection, in his mind, he was only doing this to qualify for CPP. In court, he could not get his mind around the fact that this was the way employees are paid and consistently said he was only doing this to qualify for CPP rather than that it was the way that his own employees were paid as well.

The Kicker! In addition, unknown to myself, he had been asked to fill out a T2200. When filling out his T2200, he checked off that he was NOT required to pay his own expenses and was NOT required to use his home for an office even though he has ten employees working in his home office. The form was obviously wrong and should have been discarded in my opinion. I was shocked when Judge Bonner rejected two days of testimony about the facts and what the taxpayer actually did and hung him out to dry (as CCRA had done in the first place) because of the signed T2200 which stated quite clearly that he was not required to pay his own expenses.

I had not been able to figure out why the CCRA had turned down the expenses in the first place. They turned them down because HE SIGNED A PAPER THAT SAID HE WAS NOT REQUIRED TO MAKE THE EXPENSES. When you wander around with trusts and companies, you either have to be prepared to hire a lawyer and accountant to supervise each move OR be prepared to defend yourself later when you do not have a memory of the transaction or worse still, do not have a "business" reason for the transaction. Paying $10,000 a year in legal and accounting fees for 20 years does not make sense to save $50,000 in probate fees for instance.

The solution! Public liability is NOT a reason to incorporate. If you depend on the "LTD" or "INC" at the end of your company name to protect you, you will lose. As the directors and manager s and main shareholders of a family real estate holding company you have larger rsik than if it was just you. You are considered more sophisticated with a company and run into Director's Liability problems. You are better protected with a good insurance policy for liability and a life insurance policy to pay the probate fees in the future. And "watch out" if you intend to put these properties in children's names. I cannot begin to count the number of times that I have seen someone put their sons or daughters name on a piece of property for estate purposes and watched a son-in-law or daughter-in-law walk away with a big piece of it in the child's divorce. Think about this for a couple of months. Then come and see me in May. I am putting you on a Q & A list I have. You will likely see more questions like this and there are some others archived on the www.jurock.com site.

Hope this helps.

David Ingram

NR-6 for Whistler Property

Dear David,

Update

This is an update to the question about getting a copy of your own credit report. D'Arcy von Schleinitz, a US / Canadian consultant in our office points out that you can get a "FREE" report mailed to you with EVERYTHING on it.

Sounds good to me.

ingram

-----Original Message-----
From: D'Arcy von Schleinitz [mailto:darcyv@centa.com]
Sent: Thursday, February 27, 2003 1:34 PM
To: taxman@centa.com
Subject: Re: [CEN-TAPEDE] Credit cards & personal credit history - how do I seemy report


The online credit report they give you for your $14.95 is not as detailed as the free one they will mail you.

The online report does not actually show your credit ratings but just who you had/have credit with and if you had any late payments.

The free one that you can obtain through mail gives much more detail and also states your actual rating (those r1 or r9 numbers).

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