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I recently purchased a new home and I plan to rent out my existing home. My plan was to use the equity from the current home for the down payment on the new home and then refinance such that I have a mortgage at 80% LTV on the first home. I was under the impression that the interest on the mortgage on the rental property would be tax deductible because with a change of use there is a deemed sale of the property. However in the booklet 'T-4036 Rental Income' it states:
You were asking . . .
Q. I own and rent a semi-detached house. This year,
I refinanced the property to increase the mortgage
because I needed money for a down payment on my
personal residence. Can I deduct the additional interest
on the mortgage against my rental income?
A. No. You are making personal use of the funds you got
from refinancing your rental property. As a result, you
cannot deduct the additional interest when you calculate
your net income or loss from your rental property.
So is the 'Deemed sale' not sufficient for interest deductibility or do I have actually sell an repurchase the house similar to IT-533 para. 15
A taxpayer may restructure borrowings and the ownership of assets to meet the direct use test.
Thanks for your help

comeleon99
 

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This is a situation in which I personally would visit an accountant or other financial professional with experience in this specific issue to run some scenarios and get advice.

There are a number of factors you need to take into account to see whether what you are proposing will pass what is referred to as the CRA "smell test" (specifically, how you might restructure your asset holdings. There are some court cases which set out various paths which are and are not likely to encounter friction).

Good luck!
 

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My understanding is that it depends on what the borrowed funds are used for. If the borrowed money is used to invest, then sure, it should be tax deductible. However in your case, it looks like you are borrowing for a new principal residence...

Double checking with an accountant is your best bet.
 

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I agree, it depends what the funds are used for and there needs to be no doubt about where they went (RC will always win).

how much are you renting for and how much is the house worth? have you calculated your annual expenditures for the rental property? I have been interested in doing the same thing, but the calculation never works out for me.
 

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"The interest on the mortgage on the rental property would be tax deductible because with a change of use there is a deemed sale of the property."

I think you are confusing two similar situations.

1)Current home, with mortgage, is turned into rental. The existing mortgage interest that was NOT deductible when a principal residence now becomes deductible because of 'the change in use'. See this discussion from another forum where I was corrected:
http://forums.canadianbusiness.com/thread.jspa?messageID=299185&#299185

2)Current home, without mortgage, is turned into rental. Mortgage is taken out using the rental ppy as collateral, to pay for the new principal residence. Tacking the dollar bills from the borrowing to the purchase of the principal residence makes this interest NOT deductable.

You MAY be able to get around this by putting the original ppy into a corporation in exchange for a shareholder loan. Have the corp borrow the $$ and pay the cash back to you as a repayment of the shareholder loan. Not AT ALL POSITIVE that this would work.

Another idea you should check with an accountant first is to start a LOC at the bank and use it to pay all the rental's expenses, thereby creating debt whose money went to the rental. Take all the rental income and put it elsewhere. This will gradually build up deductable debt.

There is a gov't bulletin I have not read:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/rsdnc/chngs/chngngll-eng.html
 
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