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Discussion Starter #1
I did a little search but could not find this answer.

Can you do the smith manoeuvre on a duplex in which you are receiving income from one residence while living in the other?

Thanks much!
 

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I am not an accountant, but I think as long as the money you have borrowed is being invested to earn a return, the interest is deductible. Wouldn't it be the same as having a basement apartment in your house? You could still borrow against the equity and claim the interest if the borrowed funds are used to earn income.

You are also claiming deductions against the rental income earned on the 1/2 of the duplex you are not living in, right? Nice arrangement. Lots of tax deductions.
 

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Discussion Starter #3
Thanks Dana,

That's the exact plan too! plus, I should be able to deduct a small portion of my residence as an office right? It will be my first home, so I'm also hoping to throw in a First time home buyers credit in there as well.

I wanted to ask because I thought there might be a gray since it is income property as well as a primary residence.
 

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I did a little search but could not find this answer.

Can you do the smith manoeuvre on a duplex in which you are receiving income from one residence while living in the other?

Thanks much!
If you do find out anything, let me know that would apply to my situation as well. My initial thought is that it's not what you borrow it from, but what you use it for. The only issue would be ensuring the two "mortgages" if you will are clearly apart, since you can only write off a portion of the first and all of the second.
 

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Discussion Starter #5
Hey iherald,

Can you explain the "two mortgages" comment. Are you saying that depending on how the house is divided (say 60% as the rental, 40% I live in) will be written off differently? i.e. the LOC interest will be written off as well as the rental portion of the duplex?
 

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To add to the comments, you need to be aware of the amount of the house that you are writing off as a rental. I believe that if the majority of your house is rented out, then you will face capital gains tax when you sell. Best to double check with a tax pro.

One more note, if your home office is for your rental business, but you only have one unit, CRA may have some problems with that as well.
 

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Tough Spot

I would be fairly careful trying this as it likely won't hold up to an audit. You can easily deduct interest for the rented side of the duplex however any amount claimed on the residence portion (other than home office etc) would be quite risky as CRA takes a very dim view of home owners deducting their interest.

Case law outlining this includes Lipson vs. The Queen (great read) which went to the Supreme Court last year and the taxpayer lost (Singleton no longer stands as it was pre GAR while Lipson is post). Basically a fairly smart fellow had a house mortgage and a professional business. He took a day-long loan and paid off the house mortgage and then took a loan out against his business and paid off the day-long loan (the actual facts are a little trickier as he used an anti avoidance provision backwards and his wife but you get general idea above). Long story short although he complied with the letter of the tax act he it was declared an "avoidance transaction" by the courts he lost on the grounds that it "broached the spirit" of the act. Basically this means that CRA has carte blanche on anybody trying to deduct a home mortgage or money used to pay off a home mortgage as it is against "the spirit of the act." So even fancy footwork will likely fall flat here.

Secondly I like the above comment concerning loss of the principal residence deduction. If you record rental income off your principal residence you could easily risk losing that deduction.

So I'd really recommend not trying it as your large "created" losses from the rental could easily draw an audit and I'd think you would have a very difficult time making your case.
 

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Discussion Starter #8
I’d like to express my sincere thanks to everyone who has commented so far. Your feedback is truly appreciated.

I’d like to expand on my question above using a deeper level of what I am considering.

A) Take out an optimized mortgage & purchase a duplex as my first home. Rent out the larger portion of the home, taking advantage of those deductions ( as described in MDJ-article “Rental Property Income Taxes and Deductions”) until I own 20% of the value.

B) Refinance/convert the mortgage to a HELOC-based one & incorporate the smith manoeuvre.

Do I create a conflict since a portion of the regular mortgage interest will be deductible as well as the HELOC interest?

It is difficult to say without actual numbers, but in addition, to optimize taxes I would contribute significantly to my RRSP, Pension & TFSA.

I am not overly concerned (or should I be?) with claiming a home office or other small deductions since I think….. the above is a better overall solution.

It is only within the last year I have become financially literate and set goals according to my lifestyle. I still lack quite a bit of knowledge in certain areas, especially when it comes to our tax system. & the smith manoeuvre (but I’m learning thanks to all of you!) I am looking for a comfortable level of knowledge on the subjects before I engage any professionals.

Again, your expertise is appreciated.
 

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Do I create a conflict since a portion of the regular mortgage interest will be deductible as well as the HELOC interest?

For example....

Using easy numbers...

Your mortgage is 100,000 and the rental portion of the home is 50%

Currently you would claim 50% of the mortgage interest as an expense against the rental income.

If you get a HELOC and use that money to invest then you get to claim 100% of the interest on that. I don't see that it makes a difference what the purpose of the asset is. Any loan taken out to invest and make more money is tax deductible from my understanding whether it is a small business loan or any other type of loan.

Someone please correct me if I am wrong.
 

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I would be fairly careful trying this as it likely won't hold up to an audit. You can easily deduct interest for the rented side of the duplex however any amount claimed on the residence portion (other than home office etc) would be quite risky as CRA takes a very dim view of home owners deducting their interest.

Case law outlining this includes Lipson vs. The Queen (great read) which went to the Supreme Court last year and the taxpayer lost (Singleton no longer stands as it was pre GAR while Lipson is post). Basically a fairly smart fellow had a house mortgage and a professional business. He took a day-long loan and paid off the house mortgage and then took a loan out against his business and paid off the day-long loan (the actual facts are a little trickier as he used an anti avoidance provision backwards and his wife but you get general idea above). Long story short although he complied with the letter of the tax act he it was declared an "avoidance transaction" by the courts he lost on the grounds that it "broached the spirit" of the act. Basically this means that CRA has carte blanche on anybody trying to deduct a home mortgage or money used to pay off a home mortgage as it is against "the spirit of the act." So even fancy footwork will likely fall flat here.

Secondly I like the above comment concerning loss of the principal residence deduction. If you record rental income off your principal residence you could easily risk losing that deduction.

So I'd really recommend not trying it as your large "created" losses from the rental could easily draw an audit and I'd think you would have a very difficult time making your case.

The Lipson case was a bit more complicated than Singleton. Lipson involved his wife in the "sham", and from what i remember that was what screwed things up.
 

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The Lipson case was a bit more complicated than Singleton. Lipson involved his wife in the "sham", and from what i remember that was what screwed things up.
I don't think the Lipson case overrules the Singleton case. According to the dissent (but it appears to be agreed by all sides)":

"Singleton illustrates the proposition that there is nothing abusive in principle for a taxpayer to rearrange his or her capital (borrowed or non‑borrowed) in a tax efficient manner. The Minister is not asking the Court to revisit Singleton. He does not claim that GAAR would have applied in that case. The Minister acknowledges here that it is common ground that the interest was deductible. Thus, applying Singleton, the only question is whether the deduction becomes “abusive” when income or losses are attributed back to the transferor by the spousal attribution rules in ss. 73(1) and 74.1(1). [57-58] [60] "
 

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I own a triplex in which I lived in one unit (each one at one time or another) and my expenses were written off or claimed based on the sq.ft of the unit. Sometimes I occupied 35% of the triplex and other times 25% and adjusted accordingly.

The bigger issue is disposing of the property. It is both a revenue property and your principal residence. Capital gains are waaaay more complicated and you may want to check with a tax expert before you forge ahead. I have not sold in 14 years so I have nothing personal to share. Anyone else know of a link to better info on this?

Your home office idea depends on two things - you get a CRA form filled out by your employer stating that you need a home office to work or you have some other means to prove that it is needed for a personal business. I think it is a max of 10% of your living space so that would translate into a 10% write off on some expenses - confirm this as well.

For a duplex, your min down payment may need to be higher (7.5%?) and if you get a triplex it was 10% for me...this was 14 years ago. However if you put down more you can reduce or elimiate your CMHC insurance fee.

Lastly i did the math when purchasing and found that a triplex had significantly more revenue and only minimal higher fixed costs (property taxes, insurance, interest) and the consumption costs (heat, water, elec) corresponded with the additional rent. I would buy a triplex over a duplex again.
 

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The bigger issue is disposing of the property. It is both a revenue property and your principal residence. Capital gains are waaaay more complicated and you may want to check with a tax expert before you forge ahead. I have not sold in 14 years so I have nothing personal to share. Anyone else know of a link to better info on this?
As long as you are not claiming CCA on the building itself, I believe you can still claim it as your personal residence and not pay capital gains on it. Since you can only claim like 4% on the building, and in general property values go up, you'd have to repay the CCA on the building anyway. So my advice would be to avoid claiming CCA on the building.
 

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As long as you are not claiming CCA on the building itself, I believe you can still claim it as your personal residence and not pay capital gains on it. Since you can only claim like 4% on the building, and in general property values go up, you'd have to repay the CCA on the building anyway. So my advice would be to avoid claiming CCA on the building.
Yes you get capital gains treatment easily but I think you are at risk of losing your principal residence deduction (especially if you have lived in both units). Even if you took CCA I think capital gains treatment wouldn't be that hard to get too (you would just have to recapture any CCA taken).

Realistically to the guy who has lived in each of his "rental units" each time he moved in it would technically be a "change of use" of the property converting it from a rental unit to personal use meaning it should have been treated as a disposal. This would have allowed you to track your principal residence deduction throughout the time. What you do now however having not do that in the past would probably be to pick on and not mention you have lived in the other units.
 

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I don't think the Lipson case overrules the Singleton case. According to the dissent (but it appears to be agreed by all sides)":

"Singleton illustrates the proposition that there is nothing abusive in principle for a taxpayer to rearrange his or her capital (borrowed or non‑borrowed) in a tax efficient manner. The Minister is not asking the Court to revisit Singleton. He does not claim that GAAR would have applied in that case. The Minister acknowledges here that it is common ground that the interest was deductible. Thus, applying Singleton, the only question is whether the deduction becomes “abusive” when income or losses are attributed back to the transferor by the spousal attribution rules in ss. 73(1) and 74.1(1). [57-58] [60] "
The issue with Singleton working now is the same as killed Lipson. It is an avoidance transaction in that it has no nontax reason for the move (in lipson they even admitted it and Singleton would be in the same boat). So you are left with whether Singleton breaks the spirit of the act. Tough fight to say it doesn't. If Singleton occured today I think GAAR would shoot it down.

Also even if it did show up again the federal court would very likely shoot it down and I doubt the supreme court would take another tax case in the near future (its been quite a few recently after Canada Trustco started GAAR).
 

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The issue with Singleton working now is the same as killed Lipson. It is an avoidance transaction in that it has no nontax reason for the move (in lipson they even admitted it and Singleton would be in the same boat). So you are left with whether Singleton breaks the spirit of the act. Tough fight to say it doesn't. If Singleton occured today I think GAAR would shoot it down.

Also even if it did show up again the federal court would very likely shoot it down and I doubt the supreme court would take another tax case in the near future (its been quite a few recently after Canada Trustco started GAAR).
In the quote I pulled, directly from the decision, states that the Minister of Finance admitted to the court that GAAR would not apply to Singleton. So, with respect, I'd be willing to give a recommendation that a simple "Singleton shuffle" would be still be fine.
 
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