Tax, Assurance Services & Accounting
 

Making your mortgage tax-deductible

Interest deductibility

The interest deductibility on a house mortgage was subject to two landmark cases heard by the Supreme Court of Canada:

The first case was found in the favor of the taxpayer whether the second was lost by the taxpayer. Lipson was lost on the grounds of abusive tax planning around spousal attribution rules but the Supreme Court concluded that there was no misuse of the interest deductibility provisions.

TIP

The assumption is that you own some property (investment assets, shares of the operating corporation, partnership units, real property etc.) that can be used for business or investments purposes. The property has a fair market value in the neighborhood of your house mortgage.

There are many tax planning opportunities available to you, however all of them are variations of the following:

  • You sell one of your properties above (i.e. real estate used for commercial purposes) to the operating corporation. In exchange you receive a promissory note that has a tax cost of $X (fair market value of the property sold).
  • Your house mortgage amounts $X.
  • The operating company borrows $X to pay off the promissory note.
  • You use the money received to pay off the house mortgage.

The interest on the corporate loan is tax deductible, as the real property is used by your corporation to earn business or property income. In addition, rather than paying off the mortgage with money taxed at high personal rate (39% marginal tax rate in Alberta), the loan is now paid off with funds taxed at the low corporate tax rate of 14%.

If the sale price for the office is in excess of its tax cost, a special tax election is available so you pay no tax on the gain.

You need to consider GST/HST implications for this transaction.

Depending on your circumstances, there are many tax planning opportunities available in this area.

Your trusted Chartered Accountant provides tax, assurance services and accounting engagements to individual and small business clients located in Calgary and area.






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