Putting properties in a lower-income spouse’s name to save taxes? STOP and talk to your accountant first
I make $150K per year, and my husband is in school, so has no salary. Can I put all our properties in my husband’s name so we can save taxes?
On a fairly regular basis, we get questions like this from a husband or wife saying they want to put all the properties in their spouse’s name because the spouse doesn’t make any money, while they have a high salary. Seems like a great way to save taxes right? Not so fast!
While this sounds like a really great idea, the Canada Revenue Agency is not as keen. The Income Tax Act contains a series of rules known as “attribution rules”. These rules are intended to stop people from creating a tax benefit by shifting income or capital gains from the high income earning taxpayer, to the lower income earning, lower taxed spouse, or in some cases, another non-arm’s lengths person.
In the case of real estate (or any revenue-producing property), if the property itself or the money which is used to acquire the property, is transferred or loaned to a spouse, any income and/or capital gains from the property will normally be attributed back to the transferor.
In a more dramatic example, if one spouse earns $200K per year and the other earns nothing, the CRA will be less than impressed if you say the property is owned 50/50 or even 100% for the low income spouse. Now, this may still be alright if the lower income spouse used to work or received an inheritance, but otherwise, CRA may come knocking.
The attribution rules apply only to property income, not to business income earned from money or business assets transferred. As well, the attribution rules do not apply to loans where interest is charged at a rate at least equivalent to the prescribed rate of interest as per the CRA (which is currently a whopping 1%). This means that as the higher income earner, you will collect interest payments from your spouse (from their own resources, of course) and this income would be taxed in your hands on your personal tax return. Your spouse would then be able to deduct the interest payments from the revenues earned from the property.
Attributions have many, many technical rules and exceptions. Proceed with caution!
George Dube, CPA, CA (firstname.lastname@example.org) and Caitlin Garcia (email@example.com)
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Pennies may have gone by the wayside, but driving your car for your business and/or in pursuit of real estate investments can still add up to quite a few of them in deductions.
The Canada Revenue Agency (CRA) establishes kilometre allowances which taxpayers who own or lease an automobile may charge their corporation or, in some cases, use for personal deductions. For those with a corporation, they can receive the funds tax-free from their company and also provide the company with a tax deduction. For those without companies, this can provide a tax deduction. Frequently, deducting automobile costs is superior to having the company own or lease a vehicle.
2013 Mileage Allowance*
First 5000 km $0.54/km
After 5000 km $0.48/km
*For those in the Yukon, NWT and Nunavut these rates are increased by 4 cents.
However, few of us know that the rates above are NOT applicable for employees of the government. In Ontario, for example, a CRA auditor is reimbursed $0.55/km no matter the total kms. (Although this is a reduction from two years ago when the amount was $0.57 and the overall rate that the CRA allowed taxpayers was $0.52 and $0.46).
Why is this relevant? The Income Tax Act allows us to deduct a “reasonable” amount for mileage. (Shouldn’t this be kilometerage or something like that?) I would argue that if the amount is reasonable for the CRA auditors, it should be reasonable for the rest of us! Further, there is an argument to be made that HST applies. In other words, in Ontario the company could receive a deduction of $0.54 or $0.55/km plus an HST refund of an extra $0.07/km. The individual would then receive $.61 or $.62 per km.
If you’re wracking up km’s, one more reason to speak with your accountant!
I am often asked about sweat equity and rental properties. Just the other day, a client asked me:
Are we allowed to claim for expenses that we did not pay for but consumed our time (e.g. painting a rental premises by ourselves, doing repairs on a property ourselves or clean up work done on our own)?
And the answer…while in theory you could, it’s pointless in most cases.
If you say you did $100 of labour, and took in $100 of income, they offset each other, so you actually don’t accomplish anything. Unfortunately while you could get the $100 deduction, CRA would deem that you received that income in your hands, so in essence, Revenue Canada is not allowing you sweat equity for that deduction. And potentially it could put you in a worse position in CPP and employment taxes may apply.
Question: My husband and I painted and shampooed the carpet at our condo yesterday after our tenant moved out and prepared the place for the new tenant to move in. We obviously needed to eat so we got lunch. Should we save the receipt for lunch to put as our expense for the year-end? Does that mean it would be tax deductible?
Answer: Meals and entertainment are tricky expenses, and subjective/confusing in practice. Plus there are plenty of exceptions. Assuming that someone owns a few properties, and they are out of town a distance of 40 km’s and you’re there more than 8 hours (in some cases 12), then the meals are more likely deductible. Alternatively if you are having a meal with a prospective tenant, supplier, favourite accountant, etc., then there are no time/distance restrictions — they are deductible as there is a clear business purpose.
The primary issue in the CRA’s mind is similar to what you indicated in your question. You obviously had to eat, so the CRA is saying “Why should real estate investors get to deduct their meals at work when nobody else does?”
Practically speaking, I don’t think it hurts to do this now and again, but, this would be an administrative concession from the CRA as compared to a technical ability to make the deduction.
I’ve written previously about what you should look for in a real estate accountant. But I want to talk in-depth about a few points that we often discuss:
- The key to the whole she-bang – practical and technical experience
- Size matters – small, large, and medium-sized firms?
- High standards – ethics is a two-way street
The key to the whole she-bang
In looking for a real estate accountant, investment experience is a key requirement in our mind. Why work with an accountant who does not own real estate investments? Book smarts are great, but… as Don R. Campbell says, you need to work with people who have walked that final 30 feet.
Look for someone on top of the latest accounting rules and for someone familiar with the latest tax rules for real estate investors. These are two key areas, and it’s exceptionally rare that one person can handle both sides of this equation in-depth. As well, ensure that your accountant is working with a variety of investors.
Am I training my accountant?
Beyond technical experience, practical experience is a key. When dealing with tenants, lawyers, accountants, municipal officials, financing representatives… perspective is fundamental. Technical rules are wonderful, but they absolutely need to be put in perspective to understand what is relevant and what simply doesn’t make sense to a real estate investor. How can you be creative with the rules when you don’t even understand the game?
You should also consider the size of the firm you are choosing. One may clearly be better for you! For simplicity, I will discuss working with a sole proprietor or small firm, a medium-sized firm and large firms.
Sole proprietors or small firms typically rely on one person. Essentially, one person is performing the majority of your work which can be nice. You’re always talking to the boss! But, what happens when the boss is sick or on vacation? However, if your goal is to peak at owning one or two small properties (which is great…better than the vast majority of people!), a small firm or sole proprietor may be good use of your money.
Larger firms have the experience and technical skills you require, but, at a cost. When “your” accountant is away, someone can easily fill the void. However, personal attention is somewhat hit and miss compared to small or medium-sized firms. If you are doing multinational activities, or growing a $50 million plus portfolio, however, consider a larger firm.
Medium-sized firms provide a mixture of the pros and cons of small and large firms. But, I think this is the place you need to be if you are looking to develop and maintain a small- or medium-sized real estate portfolio. For instance, with a medium-sized firm:
- You get extra support when your primary contact is unavailable but you need answers now because a deal is closing. (Your accountant can have a vacation now and then to recharge the batteries.)
- You can make better use of your money; for example, why have your accountant complete data entry work when a team member can do this? Isn’t this a waste of their time and your money?
Yes, smaller firms have lower overhead costs, therefore lower fees. But these “savings” have “costs”. Just the software and tax library in a medium-sized firm is far more than many small firms’ rent and entire professional library. Which do you think will provide you with the knowledge you need, when you need it?
Lastly, based on personal experience, we think you need accountants that walk the walk but also do so with the highest ethical standards. The street is two-way. We’re after long-term, mutually beneficial relationships. Values may be old fashioned, but they are the foundation of long-term successful businesses and relationships.
Andrei Angelkovski, of www.beachinvesting.com, interviewed George on accounting and tax issues for real estate investors for his blog. The interview covered:
1. Should we incorporate or not?
2. What are the top 3 things people think they can expense but cannot?
3. What are 3 tips you would offer real estate investors about accounting and tax?
Thanks Andrei for allowing us to share the video here!
(Originally posted on Beach Investing.)
I am often asked, “Is my REIN membership deductible?”
While the Canada Revenue Agency debates this, I’ll argue until I’m blue in the face that for the vast majority of serious real estate investors, the answer is an unequivocal YES. While I agree with the CRA that the amount is not a tax credit under the education/tuition tax credit rules, I refuse to believe anything other than the amounts are deductible under the general rules for deductions under subsection 18(1)(a) of the Income Tax Act.
The disallowed education costs are predominantly (98%) the cost of the taxpayer attending monthly workshops put on by the Real Estate Investment Network (REIN) for its members. By letter of March 16, 2011, the auditor disallowed these costs on the basis that there was “not a clear and direct connection between these seminars and the income earned from the rental properties in the year.” He also characterized the costs as training costs that resulted in a lasting benefit to the taxpayer and therefore were capital in nature. Finally he suggested the seminars “covered some rent-related topics.”
The taxpayer and her spouse own and manage a number of rental properties generating significant rental income. In order to assist them in carrying on their rental activities in the most efficient manner they are members of the Real Estate investment Network. REIN is a national organization dedicated to providing its real estate investor members with the information, research, and strategies needed to manage a real estate portfolio. One of the ways in which they so assist their members is by putting on monthly evening member only workshops in cities across Canada. Regular features of these monthly workshops include such things as regional and local economic updates, mortgage forecasts, and current rental issue updates (e.g. grow-ops, bedbugs, job market impact on rentals), to name a few. A review of the 2008 topics list also reveals such subjects as classified ad writing tips for filling vacancies quickly, bookkeeping strategies to facilitate tax filings, legal rental issues tips and traps, working with realtors, and tax planning issues for real estate investors. Such workshops are held one evening a month and typically cover two or three update issues and two or three other subjects. Virtually all topics, not some, are directly real estate related that is the purpose of REIN.
The April 28, 2010 CRA technical interpretation 2009-0347581E5…states the following.
It is not necessary to demonstrate that some income actually resulted from the training expense to ensure its deductibility is not denied under paragraph 18(1)(a) of the Act. This provision will not apply to deny the deduction as long as the training expense is part of the income-earning process.
Given the nature of the topics presented at the monthly workshops it is respectfully suggested that there is a clear and direct connection between these workshops and the real estate rental activity in the present instance. Furthermore, given the wording in the above mentioned technical interpretation, it is not necessary that the connection be directly connected to income earned from this activity as suggested by the auditor.
While I appreciate that the topic is somewhat subjective, it is disheartening to see CRA auditors routinely attempt to bully REIN members into believing that the amounts are not deductible.
Further, on several occasions I have learned that they explain to the taxpayer that the accountant must not know what they’re talking about since the amount is “clearly” not deductible. I’ve even had the CRA auditors refer taxpayers to other accountants including former CRA representatives. Yikes! I’ve lost two clients just in this manner, as they have believed that someone from the CRA must know more than a mere accountant.
In most cases, when presented with reasonable facts, the auditor allows the deduction. However, an unfortunate number of auditors and appeals officers, in off-the-record conversations, recognize that the average taxpayer is not financially capable of arguing with the CRA which has an unlimited supply of tax expertise and lawyers that are “free of charge” since taxpayers pay for them. Thus, the taxpayer who is being audited is not only paying for their own accountants and lawyers, but also the CRA’s auditors and lawyers. The end result? It is financially difficult to argue with the CRA, even when the CRA knows that they are wrong.
It is my strong hope that a REIN member with a little bit of financial clout and determination is the target of such an audit and can bring this matter to a final resolution in court.
Should the CRA wonder, I do deduct 100% of my REIN fees and I am available to fight the matter, if they’re looking for someone to attack. My phone number is 519-725-3566. Looking forward to your call.
Not to be a smart aleck, but, why the heck not?
Yes, you’re in a higher tax bracket and will pay more taxes than someone who earns less. But, surely you don’t want to switch places with someone in a lower tax bracket who earns less income? And, if you plan your overall financial situation with a tax accountant who truly understands real estate, it may be possible to save some taxes for you and family. This is particularly true for the business owner, doctor, or other professional who can incorporate their business, or a family with a lower income taxpayer, such as a spouse, parent or child, with whom you can income split.
A common misconception is that the taxes are so high, that earning the extra income is hardly worth the effort. I’m not trying to argue that taxes are too low on investment income from real estate, but, even in a worst case scenario, you’re still earning more income than you’re paying in taxes.
The alternative, I’d suggest, is that you either put your hard earned money under your mattress or make the decision to “invest” in something that loses money and thus generates a tax deduction, or requires a government subsidy to make the investment attractive. Ultimately, if you invest, whether in real estate, some stock-based investment, hula hoop factories, or whatever turns your crank, you’re going to pay taxes if you make money. So, you’re simply deciding what makes the most sense to invest in.
Don’t be scared to make money just because of taxes.
You should worry about the investments and consider the advice of your investment advisor. Let your tax accountant help you mitigate the taxes.