| | | |
 | How
to Deduct Your Home and/or Cottage Mortgage Interest
by
David Chong Yen (2004) | | |
Who
Benefits?
Individuals who:
| a. | Have
personal non-tax deductible debts, such as a home mortgage, and |
| b.
| Own
a practice, which operates as a proprietorship or partnership, and |
| c. | Have
built up value in the practice. |
Tax Saving:
You can get a tax deduction for interest expense on
loans, which would otherwise have been personal non tax-deductible debt.
What is the Tax Savings?
| For
Example: | |
| Loan | $600,000 |
| Interest
rate (approximate) | 6% |
|
| Interest
incurred | 36,000 |
| Tax
bracket (approximate) | 46% |
|
| Annual
Tax Savings | $16,560 |
How to do it?
| a)
General Concepts: | | 1. | Set
up two (2) bank chequing accounts. |
| 2.
| Expenses
of practice are paid from first bank account, referred to as "Expense Account".
| | 3. | Revenues
of practice are deposited into second bank account, referred to as "Revenue
Account". | | 4. | Loans
from bank gets deposited into "Expense Account" and used to pay practice
expenses. | | 5. | Revenues
are withdrawn from Revenue Account and used to pay off non tax deductible debt
such as home/cottage mortgage. |
| b)
Specifics: | Only
business and capital expenditures (equipment, computers, office renovations) should
be paid out of the "Expense Account".
Therefore, the "Expense
Account" may pay any of the following provided they are reasonable: |
| a) | Dental/medical
supplies and lab fees | | b) | Salaries |
| c) | Rent |
| d) | Utilities |
| e) | Business
taxes | | f) | License
taxes | | g) | Equipment
rental | | h) | Legal
and accounting | | i) | Office
expenses | | j) | Maintenance
and repairs | | k) | Telephone |
| l) | Bank
charges and interest related to the expense account |
| m) | Any
other cost required to operate the practice |
| The
expense account should not pay any of the following: |
| i) | The
non-deductable portion of meals and entertainment and car expenses; |
| ii) | Draws
to the dentist; | | iii) | Any
non-deductible fringe benefits paid to employees; |
| iv) | Any
other expenditure, which are not deductible for business purposes. |
Tax Department's Perspective:
Based on the Singleton case, since the loan was used and can be traced
to business expenses, the interest on the loan should be tax deductible as such interest
was incurred in order to earn income.
It is important that the audit trail
is strictly adhered to, otherwise CRA, the Tax department, could deny the deduction. Please note that the recent Lipson case is contrary to the above. However, this case is currently at The Tax Court of Canada level, whereas the Singleton case went to the Supreme Court.
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