Investor wants no interest payments until maturity...

[AndyLuchies]

I`m wondering if there is EVER a circumstance where Mr. A can loan money to Mr. B. at X% interest rate where Mr. A does NOT have to claim any interest on his taxes.

For tax purposes, is ALL interest calculated yearly, regardless of loan terms? (e.g. single balloon payment at maturity or something else)

What about structuring it as 2 bookkeeping entries (and no interest is paid out until maturity):

Mr. B
Jan. 1, 2010 Accounts receivable = $10,000 (income)
Jan. 1, 2015 Accounts payable = $15,000 (expenses)
(even though this means more tax for Mr. B)

Mr. A
Jan. 1, 2015 = claim $5,000 income on 2015 tax return

Or would the above example be a dishonest tax strategy?

 

[tonypeters]

Andy,

In accordance with CRA you have to submit a T5 for each investor whether they like it or not. I am not an accountant, so please seek advice from your own counsel, but I have utilized tens of millions of dollars of investment capital over the years, and we ALWAYS submit a T5 each year.

If you do not, YOU will be the one in trouble with CRA! This is NOT an entity you want to mess with so please do yourself a BIG favour and make sure you follow the rules!

Hope this helps?

QUOTE (AndyLuchies @ Jan 23 2010, 11:53 AM) I`m wondering if there is EVER a circumstance where Mr. A can loan money to Mr. B. at X% interest rate where Mr. A does NOT have to claim any interest on his taxes.

For tax purposes, is ALL interest calculated yearly, regardless of loan terms? (e.g. single balloon payment at maturity or something else)

What about structuring it as 2 bookkeeping entries (and no interest is paid out until maturity):

Mr. B
Jan. 1, 2010 Accounts receivable = $10,000 (income)
Jan. 1, 2015 Accounts payable = $15,000 (expenses)
(even though this means more tax for Mr. B)

Mr. A
Jan. 1, 2015 = claim $5,000 income on 2015 tax return

Or would the above example be a dishonest tax strategy?

 

[MonteDobson]

QUOTE (tonypeters @ Jan 23 2010, 01:18 PM) Andy,

In accordance with CRA you have to submit a T5 for each investor whether they like it or not. I am not an accountant, so please seek advice from your own counsel, but I have utilized tens of millions of dollars of investment capital over the years, and we ALWAYS submit a T5 each year.

If you do not, YOU will be the one in trouble with CRA! This is NOT an entity you want to mess with so please do yourself a BIG favour and make sure you follow the rules!

Hope this helps?

Hi Tony,

I am NOT an accountant, but isn`t a T5 for Dividend Income from Canadian Corporation? If properties are held personally, I was of the understanding that you just fill out Statement of Real Estate Rentals (T776) for a basic JV transaction??

 

[tonypeters]

Monte,

Like I mentioned earlier, I am not an accountant, but this is what we do.

If our investor receives interest within a "calendar" year, we are required by CRA to provide that investor with a T5 at the end of the year, regardless of whether they are a "corporation" or an "individual".

If our investor has not received any interest because it is "back-end" (balloon payment) loaded, there is a CRA rule (not sure of the exact wording or requirements) that essentially delays the reporting of and issuing of a T5 at the end of the "first" calendar year.

Like I said, I am not sure of the exact rules, because our accountant prepares all of our T5`s for us, but I do I do know that we always T5 them in the "second" year, regardless of whether they have received an interest payment or not. Please note: this process only applies for investors that we have structured a "fixed" (interest only) rate of return with.

With our JV type arrangements, there are no tax issues or requirement for us to report or otherwise issue a T5 until such time that we liquidate the asset. When this happens, we obviously trigger a "taxable" event for both ourselves and our investor and it is claimed on our respective corporate and or personal tax filings, but we do not utilize the T5 reporting process.

For us, it may be classified as a "Capital Gain" or it could be classified as "Business Income", it all depends on what type (buy & hold, lease to own, flip etc.) of real estate transaction we perform. This is one of the reasons why we have multiple corporations, as we do not want to be taxed at the "Business Income" rate for everything we do. If you "wholesale" properties in a corporation that you have "buy & hold" properties, CRA will ALWAYS tax everything you do at the highest rate. I guess that`s where the saying...He who has the gold, makes the rules comes from!

I hope this helps to explain it for you?


QUOTE (MonteDobson @ Jan 23 2010, 12:29 PM) Hi Tony,

I am NOT an accountant, but isn`t a T5 for Dividend Income from Canadian Corporation? If properties are held personally, I was of the understanding that you just fill out Statement of Real Estate Rentals (T776) for a basic JV transaction??

 

[MonteDobson]

Thanks Tony,

Makes sense for interest payments on a loan (such as 2nd mortgage) or dividends.

How about if a we are making monthly interest payments into someones RRSP (via RRSP mortgage)...same boat, or not required as the payments are going into self directed RRSP and not taxable for the planholder right now anyway??

QUOTE (tonypeters @ Jan 23 2010, 03:16 PM) Monte,

Like I mentioned earlier, I am not an accountant, but this is what we do.

If our investor receives interest within a "calendar" year, we are required by CRA to provide that investor with a T5 at the end of the year, regardless of whether they are a "corporation" or an "individual".

If our investor has not received any interest because it is "back-end" (balloon payment) loaded, there is a CRA rule (not sure of the exact wording or requirements) that essentially delays the reporting of and issuing of a T5 at the end of the "first" calendar year.

Like I said, I am not sure of the exact rules, because our accountant prepares all of our T5`s for us, but I do I do know that we always T5 them in the "second" year, regardless of whether they have received an interest payment or not. Please note: this process only applies for investors that we have structured a "fixed" (interest only) rate of return with.

With our JV type arrangements, there are no tax issues or requirement for us to report or otherwise issue a T5 until such time that we liquidate the asset. When this happens, we obviously trigger a "taxable" event for both ourselves and our investor and it is claimed on our respective corporate and or personal tax filings, but we do not utilize the T5 reporting process.

For us, it may be classified as a "Capital Gain" or it could be classified as "Business Income", it all depends on what type (buy & hold, lease to own, flip etc.) of real estate transaction we perform. This is one of the reasons why we have multiple corporations, as we do not want to be taxed at the "Business Income" rate for everything we do. If you "wholesale" properties in a corporation that you have "buy & hold" properties, CRA will ALWAYS tax everything you do at the highest rate. I guess that`s where the saying...He who has the gold, makes the rules comes from!

I hope this helps to explain it for you?

 

[Albertritchot]

The text below is from a book called Preparing Your Income Tax Returns 2007 Edition for 2006 Returns p. 220

"Investments made in debt (i.e. interest-bearing) obligations on or after January 1, 1990 will be subject to an annual accrual rul commencing in 1990. That is, interest must be included in income every year even if it is not received, for example, because it is interest on a compound bound or long0term investment certificate. This rule applies only to investments which do not in fact pay the full amount of accrued interest for the year on an annual basis."

In 1989 or earlier years, it was possible to delay the reporting of accrued interest earned for three years. However, this is no longer available.

Here is the link should you want to get information on the T5 slip.

http://www.cra-arc.gc.ca/E/pub/tg/t4015/t4015-09e.pdf

 

[gwasser]

QUOTE (MonteDobson @ Jan 23 2010, 06:55 PM) Thanks Tony,

Makes sense for interest payments on a loan (such as 2nd mortgage) or dividends.

How about if a we are making monthly interest payments into someones RRSP (via RRSP mortgage)...same boat, or not required as the payments are going into self directed RRSP and not taxable for the planholder right now anyway??


If you pay interest or delayed interest, or whatever other form of investment income into an RRSP (and probably also into a TSFA) no tax slips including T5 forms will be required. Because all this income is tax free. I don`t receive tax slips (other than my annual contribution receipts) for these accounts. I am not an accountant so check with him/her/them/they/she/he or it (must be bed time).

 

[tonypeters]

Thanks for your input Godfried, you took the words right out of my mouth.

QUOTE (gwasser @ Jan 23 2010, 11:35 PM) If you pay interest or delayed interest, or whatever other form of investment income into an RRSP (and probably also into a TSFA) no tax slips including T5 forms will be required. Because all this income is tax free. I don`t receive tax slips (other than my annual contribution receipts) for these accounts. I am not an accountant so check with him/her/them/they/she/he or it (must be bed time).