Here are my thoughts about deducting interest
Refinancing your property- Is the interest tax deductible?
There are different rules for refinancing for property owned in a Corporation and property that you own personally.
For properties that are personally owned, your have to use the “direct use of funds rule” This means –what did you do with the additional funds? If the funds are used for investment purposes, then the interest is tax deductible. If not, the funds are not deductible.
What does “direct use of funds mean?” It means that we should be able to track the funds directly from the lawyers trust account to refinance to a cheque used for reinvestment. e.g. You get $40K in additional funds in a refinance transaction; you would then put those funds in your personal account.
1. Write a cheque for purchase of another property on the same day it is deductible.
2. But if you wrote a cheque for $10,000 to pay your trip to Hawaii, and had the funds in your account. Next day you wrote a cheque for the $40,000, only a portion would be deductible. (75% because $10,000 was used personally)
>The later also complicates the calculation in the future. It is best to have a separate bank account to deal with the $40,000 –only transfer funds to the account where you write cheques for investment purposes. If you are using funds from lines of credits – get the bank to create sub-accounts on the lines of credits
If your property is owned by a Corporation, you can only take funds out the amount you had originally loaned the Corporation as a shareholders loan account. Say you purchased a property for $200K. You loaned the Corporation $50K for a down payment- you will be restricted to the amount you loaned to the company. (Do not confuse it with your down payment as you may have taken some money out)
Funds taken out in excess of the original loan will have to be taken out as wages or dividends. Net income earned in a corporation is taxed at the highest rate. For any dividends declared, you will get a portion of the Corporate tax back as a refundable dividend tax on hand (RDTOH). If you Corporation is in a loss position, you will lose this RDTOH –leading to double taxation- hence another reason why not to own a property in a Corporation if you do not have to.
