Expenses

[jreist]

We are starting to become active and started to investigate property and make bids. We are looking for that place in the country, but until we find it we are looking at bidding on property to resell or rent to make a profit to use to buy our dream property or for retirement, which ever comes first.  We have lost money in stocks, Nortel, Worldcom, etc, I hope real estate is a better investment.

Checking out land can be very expensive, phone calls, title searchess, etc and not to mention driving for over 6 hrs to look at the property.  We have taken a couple of trips to Addington Highlants and Prince Edward County and my wife looks at it as our vacation.

If you buy and sell property can you use the expenses from your Tax Sale search as business expense?

[Rob]

Short answer to the question.  Yes you can write-off many things but you need to show some sign of a business model after 3 years of losing money as a business.

[jreist]

I checked the local Income Tax office today and you can't claim any expences involved in doing property searches unless you were operating as a business.

But once you buy the property you can keep track of all expences on improvements on the propert and apply them against profits fro sale. You are also taxed on 50% of the profits. Example: you buy a property for $100K and spend $50K on upgrades, you sell the property for $250K less $150K your profit is 100K and you are taxed on $50K

[kcu]

I checked the local Income Tax office today and you can't claim any expences involved in doing property searches unless you were operating as a business.

[/color]

The best part about it is that you can create a business out of thin air and as long as you are serious and expect to make a profit within 3 years, you would be able to deduct all reasonable expenses. That includes your transportation, searches, offices supplies and home office. Of course you need proper advice from your accountant, but do not expect to receive favorable advice from the tax office.

However, if you intention is to buy a property for yourself, then you cannot deduct any expenses.
So the key here is INTENTION. Everything is based on your ability to prove your intention to be in business.

[Frank]

You are best not to claim them as expenses and try to show that you are running a business.  If you do, you will be taxed on 100% of your profits instead of the 50% applicable to personal capital gains. 

[kcu]

You are best not to claim them as expenses and try to show that you are running a business.  If you do, you will be taxed on 100% of your profits instead of the 50% applicable to personal capital gains. 

Frank, you are absolutely correct.

The point is, you have to decide are you running a business and want to deduct your expenses or do you have very little expenses and will save by claiming a capital gain.
In most cases capital gain will be much better.

However, if you frequently buy and sell properties, even once a year, you may be automatically qualified by CRA as running a business and during any audit this will come back to bite you. It happens all the time. My friend was reassessed for 3 years, because he bought, fixed and sold 4 houses in 3 years. And he actually lived I them. It did not matter. He had to pay back taxes for 3 years plus penalties and interest. It almost crashed his family.

So the key here is INTENTION. Everything is based on your ability to prove your intention to be in business or buying to hold for a long term.

[ynot]

I have been reading this site quietly for a while now.  Great info. If you set up a corporation, you`ll pay about 30% tax.  A second corp. will allow your accountant to get you the "IntercorporationTax Dividend" which basically means you`ll pay only 18% tax. 

[Frank]

If you set up a corporation, you`ll pay about 30% tax.  A second corp. will allow your accountant to get you the "IntercorporationTax Dividend" which basically means you`ll pay only 18% tax. 

Thanks Ynot

As KCU indicated, it is clearly what your 'intention' is that should govern how you proceed.  At the rates you have indicated above, and adding in the ability to write-off a whole bunch of other expenses (an office in your home), including costs of researching sites that get cancelled, or where your bid was short of the mark - then it would make complete sense to incorporate and run it as a business.  If however, all you want is a lot to build your dream home then you must remember that a principle residence is tax exempt.