When I am helping people figure out how much of a gain or a loss on the sale of a property, (like a cottage) we are often confused by cash flow. Some people think that if they sold the property for $200,000 and the mortgage is $120,000 so they have a gain of $80,000. This is cash flow. Cash flow is the money you have in your pocket after a transaction.
Cash flow is not the amount of the gain, and it is the gain that is taxable. The gain is the difference between the amount that you paid for a property and what you sold it for. So in this case, if the taxpayer bought the property for $90,000, then they have a gain of $110,000 being the difference between the $200,000 they sold it for and the $90,000 they paid for it.
Every property you own, be it a cottage, a rental property or land, has a cost. This cost is the amount you paid for it, plus any additions or improvements you made. Examples of improvements are; adding a deck, putting in a septic system, a new roof or landscaping. All of these costs are added to the cost of the property, unless you claimed them as repair expenses on your tax return, in which case they are not added to the cost of the property.
You may be wondering how the mortgage in my example got to be $120,000 when they only paid $90,000 for the property, likely a while ago. This would be due to refinancing. The owners refinanced the property and used the money for something else.
Take a look at the cost of your properties and the likely selling price to figure out the gain on your properties.
You can deduct the interest you pay on a loan when you borrowed money to invest. If you put a mortgage on your home and put that money into the stock market, then the interest on that mortgage is deductible as long as you have kept the money in the market. If you have a rental property the interest on the mortgage is a deduction, if you got the mortgage to buy the property. If you have a rental property and you put a mortgage on that property to pay off your personal credit card balances, then the interest is not deductible. What you used the borrowed money for is the important part about the borrowed money.
If you are using a credit card to buy items for your business, then the interest on the credit card will be deductible. This will only work if all of the charges on the card were for business, or if you prorate the interest based on the portion of the charges on the card that were for business compared to the portion that were personal. This process can be annoying, so if you can, use one card for business and one for personal.
You will only get a deduction for interest expense from CRA if you can prove that the money was borrowed for business purposes.
This time of year, Canada Revenue Agency (CRA) sends out requests for certain back-up information from some taxpayers. If you e-filed your tax return, then CRA will frequently ask for some of the receipts that back up your expenses.
They don’t ask for T4, T5, T3 or T4A slips because they have all of those slips. When organizations issue those slips they file them with CRA. They also usually have all of the RRSP contribution receipts for the same reason. What they are interested in is items like moving expenses, child care and interest deductions.
If you get a request to send receipts then you should do so within the time requested, usually 30 days. You can upload the information to the CRA site, fax it or send it by mail. If you are sending it by mail you should make a copy of the information before you send it. There have been cases where receipts have gone astray, and you do not want to lose your only copy. If you live close to a tax services office, then you can drop your envelope of receipts into a “mailbox” outside of this office and save postage.
The reason CRA is looking for items like childcare receipts and moving expenses is not so much that they don’t believe you, it is that they see an opportunity to check up on the providers of these services to make sure that they are reporting the revenue. When you send in the receipts for your childcare, CRA will confirm that your childcare provider reported that revenue.
If you do not send the receipts within the time period requested, then CRA will simply disallow the expense on your return and it is more complicated to get the deduction once it has been disallowed. So, send them in on time.
If you have a cottage, you have a tax problem waiting to happen. By definition, the word cottage suggests that you have another property somewhere that is your principal residence. So when you sell the cottage, if there is a gain, then you will have to pay tax on that gain. A family only has one principal residence.
The best way to avoid paying too much tax when you sell the cottage is to make sure that you can document any of money you have spent on the cottage. Did you pave the driveway, dig a well or put on an addition? If so, then you can add those costs to the cost of the property and the gain on sale will be less.
So, as you are sitting around the cottage this summer make a list of the improvements you have made and see if you can find the receipts. Then you can do an estimate of how much your gain will be, which will give you a better idea of how much money you will have left over after you sell the cottage.
I am sure that you have heard of people who opened an email attachment and their computer was locked up shortly thereafter. There is a common sort of malicious software which is known as ransomware. What happens is that your hard drive is encrypted and you don’t get the key to unlock it until you pay an amount of ransom, usually with bitcoin. The city of Baltimore was recently attacked by a version of ransomware known as Robin Hood and they were down for weeks.
Every business should have a policy around opening an email attachment. You should look at the actual email address, the name on the email may say that it is from someone you know, but the email address could be a hacker. I have seen email that looks like it came from a friend, even showing the friends name, but when you hover your mouse over the name an email address in Nigeria is visible. In our office we have been moving towards using a portal for transferring files, as we would like to see fewer attachments. So, give this some thought and make a few policies about the opening of email attachments at your business.