Schedule 7 Rental Expenses

Tax Topics
1

Looking for opinions

  • Corp owns a building used in active business with no mortgage.
  • Corp purchases a second building to be rented out (inactive)
  • Bank will finance 70% of purchase price of new building
  • Corp borrows 100% of purchase price leveraging the equity in the existing building to make up the 30% down payment.

Is it reasonable to allocate 30% of the interest expense as active and 70% as inactive rental expense?

Thanks
Jim

2

The whole amount is borrowed for the purpose of generating Inactive Income, so probably 100% expense of Inactive. Also gives a greater reduction of inactive income>

3

Hi jim

I think there may be a couple of approaches for the Financial Statement:

  1. allocate based on % of type of revenue generated over total sales from the perspective that the loan amounts add to working capital first.

  2. allocate based on the source of income generated by the loan.

But for tax purposes I would approach form the perspective that the loan is deductible against the source of income generated, passive income (rental income); as their is a direct transactional link.

Given that the passive income receives a less favourable tax treatment, I think this may be preferred.

Greg

4

@jimt

I really appreciate questions such as yours. These examples help me practice my double entry bookkeeping and tax analysis skills re seldom encountered examples. I am very happy to share my expertise on topics in which I am very confident or expert.

Keep up the good work and the open/supportive sharing environment.

1 Like
5

I agree I think I need to put all the interest to schedule 7, however in the short term any interest allocated to the active business would reduce the overall corp tax since at the outset there is lots of interest and CCA so the rental goes to zero before using all the CCA. I am sure I will be glad to have extra CCA in the future.

Jim