A call came in from a friend of mine. He had recently moved, but had kept his home here in the Lower Mainland and was renting it out. He asked “Should I be tithing on all the rent that comes in from the property?”
That’s a good question. It’s easy when you earn a salary or an hourly wage. You earn $5,000 – you pay $500. Just lop off a zero or move a decimal place. It can get much more complicated when you are a business owner, but I think that sometimes we may get bogged down too much in the details. The point is to be generous, so while I will go into some detail here, never forget that the overriding emphasis must be on generosity, not on giving as little as one can get away with.
To start, we need to make sure that we are on the same page with regard to a few specifics…
- By definition a tithe is 10%
- Generally speaking a tithe is 10% of our income as defined by gross income before taxes
- Owning a property and renting it out is a form of business
- A business owner has revenues (rent, in this case) and expenses (mortgage interest, etc.) and the difference is his profit (taxable income)
- Business owners often get some personal benefit out of their business
- In business, sometimes weird things happen that cause a mis‐match between cash flow and taxable income, so sometimes we need to be realistic rather than legalistic
So let’s look at the rental situation. This is equivalent to a proprietorship or partnership if jointly owned with a spouse. They are collecting $2,000 per month in rent (or $24,000 per year), but they also have expenses.
Mortgage Interest $10,000 (with principle included payments are actually $12,000)
Property Tax $3,000
Maintenance $2,000
Miscellaneous $2,000
Total Expenses $17,000 (even though $19,000 is out of pocket)
Subtract the $17,000 expenses from the $24,000 revenue and you have taxable income of $7,000. Note that the cash in hand is only $5,000, because some of the mortgage payments are towards principal. In this case the tithe should be $700 (ten percent of the $7,000) plus a benefit factor. So to answer my friend’s question, no – he should not pay a tithe on the entire rent. Rather he should pay it on his entire profit.
A few questions may arise from this:
Q. Why tithe on $7,000 of taxable income rather than only $5,000 of cash flow?
A. Because that is the profit. Think of it this way… How much principal you pay is up to you. If at the end of the year you take your $5,000 and use it to pay down your mortgage, does that mean you shouldn’t tithe on it? Or if you increase your mortgage payment so much that all of your profits go towards paying down the mortgage, does that mean you should not pay a tithe on it? Clearly the tax man doesn’t think so. They want you to pay tax on your profit. You should tithe on that same basis, too.
Q. What’s with the benefit factor? Why not just $700?
A. It has been my experience that business owners often derive ancillary benefits from their businesses. They may purchase a power tool that they want and legitimately expense it because they find it useful for maintaining the property. They may legitimately expense dinner with a repair person who is also a friend, but they would have gone out for dinner with him even if it wasn’t a business expense. In the interests of generosity one should not really deduct those items from the tithe, but this can get complicated. You don’t want a whole second set of books to account for what the tithe should be. The simple solution is to estimate (on the high side) what your personal benefit is from having the business and tithe on that amount. Simply add up or guesstimate which expenses you are deducting from your business that you would have incurred regardless. Pay the extra ten percent on that.
Q. What about when I sell the property? What do I pay a tithe on?
A. Similarly here, the basis should be provided by the tax return, but again with some adjustments. When you sell a stock, mutual fund or a property you are required to determine what your capital gain is (that is your profit on the increase in value). Canada Revenue Agency (CRA) gives you a break in that they only require that you pay tax on half of the capital gain. The tithe should be on the whole.
So if you have a $50,000 taxable capital gain, that means you have a $100,000 capital gain. You should tithe on the $100,000.
A final word. If you end up in a situation where for some reason your profit is much greater than your cash flow and tithing is problematic, God is not going to strike you down because you can’t comply. Certainly try to avoid a situation like that, but if you’re in it, try to do what you can to rectify the situation in the short run and deal with it appropriately when you sell the property.
Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area. He attends Gracepoint Community Church where he serves on the Leadership Team. He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services. Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. While every attempt is made to ensure accuracy, facts and figures are not guaranteed