Editor's note: David Ingram, who has owned more than 3,000 residential rentals, recently lost a $5-million tax settlement battle with Canada Customs and Revenue Agency, one of the largest personal tax judgments in Canadian history. In this, the first of two parts, Ingram advises other landlords on the mistakes they must not make. Next month he tells of the lessons he learned in a first-person account on avoiding bankruptcy.

There are many mistakes that residential landlords, especially novice landlords, must not make. But there are seven deadly ones that you must certainly avoid.

These are:

1. Failing to claim all the interest paid
2. Failing to use the rental property to make your own mortgage interest deductible
3. Failing to borrow money when you should
4. Keeping a separate bank account
5. Failing to keep receipts
6. Failing to vet tenants
7. Failing to inspect the property on a regular basis while a landlord.

1. Failing to claim all the interest

I have a client with a rental house in Kelowna. Every year she would give me the figures already itemized and there was no input on my part. Then, the CCRA (Canada Customs and Revenue) sent her an audit notice and wanted to see her receipts. When we were assembling them into the taped and itemized piles that the CCRA wants, I noticed that all the repairs and so on were paid on a MasterCard. When I questioned this, I found out that she had borrowed the money for taxes, etc., on her charge card as well. In fact, she had an outstanding balance of more than $14,000 on which she was paying over 20 per cent interest and had never deducted the interest she was paying. I asked her about second and third mortgages and about financing a furnace or home repair and I usually ask about Visa accounts, but I never asked about a MasterCard because I didn't know she had one. At any rate, we answered the audit questions and then opened up six more years under the Fairness Legislation and the final refund, after the proper interest was deducted, was more than $5,000.

2. Failing to use the rental property to make your own mortgage interest deductible

Rental income can be used to pay down your own nondeductible mortgage. Then you can use the increased equity in your house to open a credit line to pay the deductible expenses on the rental property. Voila, you have converted nondeductible debt to deductible debt.

3. Failing to borrow money when you should

This may seem like more of the same, but it is different. Even if your mortgage is paid off, you can use your rental income to finance a vacation, buy a new car, buy a boat or pay for fixing your own roof. Take the cash money from or two. Whenever you need money for the rental house, borrow it on a line of credit. After two years of saving $1,200 a month rent, you will have that $30,000 cash to pay for the boat you always wanted and no interest to pay that isn't deductible.

4. Keeping a separate bank account

This is a really hard one to get across because it goes against general advice, but there is no real need for a separate bank account. In fact, it usually works against you because you tend to deposit all the rents into that account and use that money to pay for the rental expenses first. If you need money for something personal you never take it out of the rental account because an accountant told you that you should keep the rental separate. Baloney. Use the rents to buy your food, pay for your car or take a vacation when you are short. Then borrow the money for the rental expenses. The interest on the loan is tax deductible.

5. Failing to keep receipts

This sounds so simple, but isn't. We just do not keep our receipts in decent order. The simple method? Get an old case at the thrift store. Fill it with 30 (or 20 - whatever number you need) 9" by 12" envelopes. Label each envelope with a topic: advertising, accounting, repairs and maintenance, mortgage interest, second mortgage interest, taxes, utilities, car, etc. At the end of the year, we open the envelope and add up all the bills. Staple the calculator tape to that bunch of bills, write down the amount on the outside of the envelope and put the receipts back into the envelope. Put the case in a safe location. When the CCRA wants an audit, you grab your 2003 case and trot down with all the receipts segregated and taped as per the request from the CCRA.

6. Failing to vet tenants

It is hard to believe but landlords will turn a $100,000, $500,000 or even a million-dollar property over to a complete stranger because they like their "looks." Landlords are almost afraid to find out anything about their tenants. Sometimes they are so happy to have someone say "I'll take it" that they lose track of all reason.

That is why so many rented expensive homes are found with marijuana grow ops in them. No matter what they look like, no matter how sweet a young married couple they seem to be, no matter how quickly they need the premises, do not turn your property over to a tenant without having them vetted first.

Two good sources of tenant information can be found by contacting ex-RCMP officer Marv Steier's TVS Tenant Verification Service Inc. at (604) 576-3004 or 1-877-974-9328 (marvsteier@shaw.ca; www.tenantverification.com) or TenantCheck Credit Services at (604) 460-0838 (www.tenantcheck.ca). For all sorts of information on how you can be defrauded, go to www.criminalfraud.com, another Marv Steier service.

7. Failing to inspect the property on a regular basis

If you do not inspect the property, you will not know if a grow op - or worse - is there. Be a caring landlord for the first six months, particularly if it is a detached house. Each province has different rules for inspection. Find out what yours are and make it a point of giving notice to inspect once a month or once every six weeks for the first six months and let the prospective tenant know that you are going to do so. It will, by itself, weed out the undesirables. Remember, $20,000 to $60,000 is the typical repair job for a grow op if it gets into your house.

The above are just seven of the deadliest mistakes that a landlord can make. As a landlord you will soon have more to add. The best advice boils down to keeping good records, screening for good tenants and learning how to use income to lessen the tax on the interest you pay.

David Ingram is the president of Centa Real Estate Realty Group of West Vancouver Ingram can be reached at (604) 980-0321 or e-mail at taxman@centa.com.