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I have about a dozen people selling out their Whistler or
Mount Baker Ski Chalet, their Palm Springs condo on the golf course, their
Hawaii condo or their Saltspring Island lakefront cabin and they all have the
same question.
How much tax do I have to pay?
The answer is that they have to pay tax on the difference
between the net selling price and the ACB.
The net selling price is the actual sales price less any costs
of sale. Costs of sale are generally considered to be the Real Estate
commission, advertising, legal and escrow fees, interest penalties to remove a
mortgage and other incidentals such as land registry fees, excise taxes, GST,
faxes and photocopies.
The ACB is the Adjusted Cost Base and is composed of what you
paid for it plus legal fees, property purchase, GST and other excise taxes and
any improvements such as a NEW bathroom, a New Porch, an addition, a New fence,
a New culvert, a road, a driveway, installation of hydro lines, installation of
a sewer line, building a dock and or even leaving behind a satellite dish.
Special Assessments are also usually added to ACB amounts. Normal wear
and tear, maintenance, condo, property taxes and ongoing regular expenses are
NOT added to the ACB.
So if I can use a property in BC as an example, I want to
pretend you sell a property for $400,000. You originally paid $200,000
and did some improvements.
Selling Price $
400,000
Less GST on real estate commission of $14,500
- 1,015
Less Real Estate Commission -14,500
= Net Selling Price $384,485
Less the Adjusted Cost Base composed of purchase price of
$200,000
plus property purchase tax of 1%
2,000
plus legal fees of
1,070
plus dock
10,700
plus satellite dish
1,550
plus hydro line
10,000
plus well
7,500
plus front deck
3,500
plus rear deck 6,500
plus raising building
14,500
plus basement 4,500
plus finishing basement
21,000
Total Adjusted Cost Base of property
$ 282,820
Taxable Profit ( $384,485 - $282,820) = $ 101,665
If you are a Canadian Resident, you would report 50% of the
$101,665 on line 127 of your T1 Income Tax return. You would then pay tax on
the $50,832.50 at your Canadian Marginal tax rate.
If you are a Canadian resident and the property was in the
United States in California or Vermont (two of the states with Alternative
Minimum taxes), you would file a California or Vermont return and pay
the minimum state tax and a 1040NR and pay a 26% minimum tax to the US.
Other states woul dhave you pay either a minimum tax or a progressive tax on
the profit.
You would then take the tax paid to the US (Federal and State)
and claim it as a Foreign tax credit on Schedule 1 of your Federal Tax return
and the BC Tax Schedule for the provincial tax.
There is a problem with the Foreign tax credit however.
I believe that they are wrong in spirit and in law but the policy of the CCRA
is to only allow 50% of the tax paid to the USA as a foreign tax credit
because Canada only taxes 50% of the profit. (More on this in another
newsletter).
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If you are an American resident and reading this and this is a
seasonal residence and not your principal residence, the ACB calculation above
is just about the same except that you would not have a GST item anmd you would
have escrow fees, etc. The main point of this question is not to
answer the "how much tax" question but to point out the method of calculating
the Adjusted Cost Base.
Put the sale on Schedule D if it was not rented and on
schedule 4797 if it was rented out in the past. The amount from the 4797 will
flow to the Schedule D.
ingram
david ingram's CEN-TA
-US / CANADA Tax & Immigration Matters 108 - 100 Park Royal South West Vancouver, BC, CANADA, V7T 1A2 (604) 913-9133 FAX (604) 913-9123 www.centa.com - david@centa.com
see archived television shows at:
www.mediaontap.com/aroundtheworld www.mediaontap.com/ingram-rogers) www.mediaontap.com/ingram-comdex (2000) www.insinc.ca/ingram-comdex (2001) If you can't get through to the office in the evening or on a weekend, my cell is (604) 657-8451 and I do not mind calls from 10 AM to 10 PM Vancouver Time |
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